As the readers of my blog know, I’m a strong proponent of corporate partnerships. I believe with a good partnership in place, each company can focus on their core competencies while relying on the partner to complement their product or service line, accelerate their market expansion, or help in areas of weakness like customer care, distribution, or geographic expansion. In hard economic times, the need for partnerships becomes more acute – as the market becomes more and more selective, business weakness becomes amplified, and the need to provide the most complete and the best solutions pushes companies into partnerships or downright M&A. In a nutshell, companies look for relationships with “synergy” (ugh, that yucky word from the 90s, but it captures the essence so well – I’m open to other words, let me know what you got!).
I’m on record comparing business relationships to dating . Hostile takeovers aside, the reason business relationships work is because people on both sides spent time to select the right “match”, communicated the desired outcome in detail, and put a lot of energy into integration after the fact. Here’s a factoid I’ve shared in the past: 50% of M&As end in failure, closely matching the US divorce rate. Obviously not everyone gets it right.
Let’s take a look at Cisco. The king of acquisitions has swallowed up no less than 81 companies since 2000. The key to their success: proper selection, and masterful integration. I doubt if Cisco would claim 100% success rate with all their acquisitions, but it is no surprise that Cisco’s revenues have been on an almost straight upwards trajectory over the years. On the other end of the spectrum is eBay with very few M&As or partnerships. One acquisition was Paypal which was an excellent choice (I mean, seriously, they must have been blind not to see that one). Another one was Skype which was a perfect example of poor “synergy” – exactly, what were they thinking? (eBay recently sold off the majority shares in Skype)
For small and mid-sized companies, M&As may be a far out idea, but the need for corporate partnerships is even more pronounced than for larger corporations. With limited resources, these companies need to focus on their core competencies, and having a solid partner either in distribution, product line or geographic expansion, becomes necessary. Over the course of my career, I’ve developed or maintained several corporate partnerships. They all were “synergistic” in either product line or service offering. With the exception of one that ended quickly, they all generated more revenues for both companies. They all required careful selection, tight integration, and constant attention in order to succeed.
Perhaps I was lucky to have been involved with successful corporate relationships, but I think at a high level, specific contributing factors were involved in their success. I’ll list some of them here. I’ll be the first to say it’s easier said than done, but these are the absolute basics to make a business relationship work.
Ownership. Someone (or an organization) needs to be in charge of making sure relationships are a success. It doesn’t mean they do all the work, but they’re in charge of bringing the right people together to make it happen. Without ownership, things fall apart.
Needs definition. Define why a relationship is necessary, e.g., product line expansion, service offering strength, distribution, geographic expansion, IP acquisition, etc. Do you need a relationship for market acceleration, market expansion, or new market entry? This is where your selection criteria crystallize.
Selection. This is one of the most important steps in the process and needs careful attention to industry sector, product line, geographic expansion, etc. You may develop more than one relationship in the same area. And, oh, by the way, the other side should want to “be in bed” with you too.
Communication. Once you’ve selected a potential partner, hash out everything you can think of prior to the contract being signed including roles/responsibilities, financial obligations, integration process, consequences of anything that can go wrong, and…. exit strategy.
Integration. This is when the real work begins with personnel assignments, rolling out the relationship internally, training, re-organizations, etc. This is where most relationships fail to realize their potential. Plan thoroughly. Implement diligently.
Maintenance. You’re never done as long as the relationship is alive. Keep monitoring the success of the relationship. Things change over time, and you may reset and restarts certain parts of the relationship.
As I mentioned, this is a very high level and basic list of steps to take in developing corporate relationships. I’d love to hear about what other criteria you have faced that contributed to success of corporate relationships. What doomed them? Bring on the discussions!
Showing posts with label Mergers and acquisitions. Show all posts
Showing posts with label Mergers and acquisitions. Show all posts
November 5, 2009
September 21, 2009
Preparing Your Business for a Major Transaction: Seven Key Issues to Consider
For today’s blog I’ve asked Ara Babaian, Esq., a partner at Ervin, Cohen, and Jessup's business and corporate law department, to tell us how to prepare a business for a major transaction.
Listen to the man. He knows his stuff!
By the way, Ara had a much longer list originally, but for the purpose of brevity, I asked him to condense the list. Feel free to add what other factors you think should be involved in preparation for major business transactions.
****
Are you considering a major transaction for your business, such as a sale, merger, private placement or debt financing? These types of deals are very important to the stakeholders in your company and to the future success of the business, and they are often time-consuming and costly. Below are seven key issues that often arise in these deals, and any one of them can become a major obstacle to closing your deal. In addition, in a major transaction, the business owners will be asked to make certain representations and warranties about the business that can make them personally liable for any breaches. Addressing these issues in advance can prevent them from becoming pitfalls.
Maintain reliable financial information. It is critical to work with your in-house financial staff or your CPA to prepare financial information that you and other decision-makers can rely upon. Developing effective audit and internal control procedures is an integral part of this effort. Doing this will allow you to gauge how your business is performing and demonstrate its value to other participants in the deal. Further, it will show that your business is organized and well-managed.
Keep your employees through the transaction. Often a company’s value is closely tied with the individuals whom the company employs. Because a certain amount of confusion and uncertainty is involved with a major corporate transaction, it is critical to retain these employees. One way to do that is by incentivizing them with equity incentive plans such as stock option or other equity plans, so that the employees are motivated to remain employed by the company to the end of the deal and beyond.
Document your relationships. Depending on the industry your are in, some or all of your business relationships may not be documented—whether those relationships are with your suppliers, customers, contractors or others. However, to the extent practical, it is important to document those relationships. Doing so will help preserve the value in your company and support the due diligence review of your business that any investor likely will undertake.
Manage your partners. If your business has more than one owner, it is important to make sure that your partners are all on board with respect to any decisions regarding the deal. A buy-sell agreement, shareholders’ agreement or operating agreement (if your company is a limited liability company) can help you do this by imposing restrictions on the transferability of the shares and providing for other management and decision-making mechanisms.
Maintain your corporate records. Maintaining and updating the corporate records of your business on a regular basis saves a lot of time and prevents confusion during a major transaction. Worrying about these details in the midst of a complex deal will take away resources from the business and the deal itself.
Protect your intellectual property (IP). It is critical to protect your company’s IP (patents, copyrights, trademarks and trade secrets). The actions that need to be taken depend on the type of IP that is important to your business. For example, you may need to file for a patent, or register a trademark or copyright. To protect trade secrets, you want to make sure that your trade secrets are shared only with people who have a “need to know” and who sign a non-disclosure agreement. Your employees and contractors also should sign an inventions or “work for hire” agreement to make sure that the sole owner of the IP is your company and that employees or contractors do not acquire rights in the IP.
Review your lease and environmental matters. If you are considering a major deal, it is important to ensure that the lease for your business (1) is appropriate for the future needs of the business, (2) is assignable in the context of your deal and (3) has acceptable terms such as rent amount and term. In addition, a myriad of environmental and zoning laws may apply to your business, and it is necessary from time to time to evaluate these laws to determine their impact on the deal.
Complex corporate transactions present many challenges and use up a lot of resources. Addressing the issues presented above, along with any particular issues that face your business, will be a good start to smoothing the path for a successful business venture.
Listen to the man. He knows his stuff!
By the way, Ara had a much longer list originally, but for the purpose of brevity, I asked him to condense the list. Feel free to add what other factors you think should be involved in preparation for major business transactions.
****
Are you considering a major transaction for your business, such as a sale, merger, private placement or debt financing? These types of deals are very important to the stakeholders in your company and to the future success of the business, and they are often time-consuming and costly. Below are seven key issues that often arise in these deals, and any one of them can become a major obstacle to closing your deal. In addition, in a major transaction, the business owners will be asked to make certain representations and warranties about the business that can make them personally liable for any breaches. Addressing these issues in advance can prevent them from becoming pitfalls.
Maintain reliable financial information. It is critical to work with your in-house financial staff or your CPA to prepare financial information that you and other decision-makers can rely upon. Developing effective audit and internal control procedures is an integral part of this effort. Doing this will allow you to gauge how your business is performing and demonstrate its value to other participants in the deal. Further, it will show that your business is organized and well-managed.
Keep your employees through the transaction. Often a company’s value is closely tied with the individuals whom the company employs. Because a certain amount of confusion and uncertainty is involved with a major corporate transaction, it is critical to retain these employees. One way to do that is by incentivizing them with equity incentive plans such as stock option or other equity plans, so that the employees are motivated to remain employed by the company to the end of the deal and beyond.
Document your relationships. Depending on the industry your are in, some or all of your business relationships may not be documented—whether those relationships are with your suppliers, customers, contractors or others. However, to the extent practical, it is important to document those relationships. Doing so will help preserve the value in your company and support the due diligence review of your business that any investor likely will undertake.
Manage your partners. If your business has more than one owner, it is important to make sure that your partners are all on board with respect to any decisions regarding the deal. A buy-sell agreement, shareholders’ agreement or operating agreement (if your company is a limited liability company) can help you do this by imposing restrictions on the transferability of the shares and providing for other management and decision-making mechanisms.
Maintain your corporate records. Maintaining and updating the corporate records of your business on a regular basis saves a lot of time and prevents confusion during a major transaction. Worrying about these details in the midst of a complex deal will take away resources from the business and the deal itself.
Protect your intellectual property (IP). It is critical to protect your company’s IP (patents, copyrights, trademarks and trade secrets). The actions that need to be taken depend on the type of IP that is important to your business. For example, you may need to file for a patent, or register a trademark or copyright. To protect trade secrets, you want to make sure that your trade secrets are shared only with people who have a “need to know” and who sign a non-disclosure agreement. Your employees and contractors also should sign an inventions or “work for hire” agreement to make sure that the sole owner of the IP is your company and that employees or contractors do not acquire rights in the IP.
Review your lease and environmental matters. If you are considering a major deal, it is important to ensure that the lease for your business (1) is appropriate for the future needs of the business, (2) is assignable in the context of your deal and (3) has acceptable terms such as rent amount and term. In addition, a myriad of environmental and zoning laws may apply to your business, and it is necessary from time to time to evaluate these laws to determine their impact on the deal.
Complex corporate transactions present many challenges and use up a lot of resources. Addressing the issues presented above, along with any particular issues that face your business, will be a good start to smoothing the path for a successful business venture.
Subscribe to:
Posts (Atom)