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Thoughts and News from Basis State
Thoughts and News from Basis State
Even in the best of times, most sub-scale startups treat documentation, process, and exit preparation as a chore to be done later. But as these companies (SellCos for rest of this article) look towards a potential exit, they will quickly realize how much work needs to be completed just to satisfy due diligence in an acquisition. Below is a list of steps every business should be taking now, and in the future, to ensure they are prepared.
Acquisition Structure and Why it Matters
Most sub-scale businesses will be acquired via an asset purchase. Rather than purchase the entire organization, including any past, present, and potential liabilities, the acquirer will pick and choose which assets it wants. For most SellCos this will primarily be the Intellectual Property (IP), but often customers will be included.
In an asset purchase an acquirer will not have as heavy a diligence burden as they would in a full purchase. But SellCos will need to ensure their assets are properly documented and compiled for the acquirer to review. Acquisitions are expensive for an acquirer and their bid will factor in expected diligence costs. A high cost of diligence, in either time or dollars, will lead to at best a lower purchase price, or more likely an acquirer not making an offer at all.
Intellectual Property Prep
Think of IP preparation in two different aspects – Can acquirers prove SellCos own their IP, and can an outside party easily review what SellCos have built.
Can SellCos prove they own their IP?
We ask this question to every client and every CEO emphatically states yes, confident they own their IP. But when we begin our review and ask for a list of all employees/consultants who worked for SellCo, including title, start date and end date few have a list prepared. When we ask for an electronic folder of all offer letters, non-proprietary agreements, and consulting letters, we get a mix of unsigned word documents and other forms. Very rarely do we find countersigned copies of these key documents. SellCos may believe that all employees sign these documents, but can they prove it. And if SellCos cannot produce countersigned documents, can they confidently represent to an acquirer that the software and processes are properly owned?
Now the good news – these are common issues even in the best run organizations. Even with great processes in place, physical signed documents can be misplaced, or countersigned electronic versions placed in the wrong folder. But SellCos can take a few simple steps to help limit this risk.
A few minutes of work each week or month can save time and money during an acquisition process.
Acquirer review
At some point in the diligence process, the acquirer will want to review the actual code and architecture of the software. SellCos should:
Remember that for the acquirer time = money. Better prepared SellCos that can quickly and easily share this information increase their chances of a completed transaction at a higher valuation.
Basis State helps software companies find exits.
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Raleigh, NC 27607