Preparing for Exit Daniel Bernstein Vice President Corum 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!

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-laws Minutes – 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 projections Monthly 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, liens Contracts: suppliers, vendors and customers

Regulatory/Insurance/Litigation Copies of any permits and licenses Reports of government agency Applicable federal/state/local regulations Copies of insurance documents Decrees, judgments or Settlement documentation Description of any current or potential litigation

Employee Relations/Property Management organization chart and key staff bios Compensation 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 employees Personal property owned/leased by company Titles, mortgages, deeds of trust and security agreements

Intellectual Property/Products IP documentations, copyright or patent filings Details of product line offering, market share List of all major suppliers – amounts purchased Inventory analysis – turnover and obsolescence Backlog analysis by product line, seasonal analysis

Markets and Competition List of major clients List of competitors and detail of market share Any pertinent marketing studies Sales 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

Historical Statement Requirements 3 years of historical financials, plus current year-to-date Buyers may require quarterly 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

3 Year Projections: Revenue/Profits Key valuation metrics Often the most difficult to prepare  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

Too Aggressive Defensible Too Conservative 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 ShareholdersBuyer Cash Stock

When Assets are Purchased Asset Ownership ShareholdersBuyer Cash Company No shares of stock are transferred Liabilities and taxes remain Company shell remains Dividend

Questions?