Now may be the time to sell your studio to a large publisher or, at least, explore the option to do so. If you are looking to be acquired, there are some steps you can take before negotiations commence and during negotiations to maximize the value for you.
Before you start talking to any potential buyers, ask if you can prove that your studio owns 100% of the intellectual property (art, sound effects, music, characters, inventions, etc.) used in all of your studio’s games. If the answer to this question is anything other than, “yes, and I have the agreements to prove it”, then you should do some clean-up here. Clean-up usually means going back to the employee or contractor who contributed to a particular piece of IP and documenting that the studio owns all rights to that IP.
Before you start talking to any buyers, have a conversation with your CPA about how to structure a deal to (1) make the acquisition a smooth process and (2) minimize your tax burden. You can increase the ultimate value you realize just by ensuring that you make the process smooth and have structured your studio to minimize the tax burden. This may mean doing some corporate re-structuring before concluding a sale, which can take some time. So, have this conversation early so that you are optimized for a sale before exploring offers.
Prepare for Due Diligence, Then Negotiate Fair Reps and Warrants with an Appropriate “Knowledge Qualifier”
Any buyer will want to know and confirm key facts about your studio, such as:
- That the studio owns all intellectual property in each and every game (or, at least, those games the acquirer plans to continue to publish and support);
- What licenses the studio has given or received;
- What the studio has done to comply with all applicable laws (for example, privacy or employment laws);
- Whether and, if so, what open source was used in any game; and
- The financial performance of each game.
As a seller, you obviously have an interest in negotiating the highest price in the quickest amount of time. A buyer wants to get a good (or, at least, fair) deal. Even before reaching the final deal terms, the buyer: needs to decide whether to buy or not to buy; wants to identify reasons to negotiate a lower price; wants to identify what steps are needed for a post-acquisition integration plan; and wants to identify the reps, warrants, and indemnities it thinks are needed for post-close protection. The diligence period is used by the buyer to answer these, and other, questions.
As a seller, you should be prepared for diligence requests. It helps to have already organized your key documents. Even if you have prepared your documents, you may receive questions you had not thought about in advance. Be as open as you can in answering those questions. Being open to diligence requests means being open to providing documents and access to people who can answer questions. Obviously, there are limits to be drawn, but it is preferable in most instances to err in favor of granting, not denying, access to information.
Because you have prepared for diligence before it commenced, you should have already identified areas where you don’t have answers. There may be gaps in the company’s knowledge because of employee turnover, poor initial record-keeping, etc. In addition, during diligence, you and potential buyers may identify additional gaps in knowledge. Build a comprehensive list of what you don’t have adequate knowledge about, be up front about that, and negotiate for a “knowledge qualifier.” The knowledge qualifier limits your reps and warrants to what the company (or certain key persons) actually know and is a way for a seller to limit their exposure for post-close claims of fraud or breach of contract.
Boiler Plate that Isn’t: Attorneys’ Fees Provisions and Dispute Resolution
Sometimes a dispute arises after the deal closes. It is hard to plan for the worst when you are optimistic and excited about the deal you are pulling together. Nevertheless, if a dispute arises, it can be much worse if the parties have not thought about “worst case scenarios” during negotiations. There are two areas where this advance thinking can help de-escalate a later dispute or, at least, help ensure that the ultimate winner is made as whole as they can be.
The first area is around dispute resolution provisions. Some agreements state that the parties need to provide notice and an opportunity to cure before a lawsuit can be filed. Some agreements require the parties to mediate in advance of filing suit. Some agreements have a separate section for accounting disputes, as opposed to legal disputes. Many agreements require that disputes be resolved through binding arbitration. Think through the ways your specific deal could result in your buyer making claims that you committed fraud or breached the contract. Then, think about how you would like to handle those issues if they do come up. It might help to role play these scenarios with your attorney or other team members. From there, make an informed decision about what kind of dispute resolution provision you want for the agreement, if any.
The second area is around the prevailing party attorneys’ fees provision that is negotiated. A clear, strong provision can entitle a prevailing party to their fees incurred in trying to resolve the dispute before any claim is filed, for all of the costs (such as for trial consultants, not just court costs) incurred in any dispute, and for expert fees. Most provisions are not drafted clearly, which means that the prevailing party will not recover all of their out-of-pocket expenses. Why does this matter? A strong attorneys’ fees provision matters because it increases the risk to a party who takes a weak legal or factual provision. Increasing the risk to the weaker party makes it less likely that a dispute will carry on into protracted litigation.
In conclusion, if you are planning to sell your studio now or in the future, it isn’t too soon to:
- Get your intellectual property ownership secured. Review your existing agreements and tighten up any ambiguities.
- Talk to a tax planner (your CPA or a tax attorney) and ensure that you have a corporate structure for your studio that both will make an acquisition uncomplicated for a buyer and tax beneficial for you.
- Get your key documents organized.
- Figure out who knows what key facts about your studio and determine what they know. Do this so that you’ve identified the appropriate persons to answer potential buyers’ questions.