Don’t Get Excited by Every Offer That Comes Your Way
In the same way that you shouldn’t get over excited because you have had a few investors call you on the telephone, sounding interested in your business, the same applies with trade acquisition offers. Many of the large corporates, just like the big investors, have teams of people who do this full time. They scour the market, making tentative probes and gathering information. Many are as genuine as a Rolex watch bought from a Chinese street market.
To make an offer costs them nothing and can often garner them much information with minimal effort. The problem we have seen created by such “fake news” investment and acquisition enquiries, is that it lulls you into a false impression of the market and stimulates the impression that your business is in very high demand, should you wish to sell. Thousands of such conversations are being conducted every day. Very few ever result in a sale, let alone a decent valuation for the shareholders.
There are many ways to quickly sift out the genuine from the fake approaches that I’ll cover in a separate article but for now, I mention it as a serious and real warning. The likelihood that you’ll receive one of these fake approaches is very high. So be warned.
Hiring a Banker to Sell Your Business
Many companies I meet with, talk about their business potentially being sold by an investment banker. The investment banking market does have a small number of very large, well connected, analytical and experienced people. There is also a much larger number of such organisations that will pretend to be the latter.
The problem you have is unless your business has a likely valuation in the hundreds of millions, then your business is not big enough for the true investment banks because their costs, processes and general overheads are too big a weight for your business to carry.
The other proviso I would offer is that well they are just “Bankers”. The software industry moves at such a pace and, as previously outlined, is quite different from “normal” businesses. You need a partner with experience and knowledge of the software sector so that your business can be advantageously plotted against the competitive landscape and a detailed exit strategy & narrative built upon that information. What you also need are people who know the individual acquisition decision makers and can assist you in positioning your business, so your company is pushing their right buttons to maximise your deal value.
Just When You Think It’s Safe...
I think it was one of the “Jaws” films that had the sales tagline “Just when you thought it was safe to go back in the water”.
Well, completing an M&A deal can be very much like that. Once you have an offer and the term sheet is agreed and the lawyers are putting together the sales purchase agreement and, even when the initial due diligence questions have been answered, it’s very easy to relax. Many don’t realise the most dangerous time in an acquisition is the time when a price has been agreed and the sale is finally completed.
There are many things that can happen at this difficult time that can turn what seemed an easy sail to the finish line into a shipwreck of epic proportions.
Unfortunately, buyers don’t always behave themselves in the way that you may wish. This is a purchase that is worth millions and people can behave in strange ways when so much money is involved. Tempers can very easily be strained. A buyer can change their offer. The seller can run out of cash. The acquiring company may want to change the structure of the deal, which will adversely affect the key shareholders. The acquirers may decide that they don’t want management team members that had been with the business for many years and were seen as valuable members of the team.
The harsh reality is, that many deals don’t close even after the price and deal structure have been agreed. There are enough different reasons for this failure to fill a large book. To avoid becoming part of those statistics, what needs to happen is that you mitigate your risk by preparing well in advance of any sale. You then make sure you have experienced deal negotiators beside you, who can qualify out the good guys from the bad.
The mechanics of closing the deal are completed by lawyers. The strategy of closing the deal is where you need to focus and ensure you are getting the right advice and assistance.
You need to ensure that during the sales process your M&A team have the experience and knowledge not to be distracted by things that have nothing to do with your end objectives. Some of the issues are that; Lawyers get paid whether the deal closes or not. Most important to remember is that they work for YOU.
They should take their instruction from you and not dictate.
Another point to consider is that lawyers are likely to be paid by the hour. Therefore, a bit of a “bun fight” between the opposing lawyers does neither of them any harm at all. Winston Churchill once said, “You will never reach your destination if you stop and throw stones at every dog that barks.”
They can also on occasions lose sight of you and your shareholders’ end objectives as they dive into the nitty-gritty and slow down the progress of the deal. However, they are essential. Moreover, you need somebody to be watching your back, from a legal perspective. However, you need to make sure that the delays they create are not based on details that do not make any material difference to you and your shareholders.
Having been involved in the selling of software technology businesses for many years, there are many important recurring points. Mergers and acquisitions (M&A) is a big topic. Much bigger than I could ever cover in full in a 4-part article. The problem of M&A for shareholders is that you don’t know what you don’t know.
Too many software tech owners ride their business up and over the top, waiting far too long before they decide to sell. In this instance, you become the limiting factor for your business. I understand this failing as it’s very easy to become wedded to your business. There can also be the fear that you have worked hard for this success and maybe you could not recreate the success again. Alternatively, maybe you won’t get the right valuation. Growth is painful; Change is painful. However, neither is as painful as being stuck somewhere you don’t belong.
What you need is help, to first appraise the business realistically, knowing the current market trends and drivers in your sector. You also need a third party who can help you in your thinking about what lies beyond this business for you and the other shareholders.
You need a structured framework to follow that’ll take you in the right order through each of the steps you need to take. Do not enter an acquisition process without proper preparation and without giving yourself the time you need to achieve the outcome you desire.
The failed sale of your business can be a crippling blow. The successful sale of your business, at the right valuation, can be a release and your launching pad towards an exciting future.
About Mark Edwards