Enterprise collaboration software company Atlassian has just posted an “open source” term sheet for acquiring private technology companies. The accompanying blog post describes the M&A process as “broken” and suggests that publishing standard terms is at least a partial solution. Publishing or open-sourcing legal documents is certainly not a new idea. Early stage venture capital financings have gone down this road for several years now through efforts like Series Seed. These standard terms have undoubtedly reduced legal costs and made a formerly mysterious process more transparent.
It is not surprising, then, that folk may want to go down the same road with respect to M&A. More interesting is to step back and ask what the new Atlassian term sheet tells us about tech M&A right now.
- It’s a seller’s market (for now).
The idea of putting forth documents that are more seller-friendly (or founder-friendly, to use the VC terminology) only make sense if we are in a seller’s market. It’s hard to imagine this blog post coming out in the depths of a global recession and a bear market in technology. The reality is that when times are good (as they are now), there are lots of buyers, which means that buyers end up competing for deals. This happens not just between strategic buyers, but also strategics competing with private equity funds, private equity funds competing with non-tech buyers, new global buyers competing with everyone and so on.
The point is that this competition doesn’t just occur around price. As we have always said, terms and structure are often more important than price in determining the optimal buyer for a company. This means it’s natural for buyers start to compete a bit more on who can be more founder-friendly.
Kudos to Atlassian for finding a creative way to do this, and establish itself as a thought leader in the space to boot. However, the notion of standard terms is somewhat self-defeating from this perspective, because if every buyer offers these terms then there is no differentiation and the buyers are back to competing solely on price. In reality, Atlassian is probably perfectly happy being the only one (or one of very few companies) offering these “seller friendly” terms—which is good because widespread adoption of this seems very unlikely, which takes us to our second point.
- One size does not fit all.
Atlassian is right that “market” terms often do not reflect the reality of the parties’ needs and may be overly tilted towards one over the other. Remember that “he who has the gold makes the rules” so it’s only natural that buyer interests are reflected in standard practices. The basic concept of having representations and warranties is, itself, a “buyer favorable” term—individual sellers would be perfectly happy to sell companies on an “as is” basis!
The problem with that thinking is that it fails to recognize that M&A is a market (or even an ecosystem) in which deals must make sense and add value to both sides. If buyers consistently got burned by unscrupulous sellers, they would simply stop buying companies, which is hardly in the long-term interest of sellers. So it’s not clear that just coming out with a different set of terms that are more favorable to sellers (on their face) would actually be a good thing for sellers. More favorable standard terms might just mean, for example, that buyers would discount valuations accordingly. Some sellers might be ok with a lower price and more favorable terms, but it’s not the right answer for everyone.
Earnouts are another classic example of this. Some sellers hate earnouts and only want cash. That’s a perfectly acceptable position to take, but insisting on all cash offers across the entire M&A ecosystem would just mean buyers pay less. Too many sellers have made too much money from earnouts for too long to claim that they are “broken” or always a bad thing. The reality is that earnouts and other forms of deal structure have evolved over a long period of time as tools both to balance risk allocation and bridge gaps in valuation. Earnouts allow deals to happen that would not get done any other way.
The bottom line: M&A is complex and you should be skeptical of anyone (regardless of whether they are supposedly seller-friendly or not) telling you there is one right way to do a deal. To better understand the complexities and tradeoffs inherent in a transaction, our half-day seller’s boot-camp “Selling Up, Selling Out” has been the gold standard in educating potential sellers for nearly 30 years.
- Relying on buyers to be nice is not a strategy.
At Corum we represent sellers and only sellers. Atlassian seems to suggest that the tech M&A world would be a better place if buyers would just stop being bullies and learn how to play well with others. That’s certainly true, and we would certainly love it if buyers woke up tomorrow and all decided to be nice to sellers from now on.
Unfortunately, however, that’s not particularly realistic. The reality is that the only thing which really gives you power as a seller is running a process and having multiple buyers at the table. If you gave me a choice between negotiating an M&A deal on behalf of a client with one “nice” buyer versus negotiating with three “mean” buyers, I’d take my chances with the mean buyers every time.
As someone who was born and grew up in the great state of Minnesota (we’re known for being nice), this is hard for me to say, but based on my two decades plus experience in the tech M&A world, nice has got very little to do with it. The truth is that buyers and sellers in M&A deals are always going to butt heads over certain issues, and we should just acknowledge that fact and get on with it.
More importantly, however, as a seller you need to be thinking in terms of a global search of all the potential buyers on the planet for your company. It is the process, and only the process, that achieves price discovery for a private technology company and tells you at the end how the world values your company.
So, by all means let’s encourage buyers to be nice and put forth more friendly term sheets, but don’t kid yourself. It’s still a jungle out there. Open source documents & warm sentiments are not going to get your deal done, and can never substitute for an effective process with a trusted advisor by your side.