If you are thinking of selling, there are tactics a technology company should use to improve its chances of a successful sale.
1. Identify the strategic reason for the acquisition
An acquirer is more likely to make an acquisition to gain creative, technical or management talent, acquire key technology, distribution channels or sources of supply, or expand or add new product lines. The selling company may want access to complementary products and markets, improved distribution capacity and customer base, access to capital without further dilution to founders and investors, an established infrastructure to accelerate growth, as well as liquidity for founders and investors. Often, an acquirer will make an acquisition to get to market more quickly, or to eliminate a competitor.
2. Identify valuable attributes and initiate due diligence
Having proprietary technology is always a competitive advantage, particularly when such technology is a market leader in a fast-growing market segment. Initiating legal and financial due diligence prior to going to market is extremely important, so that any problems or issues can be identified and remedied prior to an acquirer commencing its own extensive due diligence.
- Internal due diligence should include the preparation of a comprehensive list of all IP assets, including patents, patent applications, trademarks, service marks (registered and unregistered), fictitious name filings, Internet domain names, software and databases, registered and unregistered copyrights, trade secrets, proprietary know-how, technology or processes, and rights of publicity, each for federal, state and foreign jurisdictions.
- All IP should be reviewed for filing dates, renewal periods, security interests, validity, enforceability, and freedom to use. Anti-assignment clauses in IP licenses and other contracts that may be triggered on a change in control should be addressed and the process for obtaining any requisite consents should be clarified. Invention assignment and confidentiality agreements need to be reviewed for all employees and consultants that have contributed to the development of the IP.
- License agreements (which may affect field of use and other restrictions) and other IP-related agreements also need to be reviewed, including research and development agreements, joint venture or other strategic partnership arrangements, co-marketing agreements, manufacturing, supply, distribution agreements and covenants not to sue.
3. Identify the most advantageous deal structure
The typical forms for structuring acquisitions are stock sales, asset sales or mergers. Transactions can be taxable or partially tax-free depending upon structure. It is important to check with tax and legal advisors early in the process to determine the best form for the structure of the deal, so that the selling company is best equipped to evaluate competing offers.
4. Identify negotiating strategies
An acquirer will negotiate for the following:
- Broad representations and warranties regarding the disclosure of transferred IP, the sufficiency of IP assets, IP ownership, validity and enforceability, non-infringement, and level of protection of trade secrets and confidential information.
- Limited materiality qualifications and limited knowledge qualifiers. Joint and several liability for representations and warranties will be requested, with low caps and baskets for indemnity provisions, and indemnification beyond the applicable escrow or holdback amounts.
The selling company should attempt to narrow all of these by arguing for:
- More limited or narrow representations which are knowledge-based with materiality qualifiers, and incorporating limitations on the survivability of the representations and warranties.
- A maximum liability cap for indemnifications claims, baskets (minimum claims which must be met before an acquirer can make any claim), and deductibles (where an acquirer can only make claims above a certain threshold amount).
- Planning for the acquisition process in advance will enable selling companies to be proactive in their negotiations with an acquirer. It will also pave the way for a smoother acquisition process resulting in a successful closing that meets the objectives of shareholders.
Silicon Valley Business Journal
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