Note: This article is the sixth in an ongoing series on Exits. To learn more about how to plan for exits and maximize returns, download our free eBook today Angel Exits: Perspectives and Techniques for Maximizing Investment Returns or purchase our books at Amazon.com.
Experienced investors understand the important distinction between “selling” your company and having someone “buy” your company. It may sound like semantics, but there is a big difference in the price paid in these two scenarios. If you have to “sell” your company, you will be one of many companies that is reaching out to potential buyers. If someone decides to “buy” your company, they will initiate the conversation and are more likely to pay top dollar for your business.
Before we invest in a new company, Christopher and I always ask the question -- “Who are the top 5 potential buyers for this company, and why will they think it is valuable?” If the CEO doesn’t have a good answer for this question, we ask her to put some time into research and come back to us with a well thought out set of potential buyers along with key reasons they would be interested in the company. With that list as a starting point, we can begin to envision the path to a successful exit.
In his role as the CFO at a public enterprise software company, Christopher was involved with dozens of acquisitions. And ultimately, his public company was acquired by another public company. With this experience under his belt, he knows a bit about how buyers think.
Q: Christopher, how do you advise entrepreneurs to set the company on the right track to find their ultimate buyer?
CEOs should always keep an updated list of the most logical buyers and buying rationales. CEOs should be looking to:
Build senior executive relationships with the likely buyers and other key industry players by networking,
Make time to take meetings at conferences and events,
Ask for direct introductions, and then maintain these relationships by meeting regularly with these contacts.
CEOs and their senior teams should look for opportunities to build industry thought leadership - speaking, writing, finding ways to be quoted by journalists, and even using social media to interact with key industry leaders. PR can be very powerful and very cost effective marketing. And companies should always be on the alert for possible partnerships which may grow into something more. Partnerships are tricky to do well, but when you pull it off, you can not only grow sales, you can simultaneously position yourself well for a possible exit down the road.
Q: Say you are in Corporate Development at a large tech company. What does your day look like?
During an active deal, corporate development people are extremely busy coordinating the deal process:
Working to make sure information and information requests are all flowing,
Making sure the right people are meeting,
Working with constituents in their company such as:
The CEO on strategic issues,
Product Managers on product fit,
The General Counsel on approval and corporate logistics,
The HR team on people planning, and
The finance team on valuation and tax issues and a host of other things needed to keep the process rolling and plan for the ultimate integration of the acquired assets.
Between deals, corporate development people spend most of their time evaluating unsolicited inbound offers to buy companies or invest in companies. They work with product managers and business unit general managers to understand what is on their “shopping list,” doing research to find companies doing things of potential interest to their employer, meeting with bankers and attending industry conferences. Some of the more senior corporate development people may be active members of the senior leadership team in their company and help with the day to day strategy and operation of the company.
Q: Besides the Corporate Development team, who else should a CEO be working with at the potential buyers?
There are two constituencies that are really important to work with. The first are the people necessary to get the deal done - this would include the CEO, the bankers, possibly a board champion, and key senior team leaders - particularly product and sales. If the deal cannot get over the finish line, nothing else matters.
The second constituency are the people with whom their team is going to work with day-to-day. Think of this as reverse diligence. Who will I be working with? What will I be doing? Who will my boss be? Is there an earn-out or other incentive plan? How will I be measured? Can I imagine a life after acquisition?
With a good deal, chemistry is strong, excitement builds and the potential of the combined companies becomes apparent to all. In a doomed deal, there are frictions, misunderstandings, mistrust, and misalignments. M&A is a lot more like romance than a military campaign (though it has elements of both!)
Q: Explain some of the key differences between a Strategic Buyer and a Financial Buyer?
Strategic buyers are operating companies looking to acquire a target company’s customers, technology, people, marketshare or other attributes which they will use to enhance their business by merging them together. Strategic buyers have the potential to reap significant synergistic benefits from putting two companies together (i.e. 1+1=3 types of outcomes) and may have strong strategic motivations (whether greed or fear) to do deals. Rightly or wrongly, they are often willing to pay more than financial buyers for a company.
Financial buyers are fundamentally money managers, not company operators. They are looking to buy the free cash-flow of the business. They are not direct strategic participants in an industry, they are looking to harvest cash. While they may care about the strategic position of their assets and they may have operational influence over their assets (up to and including combining them with other companies they may already own), at the end of the day, they are money managers who care about buying free cash flow and appreciating assets they can resell later. They are very good at calculating the present value of future cash flows and building models for predicting various likely scenarios. Because they are highly skilled in finance, because they don’t have the same kinds of M&A motivations of an operating company, and because they often don’t have the same base on which to build synergies, they are much more disciplined on price. Financial buyers rarely over pay for assets - in fact, their model is built on the idea that they will typically be able to pay less than things are actually worth.
Want to learn more about how to plan for exits and maximize returns? Download our free eBook today - Angel Exits: Perspectives and Techniques for Maximizing Investment Returns or purchase our books at Amazon.com.