Anatomy of a deal: Onfido
Background of the deal
In April 2024, Entrust completed its acquisition of identity verification start-up Onfido. The largest VC-backed acquisition to happen in the past two years, its completion was a landmark in an M&A climate that had largely slowed down, particularly for tech. Conditions in the market at the time saw a consolidation of competitors, some commoditisation, and a shifting regulatory landscape which meant that there was a lot to manage.
M&A Day saw three members of Onfido's team take to the stage to share what handling such an acquisition was really like, the audience hearing from Meg McGlone, Associate Legal Director; Francesca Porter, Group GC, and Francisco Uribarri Soares, Associate Director, Legal Operations
How did Onfido know an acquisition was the right thing?
Within the backdrop of a general market that was struggling, at the start the Onfido team was tasked with thinking about strategic alternatives for the company, looking at whether an exit would be better than raising, and whether in 12 months things were likely to be better or worse.
Taking it back to basics with a red, amber, green chart, this helped to pitch and understand different factors enabling them to see that an acquisition was the best option for them at that time.
"The role of the GC and the legal team is huge in this in that we pulled together all the information, looked at all the different factors, at the timeline, whether in 12 months it was going to get better or worse. We had around 10 key factors specific to our business, which included looking at commoditisation, regulation, and consolidation. We used a red-amber-green scale and the outcome of that was that it looked like the the best time to start a sale process would be in the next six months."
Onfido didn't, however, start the sales process straight away, waiting until September, as they needed to get their forecasts straight.
"When it comes to forecasting for a sale, you need to be confident that you will hit your forecasts," Francesca explains. "Buyers in the current market are looking for cash flow, breakeven businesses. Diluted, loss making businesses are quite hard to find the right home for in this market."
Onfido being in talks for a potential sale hit the news as it was predicted to make a significant profit for Onfido's backers, and turn the tables on a stagnated funding scene for fintechs.
When it comes to forecasting for a sale, you need to be confident that you will hit your forecasts."
Francesca Porter, General Counsel, Onfido
Appointing your investment banker
Once the sale had kicked off, Onfido's next job was to pick an investment bank to support them through the process. San Francisco head-quartered private equity company TPG supported the Onfido team in finding the right investment bank for them. The team at Onfido particularly valued that TPG had a bank of precedent agreements for using with investment banks that could help them understand what was market.
The engagement letter was a priority to get right, as Onfido wanted to offer good inventives to encourage the investment banking team to work hard and help secure the best team, but not so high so that it overinflates transaction costs and takes money away from investors. The legal team worked hard with TPG to ensure it was well-balanced and were pleased with the outcome.
Organisation during the sale
A huge amount of time and effort in organising the sale was spent doing due diligence. Often the longest running part of any business transaction, it is vital to get it right to protect the sale and the shareholders.
When it came to due diligence for Onfido, AI was a big focus as its identification services are AI-driven. Investors and buyers these days are increasingly AI-savvy, particularly if its use within a business might cause more exposure to risk down the line. For Onfido, the main concern with AI was around its IP, in an environment where AI is fast-developing and regulation hasn't quite caught up.
“There was less certainty and some unknowns in the AI space," Meg says. "One of the things that came up in AI for us was around IP, third party datasets. I think that may also be some of the difference between the US and the EU, as we were quite advanced in terms of thinking about model governance, so we were well-prepared for some of those questions."
This was only one part of an extensive due diligence process that ran right up until the day the offer was officially signed.
Despite it being a huge workload, getting ahead of the lengthy due diligence is possible, according to Francisco. His top tip for that would be to prioritise categorising your contract and audit databases in a way that will be useful for due diligence. For them, that meant prioritising sorting first contracts and first audit records linked to annual contract value and revenue data.
“There was less certainty and some unknowns in the AI space. One of the things that came up in AI for us was around IP, third party datasets. I think that may also be some of the difference between the US and the EU, as we were quite advanced in terms of thinking about model governance, so we were well-prepared for some of those questions."
Megan McGlone, Associate Legal Director
Centralising the function through the GC
In a major deal, questions often arise how best to structure a team so that the GC isn't overwhelmed, but at the same time remains in the loop. Francesca found that having the function centralised through her allowed people to be brought in when needed. This prevented having too many people on standby and feeling demotivated, and allowed her to have full visibility over what was going on - something that was valuable for having conversations with the exec and other stakeholders, and for ensuring legal wasn't becoming a bottleneck to the sale. Having private practice lawyers she had full faith in also helped her to trust that things were getting done.
Onfido also had the benefit of having been through a buy experience before the sale. While this was a different experience, it meant working on a transaction wasn't completely new ground for them, and they'd already picked up some learnings to apply to its sale to Entrust.
"When you’ve completed an M&A deal of this scale, you come out with a huge number of learnings and ‘should have dones!’ that make a real difference for the next time." Francisco says.
Onfido's deal cheat sheet
Pick your external counsel wisely
Sometimes, this doesn't mean doing a lengthy tender process, but instead going for someone who you already work with and knows your corporate history. When time is of the essence, being able to 'plug and play' your external counsel can alleviate a lot of pain points!
Take time to build relationships
Focus on building the team around you, and fostering relationships across the business. Make sure to value your BAU team who are holding the fort down and keeping the business going while others are squirrelled away doing the M&A!
Get and keep your house in order
Preparing for M&A by locating, storing and auditing contracts ahead of time. Local storage can end up problematic very quickly! Prioritise storage that allows them to be queried - for example, being able to identify change of control termination rights at a critical moment during the process!