The alternatives to going public was a popular topic of discussion this week at the ThinkEquity Partners Private Company & Venture Capital Summit. Panelists talked about the risks of going public before the company is ready just because the IPO window is open, as well as about the increasing regulatory challenges of operating as a public company.

"I spend most of my time talking to companies that are public and want to go private," Walter Buckley, CEO of Internet Capital Group, said during a panel to discuss alternative liquidity events.
Although all the panelists agreed that acquisitions make a lot of sense for companies that are not 100% IPO ready and do not want to arouse the ire of investors for having a few kinks in their business model, they also offered a couple of warnings about structuring acquisitions in a smart way.

First, avoid deals with earnouts. Buyers too often mistakenly counted the future payments as part of the total deal price, when in reality they are rarely paid, the panelists said.

"Ideally, you don't want earnouts to be a big component of the deal," said Mike Dodd, senior vice president of corporate development of Omniture Corp.,  a Web analytics company that went public in 2006 and that has been an active acquirer of smaller software companies.

Jesse Rogers, a partner at Golden Gate Capital, concurred, noting that target companies are naive to think that the earnout would ever be paid and that deals containing the incentives often end up in litigation.

Another obvious tip, but one that's often overlooked, is the need for the target companies to conduct their own due diligence of prospective buyers.

"It is astonishing to me how few management teams will do reverse diligence on their potential partners," said Buckley, noting that a single scandal at the acquirer, such as one involving options backdating, could prove disastrous to a target.

"They need to make 30 calls about the prospective buyer, just like the buyer does about them." — Andrea Orr

See Deal article June 15, 2006
See Deal article Dec. 12, 2005
See Deal article Feb. 7, 2007