As a client of Corum, you will never be asked what the minimum value is you will accept for your company. The psychology around a “minimum” is not conducive to an Optimal Outcome in tech M&A. In fact, it generally leads to leaving money on the table or ending up with a deal structure that is not optimal for the seller. Sometimes, it can lead to both.
Early in the selling process, it is important to establish a valuation range that is driven by current market conditions and the individual characteristics of your company to make sure that all shareholders are on the same page. This is not trying to establish a minimum deal value for the seller, but more about early expectation setting. It’s about a realistic perspective on the current M&A environment and how that relates to your business. When shareholders aren’t on the same page, it can lead to situations like we saw at the end of 2017 with Dell having to justify to shareholders the amount that they sold for. Joel Espelien did a fantastic job of breaking down the situation and explaining how even though Dell went through the process correctly, shareholders can have unrealistic expectations about the outcome.
Asking for a minimum deal value from a seller can create a number of conditions in the deal environment that lead to sub-optimal outcomes.
One of the most dangerous conditions is how the minimum can affect the perception of an individual offer. If an offer comes in that is larger than a stated minimum, owners may be blinded by the value and jump at the offer rather than ensuring that they go through a full market investigation and unearth all the potential offers. Just because an offer is above the minimum does not mean that it is the best (from a valuation perspective or a deal structure perspective). This is a huge problem. Working with a single buyer is the leading cause of not reaching an optimal M&A outcome and leaving money on the table.
The market is the real arbiter of your company’s valuation, not the financial needs of the shareholders or their perceived minimum valuation. Defining a minimum value can cause inflexibility to needed valuation adjustments caused by changing market conditions (e.g. the emergence of a dominant competitor, or a fundamental shift in technology). Having a minimum value in mind can cause owners to become rigid in their expectations and to be unable to react appropriately when their valuation shifts (both up and down) according to the rapid changes that come with tech M&A.
Changes in valuation can come from many places and a minimum can create problems when a company is trying to consider new developments in their immediate market. This could take the form of new competitors that shake up your stance in the market, a change in your sales and marketing strategy, or your own technology improvements that put you ahead of competitors. These can all negatively or positively affect your valuation. A minimum will stifle the ability to adjust for these changes.
As a shareholder, another thing to consider during the process of selling a company is that your personal situation may shift. Many sellers get greedy once they start seeing the numbers come in. A minimum is no longer a real guide at that point. But, greed is not the only potential negative driver during the M&A process. Financial and physical health may also change and that is not restricted to only you as a business owner, but also to your family members. The point is you have to remain flexible and listen to the market.
By not asking for your minimum, we are setting you up to be able to really look at the offers that come in without focusing on a single number. In most instances, the deal structure (e.g. when and how you will be paid, how much is to be held back, your ongoing liabilities and tax considerations), the cultural fit with potential buyers, and your strategic fit in the market after the deal is completed are also incredibly important. Getting the right dollar amount for the deal is just a part of an optimal outcome. Some sellers out there are completely focused on the valuation number while ignoring the deal structure and there’s a real danger to that.
Ultimately, having your expectations for valuation set by the market is key. This will enable you, as a seller, to evaluate each offer you receive objectively, both from a valuation and deal structure perspective and compare and contrast them to come up with the deal that works best for YOU…the Optimal Outcome.