Playing the long game for shareholder value realisation and exit, with Ian Milbourn.
We are investing in founders who share the same passion we do to build global category leading companies. They are on a bonkers journey to grow from $1 or $2m in revenues to $100 or $200m in revenues, but at some point they want to realise the value of the business they have created. And playing a long term game to create a massive long term value for all shareholders, because this is what’s important to create the vibrant tech ecosystem we want to see in Europe. We want to be creating businesses that are not just delivering $100’s of millions in revenue, but north of $1bn in revenues. There’s a great quote from Bernard Liautaud, founder of Business Objects, when I asked him if he had any regrets and – bearing in mind Business Objects was acquired for more than $7bn – he said “I think I sold to early”, because he felt he had a shot to build one of the top five enterprise software companies on the planet. That gives me goosebumps to think about, that’s what we are looking to achieve – or bigger. And we talk about this long term value creation in what we call “The Art of Exiteering”.
Ian Milbourn is CFO and one of the founding partners at Notion and plays a critical role for us in building our knowledge, capabilities and network for exit and value realisation. He has a background in corporate finance prior to MessageLabs and then Notion and has been helping companies maximise and realise shareholder value for more than 15 years. At Notion he has completed 11 exits, 6 transactions at MessageLabs (“ML”), including an aborted IPO and a dual track strategy at exit and several prior to joining ML.
This article is a summary of an in-depth conversation with Ian that you can listen to here.
Notion invests in extraordinary founders, shouldn’t we just let them get on with building a great business and let the exit take care of itself?
You often hear people saying that, ultimately if you want to build a big outcome you must simply build a great business but I don’t agree it’s as simple as that. When you are growing a company you have the luxury of time, you can make mistakes, change strategy, pivot, but during an exit process if you make mistakes it’s very hard to recover and a lot of the lessons we talk about are best practices that can be put into place well ahead of time, to avoid pitfalls. At the same time they allow you to take control of the process: for example to build your buyer universe. So yes, build a great company, but if you want to really maximise value then you need to be thinking and planning far in advance.
What issues trip companies up?
Most of the failures fall into two areas.
We quite often encounter situations where there is not complete alignment between the stakeholders. That could be between shareholders, the board of directors, or even the founder group. So where founders have gone into exit processes and there hasn’t been alignment then it has caused problems, because it’s very hard to keep that misalignment from the acquirer and they will often use that to gain advantage in price or terms.
And the second a general lack of preparation, for example being grossly underprepared for the deluge of due diligence.
The programmes, tools and checklists we are putting in place are designed to help our founders achieve these two aims ahead of time – alignment and readiness.
How early should companies be thinking about exit? With for example 25 people in the company should I really be thinking about DD readiness?
It makes complete sense. If you are raising money from a VC then you should have the fundamentals in place. The process with a VC for a Series A will be nowhere near as onerous as for an exit process, but ensuring that core areas such as IP, constitutional documents, shareholder structures, share options, tax planning are being focused on now will only help you at exit.
These may not be top of your priority list as you are moving from start-up to grow-up, but they are incredibly important. As you move up scale, you should be thinking about your buyer universe, understanding market dynamics, who has acquired who and why, why they acquired them vs you. All these questions should be considered early, so that you can track your progress. You must form a view as to when is the right time to exit, on one hand that is down to the founders and the board, but it should also be shaped by understanding the market dynamics.
Is there an exit readiness checklist for founders?
There are three things you should be doing on a regular basis.
- DD readiness.
We recommend our companies develop an ongoing DD readiness checklist, with a simple RAG (Red, Amber, Green) and an action plan for each so they are constantly improving, covering nine areas:
- Capitalisation (cap table & share options)
- Corporate structure
- IP (all matters but focus on core IP / assignment / infringement)
- Employment Contracts
- Transfer Pricing
- Material contracts
- Data privacy / data protection
- Understanding the buyer universe and market dynamics.
Document the deals that have been done in your space over the last 3 years and why and the advisors who are doing these deals.
Identify possible buyers (circa 5-10), understand the rationale and agree an action plan for each, with core content for each:
- Name and key stats for each (size, strategy, acquisition history, available cash, key contacts)
- Why would they be interested? (rationale, product fit, strategic fit)
- Why would they buy you and not a competitor?
- What contact do you have with them?
- What relationship would you like to create? Commercial, e.g. joint go to market; Technological, e.g. embedded IP; or informal, ensuring they are aware of you and kept up to date on progress.
The output may be a ranking of potential buyers and RAG indicator for engagement levels with an action plan for future engagement.
- A network of advisors
Develop some relationships with M&A advisors in your space. They will have much of the information you will need to understand the market dynamics and buyer universe.
If you have done these three things, then if someone contacts you with an unsolicited offer you know you are DD ready, you have a very good understanding of the market and you have a friendly advisor who can help you.
What actually drives value at exit?
There’s the science and then there’s the art.
Taking the science first, if you look at the SaaS multiples of public and private companies, then it’s pretty clear the larger and the faster you are growing, the higher a multiple and therefore the higher valuation you will get.
But there are also numerous examples of companies pre and post revenues receiving very significant prices. So the art of the valuation is about driving a strategic price. And that comes down to knowing your market, knowing the buyers, and being able to put yourself in the shoes of the product managers at the likes of Oracle or IBM and having credible answers to why they would buy your company. Why would they buy vs build or partner? So if you understand all of those dynamics you are in a good position to create competition in a deal, or even just the illusion of competition, which combined with the ‘science’ can drive some very sizeable valuations.
What’s the role of the advisor in the actual M&A process and do they really deliver value?
Some can talk a very good game. Many will talk about their black book and who they know. However, in my view they are only as good as their last deals, so it’s always good to talk to advisors about what deals they’ve done.
We recommend our founders have one or two people they trust, who they may talk to on a semi-regular basis about the deals being done who they can then call on if or when a call comes. And the main value in that instance is on tactics. Often a founder will have little or no prior experience of an inbound M&A process and won’t understand or appreciate the nuances involved in negotiating an exit and driving value.
I liken the deal to a game of rugby. Rugby is incredibly confrontational, but when you walk off the pitch you shake hands and can be good friends. An M&A deal can be the same. If you are acquired, then as a founder you should probably expect to be working at the acquiring company for a few years thereafter. So you may need to distance yourself from the complex negotiations, which can be quite tense. So the advisor or expert can play the role of bad cop, adding to your team the nuances of the tricks of the trade that the acquiring team may use.
Give us insight to the scale of DD that comes with transactions, large or small.
It’s staggering. I tell the story of the DD kick off call when we were selling MessageLabs to Symantec in 2008. And there was myself, Stephen Chandler, and our Head of Legal sitting around a small round table. And then one by one the Symantec team dialled in. And there were in excess of 50 people from Symantec, each representing a different part of the organisation. And they would announce themselves as “This is the real estate DD team”, “This is the share options DD team”, “This is the HR team” and for all of these people their job was to do DD on the target companies.
And we asked ourselves, “Is this normal?”. And we’ve learned at Notion that it is entirely normal. In fact we’ve had one situation where there were more than 100 people on the acquiring team for what was a relatively small exit.
It is a massive piece of work. And the danger is that with a small team on sell side, there is a temptation to cut corners, which of course you can’t do. It’s all consuming and you need to be ready.
And of course this can be a massive distraction from the day to day running of the business. So you must have a clear plan for who does what and a single person to act as a point person, ideally someone who has been through a similar process on a number of occasions, perhaps your CFO or your advisor.
There will be also be considerable pressures placed on the team to develop the integration plan. There is, of course, also the possibility the transaction will fall over, and you don’t want the business to have gone backwards for a couple of quarters should that happen.
This is an experience that can break people, we have seen advisors cracking under the pressure, we have seen founders wanting to walk away. So this is why we help founders to think of and plan for these experiences in advance.
It’s so easy to trip up during the process, so the more forearmed you are the better.
How important is to create competitive tension in the selling / buying process?
It’s massive. If all your eggs are in one basket it’s very hard to get into the driving seat, and then anything that comes up in DD will be used against you in terms of price, terms or structure. You must demonstrate there are other people you can sell to and then you must be prepared to walk away and go back to building your business.
So throughout the sale process you ideally want to be in a position to point to someone else who would buy you or to be prepared to walk.
There is obviously the potential and the glory of the IPO. Is there much difference?
Well obviously the buyer universe becomes less relevant, but with an IPO you will be required to know your market inside out and explain why you are different and why you will win. You will be required to have a view on the market dynamics and how it will evolve.
I would go back to basics here and say an IPO is not an exit, it’s simply the next stage of the journey, a fund raising exercise with access to public capital. It’s a very involved process. You need to think about how you will run it while keeping the business growing, because the last thing you want to do is list and then miss your first quarters numbers.
So really this is a two to three year process. There are other requirements that don’t existing in M&A, for example the governance requirements. It’s not for everyone. You need to be a real category leader. You need to ensure the leadership team are aligned and willing to stay with the business for a minimum of another three years. You need to have more than $100m revenues, ideally growing in excess of 75% per annum. So that’s a big ask, and you need to be confident you can deliver that and continue to grow at that speed thereafter.
For some, that want everything that goes with it, this can be an incredible outcome.
How does the team need to prepare themselves?
A key facet is who on the team has the M&A experience and can lead a transaction. If you don’t have that as you are reaching scale, it may be a skill you want to bring in.
Another is who can articulate the product vision? You need people who can put themselves in the shoes of the buyers – the corp dev and product people at the acquirer – and bring your story to life in the context of their business, while putting some sizzle around it.
And then lastly, who can really position and sell the go to market story in such a way as the growth you have already achieved takes on an air of inevitability, or indeed will be supercharged by the new owner.
Alignment across the team is critical and also to ensure everyone knows their role on the team. There should be a team that focus on transaction and also a team that can continue to grow the business.
- Understand your buyer universe and the market dynamics at a product and corp dev level.
- Appreciate that DD readiness is an ongoing process
- Focus on the value drivers, looking at both the science and art.