I am your host, Kison Patel, CEO, and founder. Today I am here with Ajit Sane Director IT M&A at Agilent Technologies. Ajit is an M&A professional with multiple years of experience in leading acquisitions, integrations, and divestitures.
He’s led dozens of acquisitions, joint ventures, divestitures, diligence, go-to-market strategies, integration planning, execution, customer partner migration, and operational transition. In this episode, we are going to talk about how to wind the business down with a minimal customer and people disruption.
Can we kick off with a brief overview of your experience with wind downs?
I have been doing M&A and divestitures for a while now, but a couple of wind downs came to me as an opportunity so I spent time trying to figure out how a wind-down is different from everything else I have been doing.
You are not divesting, you are not selling, but you have a bunch of customers or products, depending on the vertical. A wind-down happens, when for multiple reasons, the best long-term strategy for the company is to wind down the business.
In analogy, it is like a DIY disassembling of furniture where disassembling has to be done in a specific order.
So it’s not as simple as just turning off the switch and cutting it out. It seems like there are more things to navigate than just sensitivity around it.
Absolutely. There is a lot of sensitivity around employees. You have to figure out what it means for employees who are specifically working on that business or a product line you are about to wind down.
There are things around customers and making sure that they are in the right place, so you can successfully transition them off to another vendor or another product. It is even better if you have something else to offer them.
There are also contractual obligations and manufacturing complications. It is basically like running an M&A but in reverse order.
What are some reasons a company would wind down a business?
It depends on a lot of things, on that business unit, the product line, and what it is that you are trying to wind down.
Maybe you did an acquisition and you tried everything to find the right solutions and prevent unwanted outcomes.
Maybe there is a change in the market environment and the decline in revenue and there is not much you can do to recourse.
Maybe there is a complete switch in a company's product design.
Sometimes the company wants to go and do something completely different and spend their resources on something more profitable. At the end of the day, you always want to make sure that all the resources you have are being used in the right way.
You may have tried several ways to correct the course and that didn’t go through.
This is the reason why, in many cases, you would see a divestiture, but if that is not possible the only option you have is a wind-down.
Once you try everything to save the business or the product line and there is nothing more you can do, that is when you make a difficult decision to wind down.
How should you approach a wind down in terms of planning?
I have quickly realized that there is no playbook for wind-downs. You are trying to decouple a business and it is like any planning exercise. It is important to identify the critical part early on if you want to know what the scope of a wind-down is.
There could be several things, like customer obligations where you may have contracts with customers. There may be legal documents that you need to look at carefully.
Depending on the scope, where the employees, the manufacturing side and the legal entities are involved, you need to look at labor and employment laws, which are very country and state-specific.
There are also regulatory things, such as how long do you need to keep the data or is there any intellectual property that you need to harvest, and keep. I do think the finance team has a big say.
Last, but not least, there are system changes. A lot depends on how integrated this product line or business is as well. These are some of the factors that come into play.
It seems like a lot of planning depends on ongoing obligations. Is there a certain approach when it comes to prioritizing that? How would you prioritize those factors you mentioned?
The prioritization depends a lot on things such as customer contracts, as there are certain clauses where customers will need 12 months notice before you inform them you are not going to sell them a certain product or service anymore.
In other cases, there are labor unions which exist in some countries, where you need to consider documentation and what you can bring to the table. You need to consider employees at the end of the day because in this case, you are not shutting down the entire business, but a specific product line and services.
That entails that the company is still selling, but just not in that space and there still will be customers buying what you offer.
What actual resources or functions do you need when you are winding a business down?
Sales and product marketing folks are important, as well as HR, as there will be some impact on the employees, one way or another.
There is also the IT sector, finance, and legal folks, so a whole gamut of functions you usually have when you are doing or planning for an acquisition.
The inclusion of a team also varies depending on what you are winding down, so for instance, if that doesn’t include customers, you won’t need to include sales or customer support.
This is defined by the scope of it, but you need all those functions at the table.
Unlike the M&A where there is an element of excitement, with a wind-down there is not that much to be excited about, and there are plenty of things you need to be careful about.
What is the last function that is shut down? Who turns the lights off as the business is being shuttered?
In many cases, the last function is WPS, the workplace services function.
What does it mean if we are not using a facility or the site is going to be shut down?
What are the terms of the lease when disassembling? What about applications or huge devices?
These are some of the questions this function focuses on in the case of a wind-down.
What are some of the other obstacles or challenges that you face?
There are a lot of challenges. You can plan as much as you can, but there are things that you simply can not foresee and the most obvious example is the pandemic. Some things can go wrong that are related to PR, and so PR is something you need to be careful about, especially for publicly traded companies.
All companies, but particularly publicly traded companies need to be careful around implications related to the employees and shareholders.
There is also the legal aspect of it, which is why you need to have a strong team of legal advisers because everything that goes out has to be vetted from a legal perspective.
Have you ever seen legal issues come up when doing a wind-down?
You have to look at all the contacts, not just with the customers, but vendors as well.
This matters because there is an interdependence between the company and the vendors. In one case, certain things popped up after we started talking to a vendor.
The vendor had a clause in there that we had to buy a certain amount of products/services for months and that was quite a number so it blew up the cost.
Can we talk about the assets that you are trying to protect? How do you prioritize that?
The biggest assets are your employees and your customers. No matter how you look at customer contracts, when talking to a customer you want to be very honest.
You need to have great communication with your sales folks so they can walk the customers through all different steps of what we are doing. You want to keep a good relationship with your customers.
No matter what industry we are talking about, you also need to have a solid plan for the employees and try to find ways to keep them working in other areas of the company.
Another crucial thing is the intellectual property, so you need to have your IP experts and your legal team help figure out what happens with the IP after the wind-down.
There are shifts in the industry, so sometimes the IP becomes not as valuable as it once was. It is a process of constantly weighing pros and cons and trying to figure out what's best for the long term.
What does communication look like when we are talking about customers?
You need to count on your salespeople as there are specific salesfolks who are knowledgeable about that specific trade and customers.
There is a list of customers you need to go through and there needs to be some prioritization.
You can't have the same plan for all your customers, you’ve got to have some sort of segmentation of how you handle your accounts and what it means for your company.
You need to talk to your customers, one on one as soon as that announcement goes out and explain to them why you are where you are at and what's the roadmap.
Transparency is the key, so try to be transparent as you can be. How can you reduce the pain of the transition? Is there a way you can give them an extra product ahead of time so that they have enough time to transition off to another vendor?
Having the same salespeople helps and you also have to have your executive staff ready if it comes to an escalation.
When it comes to the employees, is there a similar approach you take with customers in terms of providing as much transparency as you can and keeping that communication dialogue open to make the transition smooth?
When you are winding down, the employees are going to be impacted. Some have specific skills that are only applicable to that product or service that you are winding down, so you need to understand the employees.
In some cases, people who are impacted are those who have built the startup from the ground up and they have that special affinity towards that product.
You need to have empathy and plan for the right communication and get through all the specific steps that are outlined within the legal framework.
You always want to try and see if you can alleviate something as much as possible and try to see if there are any opportunities inside the company for them.
Journalists like to make a story into a provoking story. When the wind-down gets into the media scope, how do you contain that from it being something of a realistic nature versus getting blown out of proportion?
Media sometimes controls the narrative, and I think this is about how we take back the control over the narrative ourselves. Having a good communication plan is paramount, especially if you are a publicly-traded company.
Whatever discussions we have with the customers are the same conversations we need to have ourselves with the media - where we are and why we are doing what we are doing. What you don't want to do is keep it down and low and hope nobody calls you out.
If you have a valid case, if you are first to the market to tell about what's going on then obviously the media is the second.
How is the wind-down measured? What is considered a successful shutdown of a business?
When you're planning and figuring out what your priorities are for the long term you can use these set priorities as indicators.
You need to know why you are doing what you are doing and how much time will it take to wind down.
The bare minimum to shut this down is 12 months and if you manage to wind the business down in those 12 months I think you did a pretty good job.
Any extra time is just bleeding money because whatever the reason for wind-down was will bring more unwanted costs.
Can you walk me through legal entity planning as part of a wind-down and what that looks like?
As opposed to an acquisition, you need to figure out if you have an integrated legal entity or not.
If you have not, the question comes: do you need to keep it and what are all the dependencies of that legal entity?
You usually have customers and customer contracts, you have the payroll of the legal entity and IP on the legal entity of the manufacturing. As you are planning, you start figuring out the dependencies.
Slowly but surely as you hit those milestones there comes a point where you need to figure out what to do with it, because you don't have customer contracts or payroll anymore on it.
Do you want to keep the IP or move it to someone else? A legal entity is a very cross-functional initiative where everybody is involved, from finance and HR to tax people.
In the end, you collectively decide what makes the best sense for the company.
What are some best practices for somebody that's gonna have to go through a wind-down?
I think it all starts with executives. Having good support from the executives matters. Everything we discussed so far has implications, and those implications can become a big ball of fire if the executives don’t have enough clarity.
Secondly, once you have that it is important to assemble a good team because sales know customers well, and manufacturing folks know the manufacturing. You need to have the right people. Have a good communication line with the executives, give them updates on a weekly and monthly basis so they are not in the dark.
What’s the craziest thing you’ve seen in M&A?
What I find interesting is, people do acquisitions all the time, and yet 70 to 90 percent of them fail. I was just wondering what do we need to do about it? Is it a goal we have set for success that needs to be recalibrated? Is there something that we need to do differently?
This is just food for thought I always have.
What do you think are the biggest challenges that hamper deal success?
One of them is probably integration, as there are so many moving parts and so many things can go wrong, but I also think there is a lot that can go wrong on the deal side as well when creating an LOI. Was what we set eyes on achievable? Was it the right investment? These are questions we need to reflect on.
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