Exit transactions, whether through an IPO or sale, are intense and often difficult times for a company. Among the biggest missteps executive teams make in these transactions is not leveraging the full value the board of directors can add to the process, both in official and unofficial capacities.
When raising capital, founders often distinguish investors based on the strategic relationships and operational advice those investors bring to the table. An investor’s value and guidance, gleaned from extensive experience with exits, is not often part of the calculation.
MAXIMIZE THE NETWORK
A director’s network extends beyond potential customers, vendors, employees and future investors. Directors also have close relationships with the best investment bankers, M&A and capital markets attorneys and accounting and other professional service providers. Many of these best-in-class providers will take new clients only through strong personal referrals. A shared positive experience with a particular investor’s other portfolio companies will often form the basis for a new IPO banking syndicate.
When considering any exit strategy, executives should use that board network and experience to identify and retain professionals with strong track records who are compatible with the founding team.
UNDERSTANDING THE RULES OF THE GAME
M&A deals and IPOs are stressful, particularly for founders executing their first exit transaction. They often ask themselves questions such as:
- How can they make the right decisions without knowing which decisions need to be made?
- Should the company go public or sell?
- If the company decides to sell, which buyers would be a good fit?
- Which term sheet should the company accept?
- What elements should be negotiated at the term-sheet stage and what can wait until after the company is in exclusivity?
An experienced board can help the founders understand these processes, what timelines they should be managing against, which players are critical to the transaction and how to avoid common pitfalls. Although public resources are available, none are as effective as the collective experience of a board that has been through dozens of exit transactions.
NEGOTIATE WITH AUTHORITY
Transaction negotiations occur on many levels at once: with a buyer, with the lead investment bank, among the stockholder base and within an executive team.
There is natural tension in negotiations between a buyer and the company’s CEO because the executive is negotiating against his or her future employer. A well-experienced board can serve as a backstop in these negotiations. It’s certainly more comfortable for an executive to say, ‘My board simply won’t agree to this term’ than it is to declaratively state ‘no.’
Similarly, in public offerings, executives need to push the lead investment bank toward maximum value for stockholders while understanding that the price needs to be palatable to the market. Experienced directors can shore up the case for higher value based on personal experience and challenge an investment bank’s assumptions of what the market will accept. As non-founder board members are nominated by the company’s largest investors, they are also in a unique position to rally stockholder support for the transaction and resolve disputes within an executive team.
STRONG FOUNDATION
Often the most valuable contribution a board can offer is to simply be available to and supportive of the executive team as it prepares for and executes the transaction. With IPOs, the board can help digest advice from the company’s banking syndicate and provide clarity on the best path forward.
It takes more than the singular will of a strong executive to push an IPO to launch in a rocky market, particularly against the advice of the lead investment bank. Making that determination and having the authority and collective strength to act on it may prevent a missed opportunity.
A good board also reminds the executive team that certain housekeeping may be in order before an exit strategy can even be considered – including, for example, cleaning up capitalization matters, identifying gaps or excess in the talent pool and securing necessary intellectual property. Similarly, new public companies can draw on an experienced board to identify and implement best corporate practices, accounting controls and compliance procedures to ensure they are focusing on public accountability from day one.
Exit transactions are trying, but a board comprising directors with extensive exit experience can be invaluable in ensuring a successful outcome. Executive teams that cultivate their relationships with the board and actively draw upon its experience will benefit from a stronger transaction process and minimize the surprises, headaches and pitfalls that are all too common in these transformative transactions.
Nathan Hagler and Alessandra Simons are partners with Goodwin
