Joel Espelien (cont’d)
Next, we head over to the mid-west to hear from Rob Griggs in the Twin Cities.
Rob Griggs – Gauging Buyer Interest
How serious is the buyer? A quick way to gauge a potential buyer's interest or intent is to discuss specific data requests and their due diligence checklists. As a well-prepared seller, you'll have already established as many of the basics of a list already, and to ferret out whether they are just asking versus are truly prepared to have serious discussions about acquiring you can make a few things clear.
One, you are knowledgeable about the acquisition process. Two, you have potentially had other discussions based on your representation of knowing what the logical next steps are in the process, and three, depending upon their response you will know whether they are serious, ready, willing, and able to proceed to a more detailed discussion. Your time is very valuable. Don't waste it on inbound inquiries where the acquirer isn't serious about proceeding. Getting a checklist from a buyer can help make this clear, and it will provide you with a better understanding of what you will need to prepare if discussions do go forward.
Joel Espelien
Great points, Rob. And to all of our listeners back in Minnesota, Skol Vikings! Next, let's hear from Martin Lowrie in Boston.
Martin Lowrie – Sharing Financials
When an acquirer approaches you they will typically ask for as much information as you are willing to share and, of course, this includes your financials. If you don't already have them, you will need to prepare quickly three years of historical financials and a three-year projection. Remember, the acquirer needs to understand what your business could look like as part of their operation. So consider the financials from that perspective.
You may want to recast to remove extraneous one-off items that don't accurately represent your business going forward. This is where the advice of an experienced M&A advisor will be invaluable. Summarize your information by quarter and provide only the minimum detail necessary. At this stage, your objective is to get a quick yes or no.
Make sure that you include clear and concise explanations of both your historical financials and your projections and ensure that you and your pipeline can support them. You will be asked to provide detailed monthly data at a later stage. But don't be too aggressive on your projections. They will be tested during due diligence and if you fail that test your credibility will be damaged possibly irreparably, and so will your valuation.
Joel Espelien
Thanks, Martin. You really can't be too careful with those projections. Year three is particularly critical because that tends to drive terminal value in discounted cash flow projections, which are commonly used these days by both strategic and financial buyers as a core valuation methodology. From Boston, we head up to Vancouver, Canada and hear from Dave Levine.
David Levine – Assumptions and Projections
While you build all your projections as Martin described take this opportunity to question your own underlying assumptions that will be used to fortify that forecast. Ensuring that these assumptions are credible will be critical to driving value. The assumptions must be built on supporting facts, figures, and objectivity, otherwise, you will lose credibility with potential acquirers. Those underlying assumptions in many cases are more important than an actual number on a profit and loss statement or balance sheet. Look at your historical assumptions to verify if they have been accurate.
If your prior assumptions have been demonstrably on the mark leverage this to set the stage that your current assumptions are sustainable and accurate as you project the future results of your business. Don't forget to test your assumptions with your management team to ensure alignment across the functional areas of the business. This is a useful exercise in any situation but with a buyer knocking on your door it takes on more urgency.
Joel Espelien
Thanks, Dave.
This is a segment from Tech M&A Monthly: What to Do When You Are Approached (September) webcast. For more information, please visit Corum Group's Software M&A Webcast Archive.