Avoid a deal disaster with a carve out

As you would expect, we see a lot of interesting behavior with buyers and sellers during transactions. One of our recent themes has been discussing deal disasters things that cause deals to fall apart. Here is a deal disaster that outside investors need to watch for when they are selling a company

 

Sometimes investors find themselves in a situation where they are willing to sell a company below the level where employee stock options provide a return. In most transactions, you need the help of the senior management team to participate in the M&A process both to show the company in the best light and to communicate its market strengths and key differentiation. If management isnt going to see an upside upon closing a transaction, they will typically start looking for their next job as soon as they find out shareholders are considering an exit. One simple way around this is to provide key managers a "carve-out", which is an agreed portion of the transaction proceeds right off the top, in exchange for forfeiting their stock options. This is often a small amount of protection that helps ensure that management stays around until a deal is successfully done.

Posted by , Chairman on 6 October 2011
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