When should a firm begin planning its exit by merger or acquisition?

This is a great question; sad to hear it raised when your firm is in merger talks. This is too late to be much good. If your firm is unprepared for a merger, it might be better to withdraw from talks until you are ready.

This is a very large topic and the subject of a recent seminar I and several others delivered in Silicon Valley and San Francisco. There are multiple aspects of preparation from positioning your products and marketing through organizing your financials and human resources and making sure legal issues within your firm are addressed. In an acquisition, your firm will be subject to an intense due diligence process that will be difficult to survive if you have not kept accurate books and records including financial audits.

I urge any firm that has an exit strategy to begin planning for the exit several years ahead of time. This will include initiating financial audits, cleanup of books and records, establishment of a strong and accruate financial model, review of all HR policies and practices, being up to date on all tax filings and many other elements that will be exposed in due diligence. Further, at some point several Investment Banking firms should be consulted to obtain estimates of the value of the firm in an acquisition and the pitfalls that might be encountered once on the market.

One final caution, be sure that if merger talks and due diligence are started that the firm can survive if the talks or due diligence fails. You will need to retain counsel and investment banking and accounting support, which will be expensive, possibly many hundreds of thousands of dollars. If the acquisition were called off, could these bills be paid? The acquisition will be disruptive to the business; will you lose customers?

There is much more to this area than can be set forth here. I urge you to contact advisors right away that can help you prepare your firm for its acqusition before more is done.