"If you think that one day you’ll be selling your business my advice is prepare and prepare early. "
Kevin McGovern is an FCA with over 20 years experience managing technology companies. Kevin’s had an interesting journey taking Exec, Non-exec and advisory roles in public and private companies as well as investing himself and buying and completing an IPO with his own business. Now he works alongside entrepreneurs and their investors developing strategy, management and financial models for companies that need to make a step-change or are going through, or hope to go through a transaction. Depending on the situation he acts as a consultant, advisor, non-executive or executive director. His expertise spans strategy, management recruitment and team development, M&A on both buy and sell side, turnaround, commercial due diligence, IPO, MBI, MBO, buy and build, business and cash planning and fundraising.
If you think that one day you’ll be selling your business my advice is prepare and prepare early.
“There are many types of factors affecting the value of a SaaS company and perception is as important as reality. The tangible factors include data-points such as your customers, revenues, pipeline, EBITDA and standard SaaS metrics. The intangible things relating to your technology’s ability to scale someone else’s business, the quality of your management and how well run your business is are much harder to define, but equally as important. A well run business can receive a valuation many times more than a less well run business that is fundamentally the same so don’t underestimate the importance of preparation and presentation.”
Getting this right starts with basic housekeeping.
“Not having your house in order is a big red flag for acquirers and can be hugely detrimental to the deal and can even cause an acquirer to walk away. US acquirers, in particular, are extremely risk averse and the diligence process can be exhausting. Issues can be avoided with good preparation and you can minimise deal fatigue and the loss of momentum while things get fixed. Examples include; statutory legals, cap. table and waterfall, employment contracts and key IP clauses, licence and code inventory, up to date filings, tax submissions, share option plans, good management accounts and board packs are all examples.
“Know the playbook about deal stages and what tactics to employ as you go through; Positioning, long list, short list, LOI, diligence, legals, post completion conditions etc. You need to bring as many people to the same place at the same time before choosing your partner and that’s hard. Then knowing when to negotiate hard and soft is key to maximising value. The buyer is undoubtedly more experienced than the seller at this so if you don’t know the game find a peer, board member or advisor who does.
“Work through the preparation quarter by quarter to get through the amount of work that needs to be done. Ensure clear ownership and make this preparation an ongoing agenda item in your board meeting. Maximising valuations is as much about the right market as it is about having great technology so knowledge and timing is everything. Too many board meetings are internally focused and a review of historic management accounts rather than externally focused and forward looking. Monitor the market, follow trends closely, who’s doing what and why, when does their roadmap intersect ours, why would they buy us rather than a partner, what are we worth to them are the questions you should be asking. Keep an eye on peer group activity and valuations. Timing is everything, when to sell is as important as what you are selling. I remember buying Telecoms businesses in 2002 and 2003 while the owners were crying at the astronomic valuations they’d turned down in 2000!
“Constantly think about the strategy and the value proposition of your business but in the context of a buyer. Be honest and don’t believe your own PR hype. Then think through positioning, what information and data do you need to gather and present to back that up? Tie everything back to that vision.
“Think about how you can get the balance right between technology and financial factors to show as much value as possible. Package up and show both technology and revenue-based KPIs. Include KPIs around your management team as well as the market, your peer group and who you compare yourself to. Ensure you’re covering a depth and breadth of your business, not just financial. Strategic valuations are paid for technology that can scale. Revenue is important because it proves the technology has a market but non revenue generating scale factors are important too.
“Many businesses are bought by organisations they already know so make sure you’re leveraging all of your existing relationships from early on – this includes competitors, customers and partners.
“Finally, founding CEOs can be very cost conscious and in a sale process look to keep costs down. The sale process is about maximising the capital value, net cash in your pocket, that’s rarely achieved by scrimping on the opex. Get good advice! Pick your advisors carefully – always take recommendations and work with people that have successfully navigated within your marketplace.”
This story was taken from Notion’s The Art of Exiteering Report