The End.
Many of the articles on this site are technical in nature. Here’s one for the C-Level executives. For many high tech ventures, the end game is to either go public or be acquired. With current government regulations, the high costs to maintain a public company in the US suggest a corporation needs revenues north of $100M to deliver decent profitability. So ‘getting acquired’ becomes the realistic end game for many smaller firms.
If you’re running a small company it’s useful to know what strategic buyers (as opposed to private equity or venture capital types) are looking for when they make an acquisition. Here are seven things you should be thinking about to make your company attractive to a potential acquirer.
- Good financials
It’s surprising how few companies are able to deliver consistent results that show a clear trend. If your top line is significantly up and down quarter over quarter you can expect a potential acquirer will interpret this volatility as a dampening factor on the forecast ahead. Good financials also means audited financials. Something else to keep in mind is the M&A process usually takes longer than most expect: 6-12 months is not uncommon. During that time you’ll be under the microscope, and hitting your quarterly projections is important. It’s best to under-promise and over-deliver. No forecast is perfect and some volatility is expected, but any big misses may cause cold feet or provide ammunition for a price renegotiation discussion. Strong consistent financials are one of your best justifications for a strong valuation. - Reduced Risk
As mentioned above, consistently trending, audited financials reduce risk for an acquirer. So does the lack of litigation or IP entanglements. Be able to show that your IP is clean and you own it (watch for improperly documented open source use). Sometimes the acquirer will propose an earn-out (part of the total proceeds contingent upon future performance, often revenues and/or operating profit in years 1 and 2). An earn-out is great for the buyer as it reduces risk; they only pay if financial targets (generally over and above their internal financial model) are achieved. - Good Synergy Opportunities
Strategic buyers are usually looking to fill a gap in their IP or product line, improve geographic coverage or channels, increase share position, enter an attractive adjacent market segment or make a defensive play to prevent another competitor from gaining an advantage. They are also looking for opportunities for cost reduction (process improvement, expenses that would not continue after an acquisition, facility consolidation, supply chain, redundancies, headcount reduction). In most cases there is a view they can accelerate the top line while reducing operating expenses. - Talent
Keeping the talent, especially key executive, technical and sales and marketing talent, is vital to an acquirer. They will be interested in your retention history and comparing your pay & benefits to their standards to understand possible cost increases. They will also be curious to compare your view of the market, segmentation, and share position of various players with their own view. To the extent you have a firm grasp of the market and really understand your customers and market segmentation, you’ll be in a stronger position. - Customer retention
Buying a company has limited value unless you think you can keep the customers after the transition. There will be a lot of interest in your key accounts and your view of their loyalty to your firm. A buyer will want to verify your relationship with your key customers and their satisfaction before you will want them to talk to your customers – tension can be expected here. - Transparency
Disclose issues, don’t let them be discovered in diligence. Buyers expect but hope not to find unpleasant surprises. No company is perfect; it’s smart to disclose any corporate blemishes in your confidential memorandum up front so they aren’t dug up with an ‘aha!’ moment in due diligence. For the same reason, please avoid the too-often seen ‘hockey stick’ financial forecasts. If you really believe your sales are on the brink of taking off, lead your company through some strong growth years, then look at putting your company on the market, you’ll get a lot more for it. - Exclusivity
Buyers will get to a point where they are ready to devote some serious resources in diligence, and don’t want to commit to applying them unless/until they are guaranteed exclusivity. This is OK provided you are comfortable you have a good buyer with a good track record and you put some reasonable bounds on the timing – it shouldn’t be open ended.
There are other things too, like a good cultural fit and perhaps enough scale in your company to act as a nucleus for additional bolt-ons if it’s an adjacent market segment for the buyer. Many of the things listed above like clean financials, clear IP, talent and customer retention, and being transparent are good things to do regardless and can help you grow both your top and bottom lines. Ultimately it comes down to whether the buyer believes it can get an attractive return on its investment and mitigate any risks.
The Beginning.
M&A is often the beginning of the next chapter for the company you’ve worked so hard to nurture and grow. Position yourself well to respond to these areas of enquiry and you’ll maximize your value and increase the likelihood of a successful transaction - for both sides.
Mark Johnston is President of Telementrix, a management consulting firm specializing in M&A, market attractiveness assessment, new product development best practices, and strategic planning. He has spent 35 years in the high tech field on both sides of the M&A table and helped close deals from $1M to over $1B. For more information see www.telementrix.com
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