Next year is shaping up to be a very strong year for M&A activity in the Knowledge Economy. In order to assist your preparation for 2021, take a look at our M&A Preview, in which we discuss the following eight key trends:
- The adoption of digital is accelerating
- Emerging technologies are being commercialised rapidly
- There is a convergence across the sector and delivery models are blending
- Private equity participation in the knowledge economy is increasing
- Next-generation technology platforms are emerging
- Vertical software solutions are playing an increasing role
- Buyers are returning to nearshore locations for access to new skills
- Shareholders are aligning expectations and addressing structural risks
We will be taking a detailed look at how to build shareholder alignment through a shared vision, incentives and shares or options in an upcoming webinar.
Some may think that once the shareholders agree they’d like to sell the business, then this means that everyone is on the same page and it’s now a matter of finding a buyer. However, there are a wide-range of issues that need to be agreed on in order to present a united – and attractive – front to prospective buyers.
The starting point is to agree on the type of deal you want to do. It could be a 100% sale to a strategic acquirer, or perhaps the best strategy is to monetize part of your shareholding with a financial investor while raising funds to grow the business as an independent. A transaction for shareholders can take several forms and each option has its own risk vs reward consideration that must be taken into account. (See the article here for more details) Timelines and value are the two next most immediately evident points to agree on. If one shareholder wants to sell now for $20m, the second shareholder wants to sell in 2 years for $40m and the third wants to receive $50m for their share no matter how far in the future, then there needs to be some discussion about how to balance the best outcome for all involved.
There is then the practicality of what actually gets paid. A deal can be structured in a variety of combinations with cash, shares and earn out lengths all in play and of differing appeal to shareholders involved. Shareholders will receive a payment which is proportionate to the terms of their agreement and a good deal adviser will keep all parties apprised of changes and what they will be taking out of the business at all times. Before embarking on a sales process, knowledge economy firms should ensure they have a well-drafted shareholder agreement to avoid problems down the line when a sale is well advanced.
As our buyer research shows, cultural considerations permeate almost every aspect of a deal and shareholder alignment is no exception. For example, if a shareholder left a particular knowledge economy firm for a reason and that knowledge economy firm now wants to buy their business, then that does not bode well for the deal going through. Does the buyer want to subsume the acquisition while some of the shareholders are very attached to keeping the stand-alone brand? Is the buyer very corporate, with demanding reporting? Some of the shareholders may have set up on their own to be more entrepreneurial and avoid such demands. There is a lot for the shareholders to discuss and agree on.
In all the excitement of the deal, it’s important not to forget that it’s likely that the shareholders will have to continue to work in the business for an earn-out period. Motivation during this time needs to remain high among all the shareholders. This may be difficult when there is a big sum of money sitting in the bank, but all the shareholders must remain aligned with the investor’s objectives for it to be a success.
Finally, what happens if the deal doesn’t complete? Selling a business is a high-pressure situation and can be like being on a rollercoaster. If the deal fails to go ahead – whether at the due diligence point, or a buyer pulling out even later – will all the shareholders be able to recover and get back to growing the business and motivating their team? It’s worth regular reminders during the sales process that nothing is settled until everyone has signed on the dotted line.