Preparing for ExitDaniel BernsteinVice PresidentCorum Group
About Me
• 20+ years in the games industry• Computer Science and Music Mash Up• Founded Sandlot Games, sold it in 2011• Advisor to tech companies, from drone
startups to public companies• VP at Corum Group• Sell-side advisory to private high
technology companies
About Corum Group
• M&A Investment bank focused on selling companies
• Sold over 300 companies in 30 years
• Created ~$7B of transaction value
• Largest tech M&A educator in the world
8 Stages of an Optimal Outcome
• Prepare, prepare, prepare!
IntegrationClosingDue
DiligenceNegotiationDiscoveryContactResearchPreparation
Preparation and Planning
• Importance of preparation• Due Diligence• Record Keeping• Audits• Financial Statements• Financial Projections
Being prepared means
• Preparing your company• Preparing for sale – due
diligence• Preparing to pay your
taxes• Preparing to live with the
deal after closing
How to get more of what you ask
Preparation begins before the decision to sell
Frame company agreements and contracts with M&A in mind
Planning is key to higher valuations
Understanding the Buyer’s Checklist
• All buyers use a “due diligence checklist” • Often overly comprehensive• May contain irrelevant requests • Varies depending on the nature of the
transaction (Stock or Asset Purchase)• May ask for information that could be
damaging if the deal doesn’t happen• Timing of production of potentially damaging
information is often negotiated
Corporate and Legal Structure
Articles of incorporation By-lawsMinutes – board, committee, shareholder
meetings Recent changes in corporate structure Parent, subsidiaries and affiliates Shareholder list/cap table
Financial Data
Audited financial statement since inception
Most recent 3-year projectionsMonthly sales projections taking
seasonality into account Changes in accounting
methods/principles – last 3 years Outside consultants’ or accountants’
reports
Tax Status and Contracts
Federal/state income tax returns – last 3 years
Detail of any audit List of bank and non-bank lenders Agreements: credit, debt, leases, etc.Guarantees: mortgage, financial, liensContracts: suppliers, vendors and
customers
Regulatory/Insurance/Litigation
Copies of any permits and licenses Reports of government agencyApplicable federal/state/local
regulationsCopies of insurance documentsDecrees, judgments or Settlement
documentation Description of any current or
potential litigation
Employee Relations/Property
Management organization chart and key staff biosCompensation plans: including pension, options,
profit sharing, deferred compensation, and retirement
Correspondence, memoranda or notes concerning pending or threatened labor stoppage, labor disputes
Confidentiality agreements with employeesPersonal property owned/leased by companyTitles, mortgages, deeds of trust and security
agreements
Intellectual Property/Products
IP documentations, copyright or patent filingsDetails of product line offering, market shareList of all major suppliers – amounts
purchasedInventory analysis – turnover and
obsolescenceBacklog analysis by product line, seasonal
analysis
Markets and Competition
List of major clients List of competitors and detail of market share Any pertinent marketing studiesSales database size Analysis of pricing strategy Sales projections, lead analysis
Due Diligence = Full Disclosure
• Deal with any weaknesses or problems openly
• Don’t sweep anything under the rug• Do what you can to reduce risk
perception• Consider business from their
perspective• Prepare question responses in
advance
Control the timing
Financial Statements
Past Financial Statements
Future Projections
Year 3Financials
Year 2Financials
Year 1Financials
Year 3ProjectedFinancials
Year 2Projected Financials
Year 1ProjectedFinancials
Current Year
Financials
Historical Statement Requirements
• 3 years of historical financials, plus current year-to-date
• Buyers may requirequarterly breakout
• For valuation: desirable to have financials by month • Be prepared to update financials regularly and quickly• Consider formatting to match public companies in your
market
Year 3Financials
Year 2Financials
Year 1Financials
3 Year Projections: Revenue/Profits
• Key valuation metrics
• Often the most difficult to prepare
Year 3ProjectedFinancials
Year 2Projected Financials
Year 1ProjectedFinancials
Current Year
Financials
Projections must be on standalone basis & match historical financial statement format
Be realistic compared to historical results – sales, profit margin, revenue per employee
Remember – Buyers are buying future earnings
Projections
• Understand and document your assumptions• Do not be too conservative• Do not be overly optimistic• Do not miss your targets while negotiating• Be clear if projections require additional funding
Be Careful: Earn-outs may be tied to your projections
0.5 11.5
3.5
0
4
8
12
16
Last Year Year 1 Year 2 Year 3
0.52
7
15
0
4
8
12
16
Last Year Year 1 Year 2 Year 3
0.5 0.6 0.7 0.8
0
4
8
12
16
Last Year Year 1 Year 2 Year 3
TooAggressive
Defensible
TooConservative
All amounts in USD
$Millions
Projections, a case study
Two types of M&A transactions
When Assets are
purchased When Stock is purchased
When Stock is Purchased
• All of the outstanding shares of stock are transferred
• The buyer operates business uninterrupted
• Seller has no continuing company interest or obligations
Company Ownership
Shareholders
Buyer
Cash
Stock
When Assets are Purchased
Asset Ownership
Shareholders
Buyer
Cash
Company
• No shares of stock are transferred
• Liabilities and taxes remain
• Company shell remains
Dividend
Questions?