Editor’s note: Kelly Campbell is president and co-founder of Interface Technologies in Raleigh and vice president for technology of the Association for Corporate Growth’s Raleigh-Durham chapter.
RESEARCH TRIANGLE PARK, N.C.- A panel of seasoned CFOs discussed the ins and outs of selling a business with a packed crowd of over a hundred executives. The Raleigh Durham Chapter of the Association for Corporate Growth hosted the event Feb. 29.
The panelists for the event were:
• Matt Petzold, CFO, Sprout Pharma
• David Gill, CFO, INC Research
• Mike Rowe, CFO, Jones & Frank
The event was moderated by John Fennebresque of Fennebresque & Co.
Before the Deal
The panelists offered advice to executives considering an exit or financing deal. A key task for the CFO is to develop a robust model of the business that can stand up to the scrutiny and due diligence of the buyer. Since financial backers focus on the rate of return they expect to receive, this financial model is a key tool that will be used often during the process.
Not all money is equal. The panelists recommended that companies avoid taking money from a fund late in its lifecycle as additional capital may not be available if subsequent rounds of financing are needed.
Venture capital and private equity groups bring relationships that can help facilitate future transactions. Be aware that they may also have “deal baggage” that could hinder relationships as well.
The panelists also stated that an IPO should be viewed as a “last resort”. Such transactions are expensive and time consuming. Once they are complete, owners and management aren’t really free to sell as much stock as they like as the market tends to react negatively when insiders sell. Publicly traded companies are also harder to acquire. Public companies often choose to limit the scope of disclosures they provide by arguing that they would have to make such disclosures public.
Remember that your exit actually begins when you bring on your first investor.
Their expectations of rate of return and time horizon are major drivers of a future exit event. Make sure that these expectations are clear and understood by everyone involved.
Deal Preparation Checklist
The panelists offered the following checklist for companies preparing to do an exit transaction.
1. Hire and experienced CPA firm to help you prepare your internal due diligence.
2. Insure that all of your documents, agreements, contracts, etc. are in order.
3. Fully engage your board in the process.
4. Bring on a competent financial investment advisory firm early in the process.
5. Establish a relationship with your outside legal counsel.
During the Deal
The panelist reminded executives in the room that they must continue to operate and grow their businesses during the deal process. Losing focus on the day-to-day operation of the business can sink a potential deal and leave the company in a weakened position.
The auction process for finding a buyer takes considerable time – up to six months. Once the list of potential buyers has been narrowed down, the negotiation process begins. Be prepared to walk away from the table multiple times during the process. Let your advisors handle the direct negotiations – the person you’re negotiating with may turn out to be your future boss.
Try to understand the motivation of the buyer. What are they trying to achieve for their business? What valuation model are they using? Such an understanding can help you formulate specific counter offers to negotiate a better deal.
Make sure that all the members of your team understand, and stick to, your “talking points” for the deal. An offhand comment can delay the process by weeks.
If you’re looking for a financing round, don’t assume that the current round will be your last. The concessions you make on your current round will be the baseline for negotiations for future rounds so don’t give away too much too soon. In a similar vein, don’t push too early for a high valuation. If the valuation of an early round turns out to be too high, future rounds become more difficult to secure.
Remember that at the end of the day you are building a team that must work together after the transaction.
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