Acquiring a Distressed Private Technology Company – A Beginner’s Guide
It is important to understand the unique opportunities and risks associated with acquiring a distressed private technology company. In this article by Daniel Lopez, Richard Vernon Smith, Douglas S. Mintz, and Richard Harroch, we highlight key considerations for potential buyers.
Finding Distressed Tech Deals and Identifying Decision Makers
Buyers can access potential targets by purchasing debt and other claims from existing creditors. This allows buyers to transform themselves from hopeful outside bidders to creditors armed with special rights. Being a creditor may enable buyers to utilize information and inspection rights contained in credit agreements to enhance due diligence and implement special legal structures to complete an acquisition.
Once a target has been selected, identifying the “real” decision makers is crucial, especially in the distressed context where creditors play an important role in dictating terms.
Selecting a Structure for a Distressed Tech Company Acquisition
Distressed tech company acquisitions are often structured as a purchase of assets, minimizing the buyer’s assumption of unwanted liabilities of the seller. Each acquisition structure, whether traditional or creditor-driven, carries different levels of deal expense, execution speed, and post-closing liability risk.
Due Diligence Issues in Distressed Acquisitions
Despite the acceleration and limitation of due diligence in acquiring distressed tech companies, it remains a critical process for buyers. Key due diligence issues revolve around liabilities, accounts payable and receivables, assets, employee turnover, pending or threatened litigation, key contracts, and legal risks related to the COVID-19 pandemic.
Additional Key Issues in Distressed Tech Company Acquisitions
Once a structure has been selected, buyers should focus on ownership issues, including fiduciary duties, D&O insurance, transition services, fraudulent transfer issues, escrow or hold-back of a portion of the purchase price, third-party consents, regulatory hurdles, employee compensation, WARN Act, and more.
About the Authors
– Daniel Lopez is an M&A and corporate partner at Orrick, Herrington & Sutcliffe LLP in San Francisco.
– Richard V. Smith is a partner at Orrick, Herrington & Sutcliffe LLP in Silicon Valley and San Francisco.
– Douglas Mintz is a restructuring partner at Orrick, Herrington & Sutcliffe LLP in Washington, D.C.
– Richard D. Harroch is Managing Director and Global Head of M&A at VantagePoint Capital Partners.
By understanding the unique opportunities and risks involved in acquiring a distressed private technology company, potential buyers can make informed decisions and navigate the complexities of such transactions.