6 Insider Secrets to Successful Mergers and Acquisitions by@stephenday

6 Insider Secrets to Successful Mergers and Acquisitions

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Stephen Day

Co-Founder, Navidar: M&A and Capital Raising focused on SaaS, e-Commerce, IT Services, and Tech-enabled Companies

Every CEO wants to get the highest possible price for their company. After all, you built your company up through a lot of hard work and innovation. For the companies our team supports, we also want you to receive an exceptionally high or “outlier” valuation.

Through the years, we’ve learned that outlier valuations are not a matter of luck; they are earned. This piece shares secrets for increasing the likelihood of garnering such a valuation (as well as tips for avoiding an unfortunate re-trade):

Secret #1: The M&A Market Is Inefficient, and Therein Lies a Hidden Opportunity 

Let’s start with a few words about the mergers and acquisitions (M&A) market. As you probably know, the market for companies selling their business is very large. In 2020, the technology M&A market topped $550 billion across a total of 4,800 transactions.

But the M&A market has another amazing characteristic besides its large size: The prices that multiple buyers are willing to pay for the exact same company frequently vary, often dramatically. In other words, to one buyer your company may be worth very little, to another a middling amount, but to a third buyer your company may be extremely valuable. Capitalizing on this characteristic of the M&A market is both the challenge and the opportunity facing companies today.

Our clients have experienced this phenomenon when they receive a broad range of significantly different bids for their company. It really is not at all unusual for there to be a very wide range of values offered for companies that we are selling as this is a direct reflection of the nature of the M&A market itself. In our opinion, the most useful way to make the imperfection of the M&A market work for you—rather than against you—is to hire an experienced investment banking partner who can help you navigate the path to selling your company.

Secret #2: Your Story Is Important and It Should Change When You Sell Your Company

There is a direct correlation between a great story and a great offer. The more compelling you can make your company to a buyer, the more likely you are to receive an outlier valuation.

What do we mean by story? This is the narrative your banker tells potential buyers about your company. It’s your collection of assets, attributes, and capabilities, along with a broad vision of how your company can enhance a potential acquirer’s market position.

Most companies are very good at telling their stories to their customers and employees, but they have considerably less skill at telling their story to potential buyers. But that’s okay; it’s your investment banker’s job to translate your customer-focused story into one that will appeal to a broad range of potential buyers.

Translating the key attributes of your story into a language that will resonate with potential buyers is virtually always a key ingredient to getting an outlier valuation because it not only positions you in the best light possible, but it also expands the pool of buyers that are interested in purchasing your company. An example makes the point most clearly:

We had a client whose CEO was a bit uncomfortable with our enhanced vision for his company. At the time, while his company did have clients in other industries, most of its revenue came from just one industry. He asked us, “Is it really a good idea to say our solution can also be used in other industries?”

We assured him that not only was it a very good idea, but that it would also result in an expanded pool of offers from interested buyers. Ultimately, the purchaser that acquired his company at an outlier valuation did in fact come from outside the industry that had accounted for most of our client’s revenues. The buyer was motivated to purchase our client precisely because our client’s solution could be applied to many different industries.

Our team sees one of our core functions as translating our clients’ assets into points that buyers will value while simultaneously showing buyers how our clients can be leveraged post-acquisition to pursue a bigger opportunity than they could have pursued without them. Recrafting your story is one of the best ways to broaden your group of potential buyers and give you the best chance of achieving an outlier valuation.

Secret #3: You Probably Have Hidden Assets that Will Attract an Outlier Valuation

Clients often ask us how we know how the various potential buyers might value their company. This is clearly the “art” of investment banking, and it comes from decades of experience. One of the most important things we do is work with the company (and perhaps select board members) to dissect the company to discover all of its “assets.” Every company has obvious assets—customers, market share, intellectual property, and its development team, for instance. However, finding the less obvious ones and promoting them is often the key to a higher valuation.

Some examples of these hidden company assets could include:

– Ecommerce marketing DNA, meaning a deep knowledge and skillset in how best to run online marketing programs for consumer products.

– Deep industry domain expertise about the customers’ business workflow that is embedded in the software product it sells.

– A culture that can adopt and capitalize on changing technology trends over long time periods, therefore creating a reputation as a thought leader in the space.

– A unique database and data collection engine for gathering supply chain information on businesses that reflect diversity and sustainability requirements.

The next step in the process is to link as many of these assets as possible to each prospective buyer. In this respect, we don’t just tell potential buyers your story, we tie your specific assets to each prospective buyer’s business so they can clearly identify the potential benefits and synergies. The more “hooks” we can find to drive buyer interest, the greater the opportunity for realizing an outlier valuation.

Secret #4: The Biggest Mistake: A Mismatch Between Your Story and the Financials

Please make sure that you and your banker avoid the single biggest mistake that we see companies make in the M&A process. What is the mistake? Having a mismatch between your financial model—your quantitative story—and your qualitative positioning.

The real-world cases of these mismatches are highly varied, but one simple example will make the point. Suppose that a linchpin of your positioning is your superior solution, which is leagues ahead of the legacy solutions out there. You’re an up-and-coming company that can disrupt your sector. That’s a great qualitative story, but does it jive with your quantitative one, as expressed in your financial model?

If your model predicts the same rate of growth, rather than a faster growth rate, as your competitors or the rest of the market, you have a disconnect between your qualitative and quantitative stories. That disconnect will raise red flags among buyers and lead to some uncomfortable questions like: Is your product really that special? Is your company truly differentiated? Such disconnects can undermine your chances of receiving an outlier valuation in the sales process.

Other examples of critical quantitative-qualitative disconnects include presenting a financial model that:

– Uses assumptions that haven’t been thoroughly examined and tested.

– Shows an unjustified dramatic increase in sales in future years (the so-called “hockey stick projections”).

– Is not designed to withstand the extensive due diligence buyers will apply to your financial projections.

Any of these financial model shortcomings, as well as countless others, can easily destroy millions of dollars in deal value or derail your M&A transaction entirely.

Secret #5: Not All Buyers Are Created Equal

Different buyers will value your business in different ways and for different reasons. Moreover, different attributes of your company will appeal to different buyer groups.

As a result of this characteristic of the M&A market, we work very closely with our clients to help them think about themselves as a collection of assets. We spend a great deal of time identifying how those different assets and attributes may be used to attract different groups of potential buyers.

The reality that companies are seen in different ways by different buyers is a critical characteristic of the M&A market and explains why we believe that customizing your positioning for different buyers is critical to a successful M&A outcome and achieving a premium valuation.

Secret #6: Preparation Is Essential and Advanced Preparation Is 90% of the Battle

Advanced preparation in the context of selling a company has many components (and even more subtleties), but a few of those components are worth examining.

First, as already discussed, your banker and you will need to work together to create your go-to-market story, which will undoubtedly be at least somewhat different from the story you are used to telling your customers and employees. Second, you must avoid any disconnects between your financial story and positioning as noted before.

Third, you must address and prepare thoughtful answers to any issues or weaknesses in your company before going to market. In other wordsyou’ll need to formulate answers to any known company problems before your banker approaches buyers who might be interested in acquiring your company. These issues include anything negative a buyer could discover in the due diligence process.

For example, we had a client whose financial results varied significantly from quarter to quarter. Though the year-over-year pattern showed growth, there really was no discernable quarterly pattern in the company’s financials, and we realized that this might be a cause for concern among certain buyers.

So, we addressed this issue proactively before approaching any potential buyers and concluded that telling them that our client did not focus on quarterly revenues, but instead focused on year-over-year growth, would be the appropriate answer. Ultimately, our explanation for the lack of consistent quarterly patterns was a successful strategy because our client was acquired at an excellent valuation by a public company that absolutely focused on quarterly targets. Had we not addressed the quarterly pattern issue before going to market, it could have hurt the deal valuation or even scuttled it altogether.

Tips on Avoiding Re-Trades

Another major benefit of advanced preparation is that it helps to avoid the dreaded re-trade. A re-trade occurs when a prospective buyer, who has committed to a specific valuation and set of terms, attempts to reduce the valuation or add unfavorable terms later in the process, often in response to what the prospective buyer says are issues that came up during due diligence.

Although re-trades are unfortunately quite common in the M&A process, we have been highly successful in avoiding them with our M&A clients. Our success rate is high because we encourage our clients to disclose potentially unfavorable information in a thoughtful way in the marketing materials we send to prospective buyers before they submit their bids and deal terms. Using this approach prevents a buyer from claiming that they discovered negative new information during due diligence.

Following are five top actions to take to avoid re-trades:

 1. Complete an audit of your financial statements and ensure that they are properly presented in accordance with public company standards.

2. Complete a quality of earnings analysis.

3. Correctly compute key KPIs, such as customer acquisition cost, customer lifetime value, gross margin, and other key indicators of business health.

4. Properly prepare a financial projection model, built from the bottom up, driven by clear metrics and well-supported and defensible assumptions. Some sell-side bankers produce only top-down models, which are very difficult to defend and support.

5. Price in all information. Manage information flow to ensure there are no negative surprises during the exclusivity period.

Hopefully, this article provided insight into some of the key components—including appropriate positioning for buyers, rigorous financial modeling, and running a customized M&A process—that will put your company in the best position to succeed in the M&A game.

Stephen Day is the Co-Founder and Managing Director at Navidar.

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by Stephen Day @stephenday.Co-Founder, Navidar: M&A and Capital Raising focused on SaaS, e-Commerce, IT Services, and Tech-enabled Companies
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