Best Practices for Preparing Your Company for Exit

Transcript

Albert:
Hi, my name is Albert Vanderlaan. I'm a partner in our Capital Markets Group based in Boston.

Justin:
My name is Justin Yi. I'm a partner in our M&A Group based in Orange County.

Samir:
Hi, I'm Samir Bakhru. I'm a partner in our Technology Companies Group based in New York.

Justin:
Today we're going to have a conversation about things to think about as you prepare your company for an exit. We're going to have some conversations about what are best practices, things to be mindful of. So let's start with the question for you, Samir. At what stage of your company should you think about an exit?

Samir:
Honestly, you should be thinking about an exit from day one. From the moment that you form your company all the way through when we signed that purchase agreement to sell the company, it should be at the top of your mind. You are building your company for that seminal event as a founder and you never want anything to go wrong in that process. And you want to close that exit event as quickly and as seamlessly and as painlessly as possible. And candidly, as Justin and I both know, having worked together on many deals, you never know when an LOI to purchase your company may come to you. It could come at any time, both when your company's doing well and when it's not doing well. And the worst thing that could happen is that you get caught flat footed and get caught off guard and you're not prepared. I think back to an example on a deal we worked on a few years ago, right? And one of our clients, which is a private company in the US, got an LOI and they weren't expecting it. And candidly, they had all kinds of capitalization and foreign employment, tax and other issues that they had to deal with. And a deal that both Justin and I could have closed for them in 60 days ended up taking close to 180 days. And that's a lot of deal risk. It's a lot of time. It's a lot of money. And I think the client, having spoken to them after the deal, thought about that and said, "Wow, if I had just sort of been keeping the exit event top of mind at every financing event, at every sort of key material situation that I dealt with, we could have closed that deal faster and with a lot less execution risk." So to answer your question directly, I think we've all seen and experienced over the years that you want to be thinking about that exit event from day one and make sure you do everything in your power to make the risk as small as possible to close that deal. But turning that on its head a little bit, let's say you don't go down the M&A path and you are fortunate enough to be one of those few companies that could be a public company. Albert, why don't you tell us what you should be thinking about if you want to go down the IPO path?

Albert:
Sounds great. And similarly, it all plays off of what Samir initially started with, which is you should be thinking about that exit event from day one. The more you have good hygiene around corporate record keeping and doing the types of things that you should always be doing as a company in terms of making sure your employees are well oriented around what the company policies are and keeping people up to speed on that, it's going to make your process a lot better because it's all about process. An IPO ultimately is about having internal controls and processes in place that ultimately lead to an outcome where the underwriters trust that the company has what it has, the auditors are able to get through their audited financials in a timely manner, because same things happen in an IPO. If you're ill prepared, you're going to have a much longer process. And that's going to take money, time, execution risk. So the more prepared you are, and the more you have internal controls, processes and things like that, that you keep up to speed from the beginning of the company all the way through the exit that you actually have in an IPO, you get to go up on NASDAQ or the NYC platform and ring a bell. That's what you want to be thinking about process, keeping it oriented, keeping everybody on the same page, having policies, even though it may seem silly with five employees is actually really important. In that vein, Justin, what would be some considerations you should really be focusing on in the M&A context when you're going and concentrating on that exit?

Justin:
Yeah, clients always ask, what should I be worried about? What should I think about in advance? And what I always say is, look, you want to think about what your end goal is. And that is, if you're looking to sell, who do you want to sell to? Identify a pool of likely buyers. And that'll help a lot because as you go through your company's growth, you're going to develop relationships with companies that may end up being acquired or strategic partners to you. And those naturally tend to be the best fit in terms of your exit. And that way, you can also try to avoid having to hire a banker. Not that you don't need a banker, but that could be a way that you can facilitate a natural sale process to an exit or to a place where the team lands and it's a good fit for you. So that's one of the things I would say. The second thing is, and this goes kind of back to what you were saying, Samir, is you never want to be caught flat-footed. So a lot of times, clients underestimate the amount of time it takes to get an M&A deal done. And I always say it takes two or three times longer than what you hope. And this is especially important in today's climate where companies that have raised a lot of capital in past years are looking to come to market this year or next year. And they're realizing that's a much different environment. So if you're not prepared to raise, you need to be prepared to sell well in advance of the day that you run out of funds. Because the last thing you want to do is be a seller and be at the whim of a buyer. And we have had a lot of clients or a lot of targets when we're on the buy side, reliant on a buyer to provide financing to get you to bridge to a closing. And that's the worst possible position that you want to be in. I'd say, Albert, I mean, I think a lot of clients that are more mature think about dual tracking. Can you explain a little about what that is and what goes up to that process?

Albert:
Yeah, great question. So a dual process path is going to be one where a company is exploring both a potential M&A event and an IPO. The good thing is a lot of those processes overlap. You're going to be doing due diligence, either whether it's in the underwriting context for an IPO or with a seller or with a buyer when you're on the sell side for an M&A deal. You're going to be very focused on one of them, usually in the first instance, whether it's the M&A track or the IPO. And that's going to be the focal point in many cases. But ultimately, you're going to be trying to make sure you're getting to a point where you're going to be bringing the highest value back to your stockholders. Whether it's through an M&A event or that IPO, you're going to be ensuring that the stockholders have an opportunity to really weigh in on that through the process. And so the focus will be on just execution of one of the transactions and whichever one they end up going with on the back end of it is really critical from just an overall perspective of what are we going to be giving back to the community of stockholders that have invested us, whether it's going to be giving them publicly traded securities or in the M&A context, obviously cash or some other securities in that context.

Justin:
Yeah. And clients always ask, you know, that sounds really expensive. And what I say is, look, when you run a process, you always want to have options, right? You want to have a BATNA. And often when we run sell side processes, we do it in a way where we create demand all to the very end, because that way you increase your chances of deal execution. And then dual track IPO is the same way. It allows you to leverage the work that you've already done through an M&A process. You have the data rooms, you have the team set up, everyone's working on schedules and disclosures, and you can actually use that information and the work that you've done and apply to the idea so that both are ready and you could choose at the end of the day, which is a better outcome for your shareholders.

Samir:
Yeah. I have a question for you. So on the private company side, a lot of our private companies that have raised a lot of capital and are not doing that well, don't necessarily know if they're going to have another financing. So now if they need to dual track a private company financing and M&A, how should they think about that? Should they be afraid about engaging a banker or not? And if they do engage a banker, how far in advance do you think they should do that as they're sort of thinking about both the financing and M&A because they don't know what's going to come next?

Justin:
Yeah, that's a great question. And we see a lot of our clients struggling with that or working through that these days. I think it's never too early to have conversations and bankers are going to be happy to meet with you and talk to you about what your options are going to look like as we are as legal counsel. I would say, you know, naturally going to your existing investors to gauge their interest in leading another round is the first step. And if it seems like maybe that appetite is not there, really, you want to hit the ground and really start thinking about an M&A exit. And you can start getting introductions to folks, like I said at the beginning, partnerships, other potential buyers, but that is the stage that you want to start thinking about that, not when you're already at the last six months of your runway and you're having struggles raising money. I think that's too late. You want to do it earlier.

Samir:
Well, as you can see, whether you're thinking about going public or thinking about selling your company or raising private capital, it's always important to be thinking about that exit strategy from day one. And there are a number of options and things to be contemplating from the beginning. And we hope as your potential counsel that we can help you with that.

Justin:
Cool, guys. Well, thanks for the time.