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?