Okay, it’s official, even though no one wants to say the “R” word, and the pundits are arguing over whether the U.S., or the global, economy is in a recession, if you live in startupland, you know it’s a recession! I sold my first company during a tech recession. I say we skied the avalanche. And frankly today’s avalanche looks a lot like prior avalanches – no soft landing, no pivot, no good news, at least not if you are in the venture business.
It turns out that many M&A deals end up as asset sales. This is particularly true in mature or more traditional businesses, but in difficult times, it is often true for startups and growth businesses too.
Why would an acquiror want an asset purchase instead of a full company purchase? In no small part because they don’t want your liabilities. What liabilities are those? That can include cash debt or tech debt. It may be severance packages you’ve promised people (as an example see Twitter’s golden parachutes!) or just the burden of too many employees they don’t need if they really just want your tech (and possibly your tech team).
At the same time, an acquiror may prefer an asset sale because it is advantageous to the buyer from a tax, accounting or cash management perspective.
As you might imagine, in the asset sale, the acquiror buys desired assets, but leaves the corporate shell, and leaves anything else they didn’t acquire! Extremely importantly for the founder, board and shareholders is that the remaining shell still has to be dealt with. That corporate shell might be shut down gracefully, it might have an ongoing business that has to be conducted, it might need to declare bankruptcy or some other resolution. A recently announced deal with Blackstone buying part of a division of Emerson Electric shows some of these choices in action!
I’ll be honest, if you’re selling your company, it is easiest for the founding team to sell the whole thing, lock, stock and barrel. However, it may not be your choice.
So if presented with an asset sale as your only option, or as, at least on the surface, the most attractive option, what are some things you should consider as you negotiate the agreements?
- What is it that is being acquired? Technology / Intellectual Property ? Brand? Team (or part of the team)? Owned IT infrastructure (less likely)? Real Estate (less likely)?
- What will be left in the entity that is left after the sale? Some clients? A copy of the tech to serve those clients? Debt (likely)? Tech Debt (in many cases)? Litigation or other liabilities? Employees?
- How will you handle the shutdown of the entity that is left? AND How will you PAY for the shutdown of the entity that is left – and don’t kid yourself it will cost money (accountants, lawyers, your time, some soon to be former employee time, consultants if needed….)
- Do you need the approval of your shareholders for the asset sale? Generally the answer is yes! And what terms will they try to impose or are imposed by existing agreements? If you are doing an asset sale as your exit, they want as much of that money as they can get, but that is almost certainly not in your best interest (unless you also got yourself preferred stock, as I have suggested!)
- How will you take are of yourself and your team? What happens to team members who go with the acquisition – What happens to their compensation? Do they get new equity? Are they required to sign non-compete agreements? What type of non-compete will you be required to sign and is it binding? What happens to any team members who are not going with the acquisition – do they get severance? Something else?
- How will you be compensated for these assets? Cash? Up front or over time? Equity in the acquiror? With an earnout?
I’m going to tackle these one at a time because they are each worth of a post.
Each part is available.