The Complexities of Sell-Side M&A

‍Text Version of the Interview

How Kira Started 

After I quit my job as a corporate and securities lawyer, I started thinking about contracts and I realized that junior corporate lawyers spent huge amounts of time reviewing contracts. 

1. Literally, 30 to 60% of those legal fees that you get on an M&A deal are due diligence. 
2. Secondly, even at the world's best firms, people make mistakes at this work all the time.  
3. Often, when people are reviewing contracts, they're looking through them for the same things over and over again. 
   

Because of these, I had the idea that you might be able to build software to help people find that stuff and pull it out.

After two and a half years, got the software to work and we started getting people signing up. We went from 4 people to 8 people by the end of 2014. We're up to like 30-ish team members by the end of 2016 and just kept growing over 2017.

A couple of pivotal moments for us was when there was a big four firm looking for something very similar to what we were trying to build. And we hadn't even thought of auditors and consultants as potential markets for this software. 

But it turns out, what we built was very well suited to their work. So that one big contract and their support really helped us in a lot of ways like financially, but also in terms of scaling up our software to meet a more enterprise use case.

Beyond that, we started to get law firms that they have like 9 to an 18-month sales cycle, and eventually, places that we've been talking to for years start to come through, and we've spent some of the money we've got from customers on hiring out some sales and marketing people. 

They started to connect with customers and it just started to work in a repeatable way. And so we grew to over a hundred people before we took in outside capital for the first time at all.

We raised $50 million from Insight in 2018, which back then was like a pretty big raise.

We continued to grow. We built Kira to the point where 18 of the top 25 M&A law firms were using our tech, not just in the US and Canada, but also in the UK. We had a pretty global usage.

We realized that we had built a really strong professional service, but there was so much extra potential for the underlying technology for corporates to use the technology themselves.

The Decision To Sell

When COVID hit, we had a flat 2020 because of that. I felt good about how our team handled the event, which was definitely a very tough year. I also felt really good about how we did in terms of market share. Even though I don't think we had a great year, I think we had a better year than our competitors. 

At the start of 2021, we had some people approach us and asked if we were interested in sort of joining them. And at that time, we weren’t interested. 

1. We just came off with a flat 2020, It didn't seem like an equally opportune time to hit the market.
2. We were in a pretty good capital position. We just had a lot of money in the bank, so we didn't see a big need to do a deal. 
3. We had two new products that were in development that we felt really good about, but we didn't think anybody would pay for yet.
   

Despite what we said, Litera insisted to do a deal and they talked to Insight who told us to give them some information and see if they come back with something compelling. 

They came back with a number that was good and fair and frankly, life-changing for us. But my co-founder and I were disinclined to do the deal. But before we went back to Litera, I started to reflect on their offer and realized that they only really cared about law firm markets. 

They deeply cared about being the one vendor to law firms and that they cared a lot about EBITDA. 

And I realized that these businesses that really excited my co-founder and me were not only the professional services market but also the corporate businesses. And they were targeting corporates, not law firms, so Litera might not even like them. 

They were basically like money pits at the moment. No one was paying us for them yet, but even when people did start to pay us, we didn't think it would be law firms. If I were the CEO of Latera, I would probably shut these products down. 

So I wondered if Litera would be willing to do a deal where we get a copy of the underlying technology. We get these two separate businesses, we get the appropriate people to run them, and we've been running them fairly separately internally so it wasn't that complicated to figure out the people's side.

We pitched it over to Litera and they were actually quite enthused about the business idea that it sort of had some attractive attributes for them because it would immediately and significantly decrease the burn. 

So we did it. It was complicated but it got done. 

Carving Out the Business

So at the end of the day, we were about 180 people in Kira Systems. We took 34 of the people to Zuva. We left Litera with nearly 95% of all the revenue and we only took a really small little portion.

We got a copy of the underlying technology that enables you to find information contracts, but we left Litera with the specific technology that's used by all the professional service firms and most of the people. Then we went off on our merry way. 

We had our transition services agreement that is almost completed. It was definitely more complicated than a straight sale, a lot of tricky IP issues that could have kinda sunk the deal, but it got done. 

How Litera Approached Kira

Litera is a European private equity sponsor, HG-backed company that has rolled up a whole lot of legal technology companies. I had known and got along pretty well with their CEO for a bunch of years. So, I had a fairly positive awareness of them and I also happened to know their BizDev person pretty well. 

They were pretty straightforward about their intentions. They reached out and told us they wanted to buy our company, that we would be a great fit inside of their organization. They were also transparent about the amount that they are willing to pay.

Nonetheless, I still wasn't too excited about it because of the three reasons I mentioned above. Also, if my co-founder and I were to exit, we expect it to be in cash, and we didn’t think that was on the table. As it turns out, it was fine with Litera. 

Why They Didn’t Go For An Auction Process

Back in 2018, we already had this idea of spinning the business out. There was a guy in Insight who gave this idea that if we were able to grow the corporate business side of our product, the legal business side would be useless if Salesforce was our eventual buyer. 

And the thing that stuck to me is that would have been better off doing the spinoff ourselves and then going to market for the professional services business. Maybe then we could have had a more competitive bidding process. 

As for the buyer, being really flexible enabled them to get a deal done. I can’t imagine there could have been too many other companies that could have done that deal. We got a fair and solid price and being willing to do a unique deal like ours enabled Litera to avoid an auction. 

For us, we could have done an auction process, but it would have had significant risks too. It was a fair price even without the spinoff, so doing the spinoff as part of the deal is just an extra found money. It was a good way to create extra value for our shareholders. 

Lessons Learned

The spin-out did make things more complicated. We spent a huge amount of time negotiating the term sheet. Getting the IP right is super important on the deal. But that was a time well spent. 

The IP kept getting re-raised as we went through the deal, so it was a good thing that we had a solid term sheet that we could go back to every time there’s an issue. 

We used reps and warranties insurance on this deal. That was an interesting experience. 

It definitely made things easier as we're going through the deal and negotiating up to the purchase agreement.

There were a lot of things that we could have fought over, but since we had insurance, we are able to just take the money and live peace afterward as long as we’re not lying about anything.  

But once we got the deal signed up, it drove a lot of extra complications where the insurer and the insurance council had a lot of things that they felt like running down that a normal acquire probably wouldn't have cared about. 

So I would say it’s a little bit mixed on reps and warranties insurance. As a seller, I found it appealing, but it was not as easy as we initially thought it would be to use. It felt really good up until signing. And then it got trickier. 

Transition Services Agreement

The TSA went both ways. Zuva, the company that we carved out had 34 people and Kira would probably have around 40 people who were focused on administrative stuff to keep the company running. 

On day one, it was me, my excellent, but part-time EA, and one excellent IT dude. There was no finance, no HR, no talent acquisition and we weren't sure how long it was going to take us to fill some of those roles. 

So one important part of the TSA was making sure:

1. People get paid 
2. Getting policies set up, even employment contracts
3. Figuring out how to get bills paid
4. Figuring out how to get our bank accounts set up 
5. Expenses reimbursed. etc.
   

And that went exceedingly well. We were basically done in a month. With the help from Kira people, we were able to hire people into the key roles in Zuva. So we were able to hit the ground running, but that TSA support was pretty important.

The second type of TSA support is around the shared customers. We got rules governing how to help each other serve those customers well. 

The third thing was around the technological stuff. Most of the people that came with us were technical product-type people. So some of them had the knowledge and some stuff they were working on that we needed to continue to deliver back to Kira and Litera.

Integration

We didn’t help them integrate. They're pretty practiced at this, they have bought a lot of companies and have a pretty clear idea of how they like to do integration. 

They don’t even need me as the CEO. If you think about what I do inside Kira, you will have trouble on what to do with me if I was inside Litera. The acquirer will pretty much do everything that I do, so we came up with a services agreement for me and my co-founder to be available up to five days a month.

And I happily do that when someone has a question about something they were working on and I  get back to them quickly. Totally happy to see the business succeed and thrive there. 

The other thing that made integration easier is selling to the same customers. Litera has exceedingly strong, professional service firm relationships. They didn’t need me to transition the relationships.  

Advice for Founders Looking for an Exit

Something I'm proud of with the deal was just being creative. Being empathetic to the buyer and knowing their rationale has helped me get creative that has created a lot of extra shareholder value by doing this deal.

Strategic Support 

My co-founder and I spoke heavily about it with a couple of our execs as we were negotiating. So that group provided really good support to just help think through different angles of the deal including Insight who was our investor.

We're pretty used to doing the deal process and we're quite helpful as we thought about it and also quite helpful about thinking about how a private equity buyer would look at us. 

We also had good lawyers and tax help. That was our main support network in the process. We didn't use bankers. It was such a non-standard deal. I don't know that we would've gotten a ton of value to bankers on this particular deal, because it was so weird. And I don't think we could have got out to market with more people. 

I don't know that anyone else could have done this specific deal, but if we did a more normal deal, I think bankers could have been really helpful in the process.