Tech M&A: Top tips for a successful deal
Published on 10th Oct 2023
What do serial entrepreneurs and legal experts say are the secrets for a smooth deal process?
Osborne Clarke's Tech Transactions event brought together a panel of experts to share their experiences in tech M&A. On the panel were Caroline Plumb OBE, Group CEO of Gravita, Nick Field, CFO, Dovetail Games, Adrian Overall CEO of CloudStratex, and Louise Grzasko, Partner at Osborne Clarke. The panel, moderated by Mathias Loertscher, Partner and Head of Tech Transactions at Osborne Clarke, explored strategies, best practice and practical considerations for approaching M&A transactions in the tech sector.
The need for preparation
Preparation remains paramount. To fully realise the value of their business, sellers need to be able to articulate their proposition and make sure they do not get tripped up by not having their businesses ready for the rigour of due diligence during a sale process.
In practice this means dealing with any underlying issues up-front with a particular focus on the things that someone who is not familiar with the business would worry about. Sellers may find it useful to get an external perspective on this from their advisers and network before kicking off the sale process.
However, over-preparation or an excessive number of presentations on the commercial aspects of the business can also be counterproductive. Sellers should have trust in a competent corporate finance house to narrate their story.
The sale process
A pressing question in M&A is timing: when is it the right moment to sell? The answer often lies in the founder's mindset. Entrepreneurs who know from the beginning that they want to exit after a few years should prepare for diligence from the very incorporation of the company. Focusing on employee incentives and aligning rewards towards an eventual sale can help towards a seamless sale when the time is right.
Sellers should also think about their motivations. They will likely be wearing many different hats which may sometimes be at odds (as employee, as company director, as shareholder) so being clear about how those roles interact and in what capacity they are making decisions throughout the process is crucial.
Buyers should understand which role is in play for the sell-side team during negotiations: is the seller speaking as an individual shareholder or are they taking a position in relation to what is best for the company itself? From a buyer's perspective it may be helpful to deal with emotive issues – including employment contracts – at heads of terms stage.
The parties should be mindful of the nature and motivations of the buyer too. Selling to private equity is not quite an exit; the sponsor is likely to demand another five to six years of commitment. A sale to a publicly listed company may mean that the deal will need to be publicly announced and the seller will not be able to maintain price confidentiality.
Building and maintaining relationships is also helpful for a successful process. Sellers and buyers should move away from a purely transactional mindset and aim to foster long-term relationships. Having a solid connection at a senior level can unblock impediments during the deal process and help enormously in the post-acquisition phase when strategic discussions morph into operational realities.
What are buyers looking for?
Modern buyers are taking a more in-depth approach to due diligence in the current market. Their investigations are more forensic, covering a broader spectrum. For sellers, this underscores the importance of well-organised documentation and a dedicated project team familiar with the business's intricacies. This allows other staff to continue their roles during the sale process without distraction.
It is essential to understand that a buyer aims to assess the business comprehensively. They often have a thesis on the target and will look to test this through various lenses – from diligence on the underlying product or service, regulatory checks, scrutinising insurance notification and claims histories, to assessing cultural fit.
The perspective also changes depending on the buyer. For instance, compared to a private equity buyer, a trade buyer is more likely to focus on issues which will be relevant to post-transaction integration. Selling to a trade buyer, often a competitor, is also likely to require information to be released in a more phased, layered process.
From a legal standpoint, with regulations such as the National Security and Investment Act, mandatory notifications to regulators have become a common feature of tech transactions, especially when being acquired by a trade buyer.
Deals do not always work out in the long run. Sellers and buyers are urged not to get swept along with the positive momentum of a transaction process, but conduct due diligence on each other to ensure the deal is an appropriate cultural fit, cultivate strong senior relationships to facilitate challenging negotiations, and not get overly focused on the deal at the expense of post-deal integration.
Deals can be exhausting for the management team. They need to make sure their house is in order and do it as quickly as possible, while not underestimating how long it will take. And finally, always have a plan B: both sides should avoid putting themselves in a situation where they cannot walk away.