Understanding the Value of Your Technology in the Post-Sale Setting and the Importance of “Reverse Due Diligence”Fall 2014 – Articles TEQ magazine
Invariably in the life of many of a growing and valuable technology enterprise, it will be presented with the prospect of merging or selling or co-venturing with a larger organization, one that has dangled in front of the young technology company abundant marketing resources and a sure fire channel to customers, or even a needed capital infusion.
Indeed, large enterprises, particularly ones with significant market share within their served industry, continually screen for new technology offerings in order to fill holes or gaps in their respective product line-up or technology portfolio. They have the deal dollars and the business development teams to chase down new technologies. For many innovative technology concerns (Tech Company), selling or merging with a large enterprise often provides a lifeline to continue in business with the promise of free riding upon a large mature market channel or robust technology platform. For these reasons and others, the deal landscape within the technology sector abounds with these types of strategic transactions where large, powerful companies routinely capture and digest young, promising technologies.
Sadly, however, many of these deals often turn sour for the founders and shareholders of the Tech Company for their failure to understand the organizational ecosystem of the Purchaser. They are often left with Seller’s remorse.
In many instances, these failed deals stem from the simple fact that it is very, very difficult, if not impossible, for the selling Tech Company to project the ultimate utility of its technology within the post-sale operations of the Purchaser. As someone who has participated in billions of dollars of tech deals, both domestic and cross border, either as internal legal counsel, chief executive or investor, I have seen significant money wasted and dollars left on the table for young, promising Tech Companies failing to project the intrinsic value of its technology to the Purchaser once it is sold and absorbed into the purchasing organization.
The lesson I learned is simple; only when a purchased technology moves from the closing table into the organization structure of the Purchaser will the ultimate economic value of the purchased technology manifest itself.
This presents a very difficult challenge for the Tech Company since it must place a value and agree upon a selling price for its technology before its technology is sold and moves into the Purchaser’s organization. This is particularly true where a portion of the final acquisition price is tied to an earn out or hold back which is in some fashion or another dependent upon the post-closing performance of the purchased technology.
Thus, a Tech Company acts at its peril if does not soberly assess and understand the inherent deal risks lurking within the management ranks of the purchasing organization; risks which abound in both the intake of and the deployment of the acquired technology into the acquiring organization. Moreover, these risks are heightened significantly in a cross border setting where comparative cultural differences and management practices of the Purchaser must be navigated adroitly. Therefore, knowing intimately the management culture, structure and organization of the Purchaser becomes paramount and this can only be accomplished by performing “reverse due diligence” upon the Purchaser. Succinctly stated, the quality and extent of the due diligence upon the Purchaser’s organization must be as deep and thorough as the due diligence performed by the Purchaser upon the Tech Company itself.
For those entrepreneurs or company executives contemplating the sale or merger of their technology with another enterprise, particularly larger ones, here are some keys due diligence inquiries aimed at ferreting out the Purchaser’s management post-sale plans for your technology:
- Demand to have copies of all pre-deal business presentations, studies and analyses made by Purchaser or any of its advisors which concerns the integration and deployment of your technology into the Purchaser’s operations;
- Who in the Purchaser’s organization will be responsible for the management of your technology upon a post-closing basis?
- Ask for the manager’s organization chart;
- Does this manager truly understand your technology and is he or she an advocate of your technology?
- Who are the tech people on his or her team that will be responsible for your technology?
- Does he or she manage a competing technology?
- What are the plans for your key tech people going forward and will they have a significant voice in the improvement and continual evolvement of your technology?
- Who will they report to?
- What is the budget allocated for your technology?
- Has the budget allocated sufficient marketing and investment dollars for continual improvement and upgrade of the technology?
- What is the impact of the deal upon your installed customer base? Will customers be forced to migrate to a new platform, or even abandon your technology?
- What does the acquirer’s service organization look like? Can it adequately serve your customer base?
- What are the cultural factors at play in a foreign owner controlling this technology?
- How will your customer base view a new foreign owner?
In short, make sure you fully understanding the where, how and when your technology will be integrated into the Purchaser’s organization; if you do not fully grasp this perspective, do not do the deal for your information and knowledge are meager and incomplete relative to properly placing a value upon your technology.
Invariably, the information uncovered by these inquiries often become critical deal points and some of these points you will insist upon being memorialized within the definitive deal documents, thus becoming binding legal obligations upon the part of the Purchaser.
In closing, Tech Companies who desire to maximize the value of their technology within an acquisition context will leave money on the table if they do not do a “deep dive -reverse due-diligence” into the management and operational structure of the Purchaser and its plans for the purchased technology. Failure to do so may prove fatal to your technology itself, the economic returns you reap and ultimately your company, with profound consequences for your workforce.