Don’t Allow Yourself to be Seduced by Opportunistic Offers to Acquire Your Business
It's a similar situation to having a few investors call you to say they'd like to invest in your business. Don't get over excited by opportunistic acquisition offers. Just like the big investors, many large corporates have teams of people who make these approaches on a full time basis. They hunt the market daily for ripe pickings, gathering information and making tentative offers, many of which are as genuine as a Rolex watch bought from a Chinese street market.
Consider this: making an offer costs them nothing and can often give them access to a deep level of information with very little effort expended.
The problem we repeatedly see created by such investment and acquisition enquiries, is that it gives you, the entrepreneur, a skewed perception of the market. It encourages the impression that your business is in very high demand, should you wish to sell. Thousands of such conversations take place every sinlge day. Very few ever result in a sale, let alone a decent valuation for shareholders.
There are ways to quickly sift out the genuine from the bogus approaches that I’ll cover in a separate article. But, for now, I highlight the scenario as a genuine and serious warning. The likelihood that you’ll receive one of these fake approaches is extremely high. So be on your guard.
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 pose as the latter but without any depth of experience.
The problem for SME's is that, unless your business has a potential valuation in the hundreds of millions, then it is not big enough for the true investment banks because their costs, processes and general overheads are too heavy 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 to other “normal” businesses. When planning your exit/trade sale, you need a partner with experience and comprehensive knowledge of the software sector. Such a partner will have the knowledge and ability to position your business advantageously against the competitive landscape. They will also be able to create a detailed exit strategy & narrative, built upon that information.
What you also need are people who know the individual acquisition decision makers and can help you position your business, so your company is pushing the 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, the lawyers begin putting together the sales purchase agreement - and, even when the initial due diligence questions have been answered - it’s very easy to begin to relax. Many aren't aware that the most dangerous time in any acquisition is the when the price has been agreed and the sale is finally completed.
There are many things that can happen at this time that can turn what seemed an easy freewheel to the finish line into a shipwreck of epic proportions.
Unfortunately, buyers don’t always behave themselves in the way that you may wish. In a purchase that is worth millions, people can behave in strange ways when so much money is involved. Tempers can very easily fray. Buyers can change their offer. Sellers 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 mitigate your risk and avoid becoming part of those statistics, you need to prepare well in advance of any sale. That way, you can ensure you have experienced deal negotiators by your side 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 in order to ensure you get 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. On this point, an important factor to be conscious of at every step of the process, is that the lawyers get paid whether the deal closes or not - Most importantly, remember 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 any 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 huge topic. Much bigger than I could ever cover in full in a 4-part article. For shareholders, the issue with M&A 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 example, you become the limiting factor for your business. This failing is completely understandable, as it’s very easy to become wedded to your business. There can also be the fear that you have worked hard for success and maybe you can't recreate it. 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 and watching the value of your business decline because you missed your window of opportunity.
What you need is help, to first establish a realistic appraisal of your business. You also need to understand 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 process to follow that will take you, in the right order, through each of the steps necessary to a successful trade sale. Do not enter the acquisition process without detailed preparation and without giving yourself the time you need to achieve the outcome you desire.
Experiencing a failed sale of your business can be a crippling blow from which it's hard (though not impossible) to recover.
Conversely, 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