For private companies backed by venture capital investors, acquisition is frequently the most likely path to liquidity. Founders are often laser focused on product development, market expansion, and fundraising, without devoting the same early-stage discipline to ensuring the company is well-positioned for a future exit via a merger or acquisition.
M&A preparedness is not a late-stage exercise, but an operational strategy to position your company as an attractive, high value target to potential acquirors.
Corporate Governance
Some of the mostcommon obstacles to efficient M&A processes stem from issues related tocorporate governance. Complex capitalization tables, unclear chain of equity ownership, and unresolved governance issues can create transaction delay and, depending on the structure of the transaction, loss of leverage.
Companies should consider focusing on three key areas of corporate governance to be prepared forfuture M&A processes: capitalization table discipline, stockholder rights, and board and stockholder alignment.
Capitalization Table Discipline
Maintain clear documentation of all equity issuances with proper board and stockholder approvals; confirm board minutes are complete, approved by the board, and signed; verify that 83(b) elections have been timely filed with respect to restricted stock grants to founders and early employees; and ensure 409A valuations are updated following major events that may impact valuation (such as a financing) and, absent such events, at least annually.
Stockholder Rights
Ensure all stockholders have signed the relevant stockholder agreements and that the company’s management team understands the protective provisions embedded withinsuch agreements; similarly, ensure that the company’s management team is familiar with relevant provisions of any investor side-letters (thinkdrag-along mechanics, rights of first refusal, and co-sale rights).
Board and Stockholder Alignment
Understand what approvals are required to approve a sale or merger of the company and whether any investor has blocking rights.
Contracting Discipline
Material contracts, such as key vendor and customer agreements, collaboration agreements, and licensing arrangements, are some ofthe first diligence requests in an M&A process. These contracts often contain assignment orchange-of-control provisions that can require third-party consent, accelerate payment obligations, or trigger termination rights or other contractual rightsthat could significantly impact the trajectory of a deal. Accordingly, it is important for companies tomaintain clear records of all material contracts, ensuring that all contractsare fully executed and include all attachments, exhibits, amendments, and restatements. Companies should trackwhether any material contracts have upcoming renewals or expiration dates. Additionally, tracking key provisions in suchmaterial contracts that may be triggered by an M&A (such as third-partyconsent requirements) will help streamline the M&A diligence and consent process.
Intellectual property is another value-driver for life sciences companies and technology companies, making it vital for companies to have documentation that clearly delineates intellectual property ownership. Companies should verify that all employees and contractors have signed Proprietary Information and Inventions Assignment Agreements (“PIIAAs”), review consulting agreements to confirm that intellectual property created by consultants/contractors has been validly assigned to the company, and obtain confirmatory assignments from founders and early contributors, if needed, and at the appropriate time. For companies with affiliated entities, confirm that the company’s core intellectual property assets sit within the target entity and not within any affiliated entities.
Being proactive can save time and expense during the M&A diligence process.
Regulatory Compliance
Depending on industry and geography, regulatory risk can become a gating diligence issue. Companies should identify areas of risk and preemptively resolve any outstanding compliance risks (e.g., data integrity, marketing, industry-specific licensing, etc.). In particular, life sciences companies should consider pursuing regulatory planning with the assistance of healthcare and/or FDA counsel (as needed) to ensure, among other things, that regulatory filings, communications, and approvals are complete and accessible.
Deal Team Preparation
Once the company has decided to start a sale process, identify at the outset who will be part of the core deal team, which will typically consist of a select number of employees and outside advisors. Members of executive management and other key internal personnel with specialized knowledge about the company’s corporate governance, labor and employment practices, employee benefits structure, assets (IP, real estate, etc.), litigation exposure and regulatory compliance, are typically included within the core deal team. Further, at the appropriate time, companies should engage outside advisors, such as outside legal counsel, financial/tax advisors, and investment bankers, all of whom can help quarterback the transaction and efficiently drive the deal process.
After the deal team is in place, consider implementing deal confidentiality procedures to maintain the integrity of the sale process:
- assign code names to the project and company participants;
- limit working group size and access; and
- consider antitrust issues and the use of “clean team” agreements and data rooms.
Data Room Readiness
Prepared companies treat diligence readiness as an ongoing process and not an exercise triggered by a letter of intent or term sheet. First, select a virtual data room that provides strong security and activity tracking. Second, build the company’s data room with organizational discipline, using logical folder structures (corporate, IP, finance, regulatory, benefits, etc.) and uploading documents in a searchable, digital format with consistent document naming conventions. Lastly, in connection with building the data room, flag with the guidance of deal counsel any confidentiality concerns and access restrictions that need to be put in place. For example, are there any documents that need to be redacted or anonymized? Does the transaction present antitrust sensitivity requiring documents to be shared through a “clean room”?
In all, a well-maintained and categorically organized data room significantly accelerates a sale process and signals sophistication to potential acquirors.
The most successful exits rarely begin when a banker is engaged. Ideally, it begins years earlier with strategic and operational foresight. Companies that understand the value of M&A preparedness can preserve negotiation leverage and act more decisively when M&A opportunities arise. After all, engineering an exit is more than closing a deal – it is positioning the company so that the right deal finds you.
