Let’s now look at a big component, the Corporate information. This includes all aspects such as structure of share capital, governmental notices, minutes and resolutions, list of directors, securities, agreements relating to Shares of the Company and operations. Here are some specific point of interests:
Directors
This can be quite important if you are doing some form of Merger or Leveraged buy-out (LBO). Understanding who these Directors are can actually help you during the deal making process. Everybody is involved for a reason (and it can’t just all be about philanthropy) and knowing this early on can be valuable – even more if you are considering keeping some of these Board members going forward. Of course, you will want to get rid of the VC related Directors but you don’t want to exclude 3rd parties without a proper reflection.
Senior Executives or Officers
Who is the executive team? What is their individual roles and actual contribution? You want to find out who is really running the business and how they are doing it. Sometimes you might have many VPs in the Company but only to realise that they are basically a bunch of “yes men” to the CEO. It is crucial to understand beyond their title who are the movers and influencers (right or wrong) within the Company you are acquiring.
Shareholders’ agreement
Does the Company have a shareholders’ agreement, what type is it? Who are the shareholders that have special voting rights? You also need to understand any special components such as vetoes, multiple dips, carve outs, etc. This can actually help formulate a valuation/offer that will make the deal happen. You also want to make sure who is benefiting from the employee stock option plan (ESOP). Often, start-ups are very aggressive on valuation and therefore put the exercise price under water (ESOP’s worth nothing). Planning to new ESOP or special consideration for key employees are not required to make the deal but are key in making the integration and acquisition ultimately successful.
Subsidiaries and Other Entities
How is the overall Corporation structured? How many subsidiaries does the Company have. This is crucial in understanding how you will operate this going forward but also for things such as Tax considerations. Never underestimate how this can impact the business once acquired. Not all finance deal coming out are as good as when created…
Business Plan
You need to get an up to date version of the Company’s business plan but also all business and products plans from the past five (5) years. This is key in determining how accurate and realistic the product and executive teams have been for the past years. As the Company will make representations on the sustainability of the business going forward, knowing how good they’ve done in the past will help you put in place the right level of reps and warranties on the deal (and also including escrow).
Relationships Between Individuals
Another very important aspect of a transaction is to understand the relationship (family, corporate, financial) between every director, senior executive, shareholder or employee of the Company. Who is dating the CEO’s daughter? Who is working in Support but is also married to the VP of Products? Is the main supplier of consulting services actually the cousin of the Dir. Of Operations? Never forget that blood is ticker than ink and enterprises that have deep roots in family ties require a greater deal of attention (and finesse) if you want the acquisition to be successful.
Past acquisitions
What acquisitions were done in the past. What are the key elements still ongoing on those deals (escrow, retainer programs, IP ownership, etc)? What assets were acquired in recent years? You want to make sure that all IP and rights were properly transferred to the Company you are acquiring. Make sure to include all past obligations as part of your assumptions – including implicit rights given to certain employees or shareholders. Just remember that while it is good for a seller to go thru multiple acquisitions (greatly reduces their own liability), it is the opposite for the acquirer ..
