Board Packs – innocuous and normal, but they can kill high value M&A deals.
Late stage growth companies often reveal far too much ‘dirty laundry’ in monthly packs prepared for their board meetings. In normal practice this is fine to stimulate debate and ensure transparency. But when that company is being sold in a high value M&A deal, these packs can give buyers cause to worry about things they might never have thought to ask. Worst case, they can lead to a major price reduction late in due diligence, and we know they have even killed a few deals.
A well-run business needs a high-quality board, where intense debate about growth, and frank exchanges about what is going well and badly are the norm. To prepare, CEOs often deliver detailed, clear, and self-critical documents for their board. Their objective: get the most out of the discussion by giving directors real insight into the challenges of the business.
But when that same company is about to be sold, in due diligence the buyer always asks for all the monthly board packs. Since these packs give insight into the business from the CEO’s eyes, they are read with great interest.
Boards of high value growth companies must anticipate this, and prepare accordingly. In the 2 years before an M&A exit is expected, boards should guide the CEO to prepare neutral, factual board packs in the same format each month, that give clear updates on the business but, crucially, do not dwell on all the negatives in the business. As important is that the board packs need to stay at a high enough level to avoid giving too much detail into operational problems.
It is totally appropriate for special documents to be prepared for discussions just before or after board meetings, which cover key issues in the business in much more depth. Along with occasional board communications and ad-hoc email board discussions, these documents are normally not made available to a buyer. If in Board meetings the CEO wants to talk in much more detail about certain negatives or issues, it is his or her prerogative to do so. Again, what is discussed at board meetings stays in board meetings, and does not form part of the monthly board pack.
We are not by any means saying Boards should hide anything from a buyer. However, careful board pack management can keep a buyer from jumping all over a small point, especially when they are looking for ways to reduce the agreed price. ‘Avoid showing a red rag to a bull’ comes to mind.
Agreeing a good price for a growth business is only the first step in closing a successful exit. Things like board pack management are critical in ensuring a growth company’s shareholders actually get the price they agreed, not the price they have to settle for.
Posted by Victor Basta @MaExits