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Clearing the Way for a Potential Acquisition – Don’t Wait Until It’s Too Late

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Too many startups discover they’ve got an acquisition-blocking or acquisition-inhibiting issue after a price tag has already been agreed with the acquirer.  It comes out during due diligence and the best outcome could be a reduced acquisition price, significantly increased escrow amount or something else not so desirable.  The worst outcome could be a busted deal.

Trying to “clear the way” late in the game is usually very difficult and sometimes impossible.  So why not think about it now and set some processes in place to keep things clean from an acquisition readiness standpoint?  Here are a few things to consider:

  • Intellectual Property Ownership

    In a nutshell, do you have clear ownership of your intellectual property?  You need employee invention assignment agreements with all employees and your written agreements with contractors/consultants should assign all resulting work product to the company.  If you brought anything with you from your prior employer or college studies, you’ll want to make sure they can’t make ownership claims to anything important.

  • Open Source

    I’d venture to guess that just about every software company today incorporates at least some open source code into their shipping product.  This isn’t a problem but how the open source was used and how its use is documented is critical.  Do you know exactly where your development team has used open source code?  Are you sure you really know?  Have you ever had a code scan done to make sure?  Do you know which license controls each use (GPL, LGPL, Mozilla, etc)?  Do you know if improvements have been made and, if so, have they been properly contributed back?

  • Customer Contracts

    First, can you put your hands on every contract you’ve ever executed with a customer, supplier or business partner?  Second, can you easily identify the contracts that grant some form of indemnification, change of control rights (ie – termination, source code escrow, consent, right of first ___) or most favored nation status?  Can you quickly identify the contracts that have amendments following the initial agreement?  From the very beginning, start an index and log of every contract and capture this sort of information for future use.

  • Patent Violations

    Have you ever researched the possibility that the secret sauce of your solution violates someone else’s patent?  Your acquirer will do this research so you may as well know the answer ahead of time.

  • Financial Accounting

    If your company isn’t large enough to justify regular financial audits by experts, discovering at the acquisition table that you’ve been improperly recognizing revenue, accounting for employee stock options, capitalizing software development, etc. can be a killer.

This obviously is not an exhaustive list but it at least represents some of the most common issues discovered after an LOI with a price tag has already been agreed.

Check out my other M&A-related blog posts here.

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