Maria described an advisory team, or network, that helped her through the sale process. She included other founders who had successfully sold their companies, and made a point to recognize that those founders sold design consultancies, not just product companies. In addition, her advisory team included her accountant, her M&A advisor, and her lawyers.
This is the makeup of a strong advisory team. Let’s look at each role, and what to look for when you assemble your team.
I never knew what it meant to be in “Mergers & Acquisitions” before considering selling my company; it always reminded me of George Costanza, from Seinfeld, getting into the very vague “Importing and Exporting.” I learned that a) “M&A advisors” and “bankers” are terms used synonymously during this process, and b) without a banker, I would probably have been taken for a ride.
These are the things your M&A advisor or banker will do to help you in the process:
Your company is a story, and designers are really good at telling design stories—stories of how people use and benefit from products and services. But we’re often bad at telling stories that focus either on the purely financial, or on a broader business story. That’s a banker’s sweetspot: helping you explain to companies that you don’t just make beautiful or meaningful design work—you act as a value multiplier, or contribute a set of ancillary skill sets, or expand market potential, or bring accretive revenue, or open the door to new client service pathways. They’ll work with you to understand what you want out of a deal, and then help you tell the world your story in just the right way.
A unique part of the sale process is the dating phase with potential buyers: the cat and mouse game of giving enough information to prospective buyers that they want to learn more, but not so much that they turn you down before they ever get to hear and learn the details. First, your banker will create a list of contacts that you may want to engage with. This is usually based on their “ear to the ground” knowledge; as they network, they learn about companies that are interested in growing design capabilities. They also have a set of contacts at the “usual suspects”—private equity firms, operational consultancies, and tech integrators. And, they’ll ask if you have any specific companies you want to add to the list.
Next, they’ll create a teaser—a one-pager that, without mentioning your company by name, gives a high level overview of the value you can provide. It highlights your company size, revenue, key capabilities, and any unique qualities about your firm. They’ll email that to the whole list, and people who are interested in learning more will request the next document, a Confidential Information Memorandum (or CIM). The CIM is a 30–40 page document that adds color to the teaser by better describing who you are, what you do, and providing a deeper dive into your financials, customers, team, and unique parts of your company. Prepare yourself that it’s going to look terrible; it’s going to look as if a banker made it, not a designer.
When potential buyers show interest in the teaser, they’ll then sign an NDA before receiving the CIM. The teaser was anonymous; the CIM is not. This is where the process starts to feel real, because there’s now an indicator of your sale out in the world and out of your control. More about secrecy in later chapters; for now, suffice to say that many people ignore NDAs, and as I networked through my own process, I received numerous CIMs that I shouldn’t have from people generous with their intentions, showing me how other companies presented themselves.
After seeing the CIM, some prospects will drop out, and the group that’s left becomes the target of your roadshow—presentations that you give about yourself, highlighting your work and experience in the best light possible. This part probably isn’t very hard, because as consultants, we present work all day long. But there’s a lot riding on it, because often that first presentation can be what really sets a deal in motion. We’ll go into more detail on the roadshow presentations themselves later in this book.
Your banker will backchannel information to you (from their banker, most likely) and as the process and conversations continue, they’ll act as your advisor on how to shape and refine your message, which buyers are most serious or committed, and where they think you’ll have the best outcome based on your goals and needs.
While they’re helping you show off your company, your banker will also be translating your finances into the format and style that a buyer will expect. I understand the financial fundamentals of running a business, but I had never produced documents for anyone to look at other than my partners’ and my accountant. Our banker’s format followed what a buyer expected to see. He leveraged all of our Quickbooks data, and my various spreadsheets, to develop a working model which looks three years backwards.
He also spoke extensively with us about what would constitute a realistic forward-looking forecast, and the model included 18 months into the future. This was based on historic trends, pipeline, leads, and marketing events.
Once a buyer has formally indicated their interest through a letter of intent, or LOI, your M&A advisor will do their magic: they’ll negotiate on your behalf. They understand what’s realistic and what the market will bear, they likely have a strong relationship with the seller’s financial team, and they’ve (hopefully) done this enough times that they have a muscle memory for how a deal will work and what might make it fall apart. They’ll be your advocate on when to push back and when to accept detailed financial issues, and they’ll be a sounding board to role-play different scenarios related to those negotiations. Since they act as an intermediary between you and the buyer, you’ll be able to vent to them and have them translate your anxiety or annoyances into productive steps forward. And they’ll work with your attorneys on the nonfinancial part of the deal, when asked.
I found that having a banker on our team was critical to our success; just be prepared to pay them, perhaps more than you imagined. Terms are different depending on who you work with and how much your company is worth, and they only get paid if you actually sell, but expect to pay a minimum amount of hundreds of thousands of dollars, and more likely, a low percentage of the total deal size (anywhere from 3–7% seems to be typical).
I found my banker/advisor during my initial research. I looked at the various deals they had done in the past, and saw they had helped some companies that I recognized and respected. I’m extremely glad I selected someone who had experience with design companies, and experience with service businesses.
Prior to our acquisition, our CPA helped us with the basics: filing our tax return at the end of the year. She understood our business, and our business was very simple, so we interacted rarely.
During the acquisition, and especially during the financial negotiations, we found ourselves communicating much more frequently. The biggest concerns we had, which she helped us through, were related to the tax implications of when and how to receive money. These are some of the specific things your CPA will help you with:
As you get into diligence, which we’ll talk through later in this book, an acquirer will be looking into your financial history with much more scrutiny than you are likely used to. We follow best practices with Quickbooks: connect to our credit cards and bank accounts, categorize things into accounts, and reconcile at the end of each month. But the books get a little more complicated at the end of each year, because closing balances are intertwined with revenue recognition methods. As your banker structures your financial outlook, you’ll have to get very crisp on your revenue recognition method, and that may mean your CPA makes adjustments.
Your deal may contain a mixture of cash and stock, and there are implications on when you receive this compensation and how you report it to the IRS.
For example, stock has value, but you may not have earned that value when the deal closes (for example, if it’s tied to an earnout period). There’s an IRS rule called an 83(b) which allows you to pay tax on the stock when it’s granted, which—theoretically—will be at a lower value than when there’s a liquidity event.
Or, your stock may be referenced as being made pursuant to Section 721, which describes that “No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership.” Yikes; I’m never going to be able to get my head around that.
Your CPA will help you work through the implications of filing an 83(b), will try to explain Section 721 to you, will take on all of the other arcane parts of the tax code, and remind you to actually follow through on the paperwork.
While you can probably get by without an M&A advisor, and you may be able to work the tax implications yourself, there’s no way you’ll get through this process without a lawyer. The paperwork is just too thick and daunting, the language obscure, and the intimidation factor is off the charts. When you find a lawyer, look for someone who has done this before—worked through deals that focus on creative services, rather than products. And make sure they’re small enough that you’ll get their time and attention!
Here are some of the things your lawyer will do to help you in the process:
Your banker is going to help you negotiate the financial parts of your deal. Your lawyer will help you negotiate everything else. For example, in an asset sale, you’ll be selling everything the company owns, like the contracts you have in place with your clients. They’ll help you write language to make sure that, while you’ll do your best to provide all contracts, and to confirm that all contracts are buttoned up, you’ll have an out if you made a mistake along the way. When my lawyer works on contracts, I frequently see him adding language like “to the best of my knowledge” or “within reason” and changing words like “all” or “every” to “all that I am aware of.” I also see him arguing for like-terms: if the buyer gets something, the seller should get it, too.
Just like your banker understands what other companies are being valued at, your lawyer understands what terms are common in contracts. I tried to educate myself on the things they were recommending, but there’s a reason I’m not a lawyer; I struggled with terms like wrong pocket assets and a much more robust indemnification section than I’ve typically seen. For example, imagine that your contract has a clause that looks like this:
Procedures for Indemnification of Third Party Claims. A Purchaser Indemnified Party entitled to indemnification hereunder with respect to a third-party claim may assume the defense and otherwise deal with such claim in good faith, with counsel of its choice; provided that, such Purchaser Indemnified Party shall not settle any such third-party claim without the prior written consent of the Indemnifying Party (which consent shall not be unreasonably withheld, delayed or conditioned), unless such claim involves Losses which are reasonably expected to be in excess of an amount indemnifiable hereunder due to the application of the Cap.
You may find yourself watching a back-and-forth negotiation over the last sentence, “unless such claim involves Losses which are reasonably expected to be in excess of an amount indemnifiable hereunder due to the application of the Cap.” It’s very satisfying to not have to engage in those discussions and trust that someone else knows what they’re doing!
Designers are typically skilled at scenario-play because a big part of our job is thinking about or drawing things that don’t yet exist and then considering the implications of those innovations or changes. Your lawyer will lead you through similar exercises, mostly related to worst-case scenarios. These scenarios then lead to proposed contract changes, feeding that negotiation process.
For example, consider what happens if, post-close, a client from several years back sues you for designing something that isn’t accessible for people with visual impairments. Imagine that the MSA covering that client interaction is still active, and as part of the acquisition, you’ve assigned the contract to your buyer. Who is responsible for covering the legal costs for the lawsuit, and who will be held liable if you are deemed to be in the wrong? There are countless things like this that, while unlikely, could happen. In the excitement of a deal, it’s easy to want to see a future that works perfectly. Your lawyer will work you through a future that is more uncertain.
After a deal has closed, you get to (or have to) work with the people who acquired you in close proximity and collaboration. If they have a bad taste in their mouth from the negotiation process of the deal, it’s going to make those interactions difficult. The negotiation is, in some respects, a prolonged job interview, where your behavior will color the way you are perceived. It’s great to have someone else push back on things, because (right or wrong), they’ll be perceived as the person who is difficult to work with, not you.
There’s a limit to this pushback, and at some point in the negotiation, you’ll arrive at details where your lawyer will advise you that it’s not worth it. Later, we’ll talk about the importance of establishing non-negotiables before starting the legal process. These are the places where your bad-cop lawyer will carry the burden of pushback, so you can keep your reputation intact.
Acquisitions are unique, and aren’t something we encounter frequently in our lives. But we can lean on our friends and professional acquaintances and learn from their experiences, in order to fill in the gaps of our knowledge and level the negotiating playing field. And as Maria said, those who have had negative experiences are probably going to be straight with you.
Your team of “been there, done that advisors” will help you with a few key parts of the process.
As I researched this book, I found that some people are more forthcoming than others, but none of the people I interviewed were willing to share the actual contracts they signed that described the deal, or even get close to that level of specificity. But some of my personal friends were, and it was invaluable to me. It’s not The Big Number that’s the most useful, although it’s helpful to have a financial context. Instead, it’s the nitty gritty of all of the small ways that might chip away at the upside of your deal.
These “been there, done that” people will also be able to give you context with which to compare your deal, and talk through the comparison with you. I think this is one of the most helpful parts of discussing your experience with someone else. I mentioned earlier that I felt like I was “doing it wrong” all the way through the process. Having a point of reference made me see that I was, at least at a high level, working from the same set of assumptions and considerations as someone who “did it right.”
While there’s certainly a set of common steps to a process (and I hope this book will help you learn about those commonalities), each step is also extremely unique and tied to the context of your company, and each step needs to be handled with care and introspection. Your team of once-bitten-twice-shy advisors can help you make those decisions thoughtfully, and can help you spend your limited time and energy in the right places. Maria described that her advisors helped direct her energy, giving her advice to “Pay attention to this, don’t pay attention to that.”
It’s also likely that you solve problems in a similar way as those advisors, and that you speak the same language when it comes to evaluating a situation. Your conversations with them will feel more lucid than those with your bankers and lawyers, and I found these interactions to feel much more relatable.
For example, when I started talking about financial projections, other design leaders could relate to the more intuitive or flexible nature of a sales pipeline, which—as you’ll hear later from Doreen Lorenzo, the former CEO of frog design, is “a very fluid pricing model. And it’s really dependent on how much business you have at that moment or how much you can charge a client. It’s about the value you are going to bring to the company through the project. And that model is just insane to some people.” A banker, and buyer, will want a very objective view of future sales. Other design leaders are comfortable discussing the more realistic nature of design sales.
A big part of working through a complex problem is commiserating, and sometimes, you don’t want someone to solve a problem—you want them to empathize with you, and simply “be on your team.” If you have partners at your company, they play this role, but outside and trusted advisors can really help work through some of the long parts of the process. There are parts of the process that feel truly defeating. Am I doing the right thing for myself and my team? Is the buyer going to walk away? Why aren’t they responding to my texts? Your creative advisory team can be that shoulder on which to bitch and moan.
I spoke with several design leaders who didn’t sell their companies, but got fairly far through the process. They described that, while a decision to back away is complicated, they were able to come to that decision after meaningful reflection with a trusted peer. Strong leaders know that being surrounded by “yes-men” isn’t healthy, and that multiple perspectives from educated people lead to more valuable decision making. You’ll be flying high on adrenaline and optimistic about an exciting new chapter in your career. Negative sentiments, while disappointing to hear, can help you evaluate your decision with a more objective, rational, and clear perspective.
You’ll play a few roles in the group. First and foremost, it’s your company, and so your most important role is having an opinion and speaking up for yourself. When you don’t understand something, it’s on you to stop the train and get someone to explain it. When you’re feeling pushed around or intimidated, it’s on you to be loud, forceful and direct. And if the process isn’t going the way you want, it’s your responsibility to fix it. It’s easy to find yourself going along for the ride, because there are so many moving parts that feel intimidating or confusing. If the process has gained too much inertia in one direction, it can become harder and harder to undo. It’s ultimately your process, just like it’s your company.
Additionally, you’ll play the role of advocating for urgency. No matter how much the people on your advisory team care about you and the outcome of the sale, the sale isn’t their first priority. Your lawyer and CPA have other clients. Your banker is pushing on multiple deals at once. And your acquirer is looking to minimize the risk of their investment, and so they’ll likely be methodical and slow. Ultimately, there’s no real hurry to get a deal done, except that I’ve found that the longer a deal of any kind hangs around unsigned, the less likely it is to ever get signed at all. The world changes, the people involved in the negotiation come and go, and so once you’ve made a decision (small or big), it’s in your best interests to push forward.
That advocating for urgency is shown primarily through communications. Be in touch with each party with regularity. Send follow-up emails to check on status. Get people’s phone numbers, and text with some regularity. Schedule regular meetings and check-ins, and come to those meetings with an agenda. This will all likely come naturally, because you’re already in the services business and these are all things we do when interacting with clients. But it can be easy to abdicate this communication responsibility to one of the other parties (often the banker), which will slow the process.
You’ll be in charge of being the connector. Your CPA, lawyer, and banker often need to speak to each other, but this becomes a selective dance since at least two of the three are likely charging you by the hour. Not everyone needs to know everything. As a guideline, if it pertains to money, everyone needs to chime in; if it’s about value (what you give and what you get), it’s likely a lawyer/banker item; and if it’s about what-if scenarios (“What if I get fired after the acquisition?” “What if I change my mind?”), it’s solidly one for the lawyer.
You’ll also likely find yourself playing a game of telephone, with you in the middle. Your lawyer may have a question that is best answered not by the buyer’s lawyer but by the buyer’s executive champion or stakeholder. They probably won’t reach out directly, so you’ll have to do it. I found myself frequently fielding questions from my attorney, jumping on the phone with my banker, and then texting the results back. It’s not an ideal role to be in, but—again, since it’s your process—you’ll want to know what’s going on, and the best way to know is by being smack in the middle of it all.
Finally, since you’ll wear the anxiety, it will be your responsibility to reach out to your mentors, friends and fellow designers when you need a hug. They probably aren’t going to proactively come to you, but I’ll bet they will be forthcoming with support!