The transaction is complete. The keys have passed to the new owner. This is what you, your team and investors were aiming for, and your bank accounts have become a lot larger.
You’re selling your firm to garner liquidity for the team and your investors, to bring products to a larger market through new channels or because it’s the right time to sell.
For the acquirer, buying your firm gives them faster pathways to new markets that organic growth can’t. They don’t need to build new products and technology, and they get talent specialized in new products or new markets. If they’re buying a competitor, they’re reducing competition.
You may wonder if the acquirer truly understands your products, values, culture or the customer needs that drive the business. Staff will wonder if there’ll be a place for them as a part of another company. These concerns are valid, and you should seek answers as you go through the sale process.
Keep in mind the acquirer is also in transition, though their experience may not be as stressful as yours. Despite their extensive due diligence, it’ll take them months to roll out their integration plan, and that’s a process likely to change several times before it’s completed. The best-case scenario has you and your team as key guides.
To increase the chances of getting the full escrow, you and key employees should consider staying on through the transition period.
Below are six guiding principles that will set a transaction up for success. I’ve gained these insights by guiding my own company through the M&A process, successfully transitioning it to become a business unit and running it within a $2 billion public company for many years. I’ve also been on the other side, helping transition other companies through M&A and working with both buyers and sellers.
There’s more than meets the eye
When purchasing a company, the buyer acquires client lists, patents, products and infrastructure. They also buy talent, networks and institutional knowledge. All of this will take time to understand and sort through.
A lot goes on behind the scenes. Unexpected changes could lie ahead, so it’s essential you’re emotionally able to deal with this uncertainty. There may be a battle of wills, and as a leader you need to get ahead of these issues. Lead the charge by pushing for the right changes. You want the acquirer to get their money’s worth out of the transaction, so push for decisions you believe are correct to ensure a smooth transition.
It is absolutely critical that your team knows you are advocating on their behalf as well. For example, I made sure that all of my team was offered positions in the new organization and compensation and responsibilities were in line. I also negotiated so all tenure with the private acquired company would count as tenure in the acquiring company, as this affected vacation times. The last thing your team should see is you negotiating a “sweet deal” for yourself and leaving others behind.
Make alliances within the new organization
Spend time asking questions of peers and other leaders at the acquirer. Think of this as a “listening tour” to understand the lay of the land. It’s how you’ll find allies, because often, the real power sits outside the organizational chart.
As you understand the corporate landscape, ask a respected employee to introduce you to their colleagues at the firm. Ask how you can help the new organization ease the transition and position yourself as a resource they can tap to succeed. The more they understand your value, the greater your role will be as the organization moves forward. As I mentioned earlier, positioning yourself as someone who is leading the transition and integration will let you have a large impact on the direction in the new organization.
Be open to questions throughout the sale
Even though the buyer has done extensive due diligence on your company, your business is still new to them. During sale negotiations, expect many people from across the acquirer to dig into every area of your operation. They’ll run a fine-tooth comb through your business, examining it from all angles and questioning everything. There will be new priorities, policies, personnel, processes, politics and restrictions.
Keep an open mind while being honest with your team and the acquiring company about the consequences of the proposed changes.
Once the sale is complete, you may have to give in to much more oversight of your budget. For instance, after the acquisition, I went from having one CFO with financial oversight to having five financial professionals regularly inquiring about different costs and numbers as they sought synergies and ways to cut costs.
Acknowledge that you may be competing with many divisions at the acquirer for investment dollars, and you may discover it’s hard to secure funding. You’ll give many presentations for a small amount of money. Sometimes, you’ll be turned down anyway.
Achieving the earnout in escrow
Even though you’ve sold your company, it can take several years to complete the transition and get your full earnout. An earnout is a contingent payment you, your team and your investors receive from the buyer when you’ve met specific performance targets.
Here’s how this works:
- About 20% to 30% of the proceeds are held in an escrow account until you’ve met the performance targets; this period can can range from two to four years.
- An escrow account protects both the buyer and seller. When escrow conditions are met, often as one-year targets, the seller will receive funds.
Let’s say your business was sold for $100 million with a two-year escrow. If the escrow amount is 20% of the deal, $20 million would be held in escrow. If you meet the targets, each year on the anniversary of the acquisition, the seller will get a portion of the funds: $10 million the first year and $10 million the next.
If you don’t meet performance targets, you’ll likely discuss a mutually agreeable solution with the acquirer. Such discussions can be contentious, and solutions can be challenging to find.
For the buyer, an effective transition often makes the difference between success and failure. Depending on your industry, a buyer is likely to negotiate for a mandatory transition period where you remain at the company to help them integrate the business.
The financial incentive to stick around after the sale can be immense. Think of it this way: As the person who started, grew and operated a business for years, no one understands your company better than you. Continuing to be a part of growing it is your best opportunity to convert your knowledge and efforts into cash and ensure escrow payments are released in full.
Determining how you fit in
Once the deal is done, your business will no longer be in your care, and you may find yourself taking orders from someone with whom you may not see eye to eye.
This can be a difficult and big adjustment to tackle. Not only will you face a new culture and responsibilities, your role will likely change dramatically. The extent of these changes will depend on the outcome of your discussions before the sale and your involvement post-sale.
The two most common forms of written involvement about your future role are employment contracts and consulting contracts. It is absolutely critical to hire an employment lawyer to work through the details throughout the entire process. They will help you negotiate the details of your compensation; role and responsibilities; good reason clauses for termination; benefits; and other terms of employment. A good employment lawyer will show you how to advocate for yourself in the agreement.
Time to exit and seek new opportunities
Many startup acquisitions come with a two-to-four-year vesting period. To increase the chances of getting the full escrow, you and your key employees should consider staying on through this critical period.
Many entrepreneurs and teams will find the constraints of a new company challenging to get used to. As soon as the vesting period or mandatory transition contract period ends, you may be eager to start a new venture. My itch to exit came after 13 years when our new CEO directed all business units to fully integrate into the parent company instead of continuing to run semi-autonomously. My fellow business unit leaders and I would have seen our roles getting eliminated. Each of us exited the company to new opportunities.
You may be tempted to mentally check out and move on to your next endeavor before you get the earnout. And why not? After all, you’ve pulled off the exit plan and the buyer can take over now.
But there’s a big reason for staying put through the critical stages of the acquisition. Remember why you founded your company in the first place: to create, launch and go to market with a breakthrough product or service. A successful sale is clear confirmation that you’ve delivered on the promise to your stakeholders and yourself. You led the successful sale of your company to a firm that can take your product or service to new levels of success.
By staying on, you’ll not only reap the most financial benefit, you can be instrumental in seeing your innovation soar even higher.