Sunday, May 06, 2007

Shopping in Canada: What to do When a US Buyer Comes Calling

The buying spree that is being fueled by its technology buyout players continues. Most notable was the announcement last month fo the acquisition of Vancouver-based Fincentric by Open Solutions, a vehicle backed by US private equity giants Carlyle Group and Providence Equity.

Before taking venture capital money eight or so years ago, Fincentric had been growing a successful financial software business for 15 years. But despite a capital injection from Ventures West and notable US funds the company did not seem to scale to IPO. The price at which Fincentric was finally sold was not disclosed, but given the length of time between the first VC investment and the sale of the company, one wonders if management could have improved its own return had the company exercised any retraction rights that may have matured beforehand.

Retraction rights allow a company to buy back shares upon the expiry of a period of time or the occurrence of certain events. I try to negotiate for these rights to parallel any redemption rights requested by VC investors, who usually want to have a "last resort" right to liquidate their holdings in a company if, after 5-7 years, the Company fails to achieve an IPO.

If you think your industry niche is ripe for consolidation, please do some basic homework now. For older companies, check and see whether there is a retraction or other right that could be exercised to clean out disinterested shareholders before the company is in play. If your investors have been around for 5-7 years, they likely are coming to the end of the fund that holds its investment in you, and they may be willing to accept a reasonable cash payout now to assist in the returns they advertise to potential investors in their next fund.

Young and old companies alike: Check your share register and your capital structure. Do you have current addresses for your shareholders (including those contractors you gave shares to five years ago)? Any potential transaction is easier to effect (and more appealing to buyers) if you have voting trust in place to minimize the interactiosn you must have with your shareholders. Are your option grants properly documented with formal grant agreements?

This week's posts will cover other aspects of preparing for sale to a US investor. Stay tuned.

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