For start-up owners putting their heart and soul into a company they’re passionate about, their exit strategy may seem too far off to even consider. But understanding the process early may not be such a bad idea for emerging tech companies.
Monica Mei, a Toronto-based entrepreneur, is currently involved with three fashion-related start-ups, the most recent being WhatImWear.In, a mobile street style application that will launch within the next two months.
While each project is close to her heart, she says her team is already getting interest in their new app, so thinking about the acquisition process is not such a foreign concept. “We know we have something really hot,” she says.
Mei, along with a crowd of other tech entrepreneurs, attended a session on mergers and acquisitions (M&A) as part of PricewaterhouseCoopers “Connecting Vision to Reality” conference in Toronto on May 11.
Mergers and acquisitions are more common than we know, according to Bruce Lazenby, regional vice-president for Canadian operations for the Corum Group and one of the event’s speakers.
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In 2010 alone, there were more than 3,200 acquisitions of software companies globally, according to the Corum Group Ltd., a firm that specializes in software M&A. But cases like Microsoft’s recent acquisition of Skype are what Lazenby calls the “lottery cases,” but there are many more that we simply don’t hear about. “A lot of the time, the person buying your company is someone you haven’t heard of,” he says.
If you are looking to go through the M&A process, you should be prepared for a marathon, says Mark Burton, CEO of Gesture Tek Inc. and another panellist. He has been through four successful acquisitions with software companies and is part way through a fifth. The fastest that he ever sold one of his companies was seven months, but typically it takes more than a year, he says.
In that time, a lot can happen, including water cooler rumours and insecurity among your staff. “They will fill the vacuum with rumours,” he says.“There might be some loss of jobs and that process is ugly.”
Serial entrepreneur Shelley Kuipers would agree. “Letting people go is brutal,” says the CEO of Calgary-based crowdsourcing company Chaordix.
Your employees might assume 90 per cent of the staff will be let go, when it could be closer to 10 per cent, Burton says.
“Unless you give them positive news, they will fill it with negative news. It’s just human nature,” Burton says. Even if you can’t tell them anything, at least admit to it, he adds. “I tell them everything I can and if I can’t, I tell them I can’t,” he says.
Because Mei’s team is so small, those sorts of issues likely won’t be major problem assuming their company is acquired soon, she says. But there may still be differences in goals among the team, and its open and transparent culture will likely help with the process, she says.
For her, understanding the M&A process was about other details, like realizing she’ll need to eventually hire a software lawyer who can help with issues surrounding intellectual property, she says.
Indeed, it’s crucial to assemble a dream team, according to both Burton and Kuipers. That means the best possible investment bankers, who truly understand how a small software company works, Burton says. It’s also imperative that you “paint a picture of marital bliss” with your acquirer, he says. You need to show how your company can integrate with the acquirer’s culture.
But even if you have the best dream team possible, critical decision making and discussions should be left up to the people directly involved, Burton says.“While the trusted advisors are really important, the businesses have to push it through,” Kuipers says. “That has to be done without the lawyers and other advisors,” she adds.
Overall, your business really needs a solid Plan A-a strong business plan that will make acquirers want you but will help your business succeed even if the acquisition doesn’t go through. And if it does, you should be prepared to share the wealth among your team, according to the event panelists.
“Your team has to be amply rewarded for what they’ve just accomplished and they have to be highly motivated going forward,” Kuipers says.