Always Be Ready: Four Tips for Startup Exits
At a recent Vancouver Entrepreneurs’ Forum (VEF) panel on mergers and acquisitions (M&A), a key message from company leaders who had recently sold their tech companies begs repeating: Always Be Ready.
Despite a very tumultuous year with overall M&A transaction volume and dollars looking likely to close down in 2020, between 40-50 transactions still closed in British Columbia alone last year according to a recent report by Valeo Corporate Finance. While it may seem obvious to be prepared for an offer/approach, saying and doing can be two different things, and many companies may find themselves flat-footed by an approach from a prospective buyer. In our view, as private tech investors, key preparations and activities that a company should do in advance so as to Always Be Ready include:
Craft and refine your story
Turning your vision into a narrative that is compelling and credible is no small feat, but it is crucial to sparking interest and attracting attention. Why you and why now? The strategic and unique value of what your story, above the story of others, brings to the acquirer’s story is what helps to garner a premium valuation.
The big picture story needs to be supported with just enough detail to be convincing. The buyer needs a strategic reason to buy your company, such as how your product or technology will accelerate their market access. The rest of the details can be validated in diligence. Give them that reason early and in a way that makes it blatantly obvious why they should buy you. Continually work at honing this story. It is a good way to stress test (gut check) that your day-to-day execution with customers and your product are still in line with your vision and therefore continuing to increase the overall value of your business.
Create your dream deal team
The team should be made up of key people who can mobilize for a transaction. That includes internal and external resources. Do you have knowledgeable and experienced individuals internally, and/or how do you need to augment? Who will run point on negotiations? Having the right accounting, tax and legal advice is key, so decide in advance who those experts are so that you can tap them in quickly when ready. Often board members have been through this before and can provide great counsel and help align all stakeholders around the process. If you don’t have any board members that can add value in this way, consider adding one.
Build and secure an information database
Always have a data room ready to go with accurate corporate materials. Make sure all documentation is accessible and updated. That includes not only financials documents, but also agreements, including employment, confidentiality and invention contracts. We have seen many transactions held up by contract issues that should have been properly documented and dealt with long ago. When these issues arise, it reflects poorly on your team and may impact post transaction success. Do not wait to see how far you get before completing your data room. You should not be creating strategy documents on the fly. They should already have been thought through (since you are executing on said strategy day-to-day!). Not having good answers to key questions impacts pricing and the perceived value of your team, not to mention it can slow down the process.
When to use bankers or third-party advisors
To the question “would my dream deal team include investment bankers or third-party advisors “the answer is “it depends”. If you receive an offer, but you believe there can be significant additional interest at a higher price, it may make sense to hire an investment banker to round up other offers and create a bidding contest to drive up value. So that means you need to establish relationships with potential bankers before you actually need to hire them.
Many bankers can help provide insights into your market, know current trends and have relevant contacts. Just as you continually assess the competition, you should always be surveying your buyer universe to understand who they might be and what trends and recent transactions are relevant to your ecosystem. If you don’t have the internal team to handle the transaction (skills, experience, bandwidth), it may also make sense to hire an advisor. Keep in mind, transaction size and costs matter, so while it can still make sense to use an investment banker for very small companies, you still need a team and one person ultimately to manage them. But do not expect bankers to invent your story – they can improve how you tell it and provide coaching on how you tell it, but YOU still have to sell your story.
Final thoughts
By the way, this list can apply if you are just fundraising or even considering going public (although there are a number of additional things to do to get ready to go public). In fact, many conversations start with fundraising and end up in M&A discussions quickly. If anything, what this past crazy, unpredictable year demonstrates is how company leaders have to be ready for anything that can come their way, including M&A, even in the time of a pandemic.
Finally, selling your company is a BIG deal and can be a very emotional. Handling impacts to your customers and team require delicacy. All good reasons to have a good process, strong advisors and to ALWAYS BE READY.
Maria Pacella
February 3, 2021