Wednesday, December 2, 2009

Positioning for an exit: Five must-do's before year-end

By Lawrence Gennari, partner, Lawrence Gennari

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This has been an historic year, and technology companies and management teams are counting themselves lucky to have survived the worst recession in 50 years. As strategic planning for 2010 continues, decision makers planning for an exit or major transaction next year must keep at least five considerations in mind.

1. Housekeeping begins now. Every sale or financing starts with due diligence, and that means corporate books and records and significant contracts should be in good order. Now is the time to complete stock option or restricted stock grants, estate-planning transfers or issuances long promised but not papered. In connection with new grants or stock awards, the company may want to consider securing or updating a so-called 409A valuation of the business, to establish a baseline before a significant transaction. Also, consider necessary changes to important contracts, leases or customer agreements. Better to negotiate those now, instead of during the compressed time of a contemplated sale.

2. Start the Competitive Process. Many companies make the mistake of talking to only one potential partner or reacting to an unsolicited term sheet from an interested party. Due diligence commences, negotiations quickly follow and the team finds itself confronting the often difficult choice of status quo versus sale to a particular buyer. Remember: terms, conditions and equity valuations improve only in the context of a competitive process, with multiple suitors with terms sheets bidding against one another. The executive team should consider how to create such a process or meet with experienced investment bankers who know how to make that happen.

3. Make sure you can say “No thanks.” Given the year just ended, many companies have stretched their financial resources significantly and done more with less. Projections for 2010 should include a go-it-alone strategy, with realistic plans for cash flow, including any necessary equity or debt infusions. Hope for a game-changing transaction is not a substitute for a real-time financing strategy. Chances are, finding and negotiating the right transaction will take months, especially if a competitive process is in play. Any team would want the leverage of continuing the business in the ordinary course while the auction/sale process is ongoing.

4. Go back to basics for capital. If the company needs a capital infusion, identify the dollar amount and the investor “target audience.” Typically, a round of less than $1 million means friends and neighbors and an angel or two. For a financing round of up to $5 million, the company is likely to pursue angels, a receptive venture capital investor, and possibly a private equity firm interested in the market sector. Terms for those transactions vary widely, and the company will need to pay careful attention to investor expectations, especially as to the timing for return on investment. Executives also ought to be pursuing every available capital lease alternative as well as readily available state employee training and assistance programs.

5. Think about structure. The company should be engaging its accountants and lawyers about tax and structure planning now. Next year’s tax code could bring big changes, and thoughtful structural changes now could yield significant efficiencies next year. Also, if the team is not familiar with earnout structures, which provide for contingent purchase price payments over time, they should consult their legal and tax advisors and get up to speed.

Financial pundits are suggesting an uptick in corporate finance activity in 2010. A proactive financing strategy will best position your company for what lies ahead.



 

Lawrence Gennari is a partner at Gennari Aronson LLP and an adjunct professor at Boston College Law School, where he has taught mergers and acquisitions and corporate finance. He can be reached at lgennari@galawpartners.com.