Recently, World Financial Symposiums (WFS) hosted a Growth & Exit Strategies virtual conference focused on women leaders in tech. The conference was highlighted by three panels comprised of women executives representing investors, buyers, and sellers of tech companies, respectively. The panelists shared insights and tips on a variety of topics such as what investors look for in funding strategies, what buyers want to see in companies for purchase, and how to prepare for an exit.
In Part 1 of this three part series, we highlighted some of the recommendations provided by the Investors panelists. This part, Part 2, highlights some advice from the Buyers panelists.
The buyers panel consisted of the following seven buyers, representing a wealth of experience in corporate development, mergers and acquisitions, and private equity investments:
- Christina Wheless, Group Leader at Volaris Group, a Canadian buy-and-hold acquirer of software businesses.
- Amber Hilkene, Partner, Head of Investor Relations at AnaCap Financial Partners, a European private equity firm advising funds that invest in the European financial services sector.
- Sharon Van Zeeland, Vice President, Corporate Development at Rockwell Automation, a provider of industrial automation components and solutions.
- Cheryl Strom, Partner, Origination at The Riverside Company, a private equity firm that seeks to grow companies organically.
- Jyothsna Tremblay, Vice President, Corporate Development at Paycor, a provider of human resources and human capital management software.
- KC Kanoff, Principal at Mainsail Partners, a growth equity firm that partners with founders of bootstrapped software companies.
- Laetitia Pariente, M&A Senior Manager at SITA, a Switzerland-based IT provider for the air transport industry.
The panel was asked various questions that are of particular importance to tech company sellers, such as what do buyers look for in a company? Here are their responses.
What do buyers look for?
A key element in attracting buyers is sustained revenue and growth. For PE firm Mainsail Partners, the point at which they show interest in a specific company is when that company has $3 million of annual recurring revenue (ARR). KC Kanoff termed this an inflection point, a point where the company starts to see booking momentum and more predictable, consistent growth ‒ even if it's at a smaller scale. She added, "Predictable growth becomes really important to us because that's ultimately what informs our model and what we're underwriting."
The reality for financial buyers is that they’re always on the lookout for companies in which to invest. Cheryl Strom mentioned that at The Riverside Company, "We are continuously replenishing our funds with available capital and our investors are depending on us to find companies that can grow and where we can be collaborators to help achieve that growth." And that investment can be in a standalone companies or one that adds a new product line or a product set to The Riverside Company’s existing portfolio of technology-enabled, service-related businesses.
Proper fit is another driving factor in attracting buyers. Laetitia Pariente pointed out that for her company, SITA, it's important to feel comfortable with a prospective strategic acquisition. That could mean developing a relationship by first partnering with the company. That way, she notes, "We can know each other and see if there could be some opportunities to work together before acquiring them."
Establishing a partnership with a targeted company is also important to Rockwell Automation. Sharon Van Zeeland stressed, "We're very thoughtful about talent acquisitions in terms of how do we allow those leaders to grow and develop. Within Rockwell, we spend a lot of time building partnerships and relationships, and usually we would like to keep those leaders to help run our business as well. "
Jyothsna Tremblay also highlighted the importance of proper fit in driving a deal. She said her company, Paycor, focuses on providing solutions for small-to-medium sized businesses. In many cases, the companies Paycor looks to acquire are startups that have products that they're looking to scale. In essence, it's a case of having resonance between the companies. Tremblay put it this way: "If the product fit is right and it's a capability that is really complimentary to what we have to offer, we can bring the scale of the go-to market motion, as well as investments required to further enhance the product. So I think in those cases where there's a technology capability or a move into a new segment that that will really enhance what we're offering, it's pretty attractive."
And for a buy-and-hold company like Volaris, interest in a company is a function of gauging what the prospective seller really wants. Christina Wheless points out that at Volaris, "We're happy to get these companies and to grow and to move forward with them. But really, what I'm most interested in is what the seller is looking for. What is your goal? What is it you hope to achieve? What are your priorities? And if the seller isn't sure, then we just build that relationship and nurture that company until the timing is right for the seller. And at that point, we're good to go."
How should sellers prepare for an M&A?
The buyers were asked what things are important for a seller to do in preparing for an M&A. Sharon Van Zeeland said one thing she looks for is three years of financial statements, preferably audited. She also noted that sellers need to do careful analyses of things like the tax implications of the sale as well as their company's structure. Is the structure sellable? Is it in the right form and space that a company can take it over? Van Zeeland also cited the importance of doing an intellectual property protection analysis and a cybersecurity risk assessment. She stressed that consistent messaging from ownership regarding the sale is also crucial. She pointed out that a number of times she has had conversations with different owners of the same company, with each one offering a different message and a different understanding of why they're selling. Her advice to sellers: "Try to get alignment in the ownership team on that prior to the start of the process."
Financials and associated metrics are also very important to KC Kanoff. She has seen prospective deals go wrong because after examining the data it's not what was expected. Kanoff stressed that having accurate data and financial metrics available before data discovery, and in a form that can be examined by different segments, is very important. Because, she said, "That is what the financial buyer is going to come in and really dig into."
For Cheryl Strom, what’s key is the seller having a clear vision of their future role and where they want their company to go. Then it's a matter of finding a partner, buyer, or investor who has that same vision. Strom noted that it's very hard to interact effectively with a seller if the owners are still in the process of determining their vision. Strom's other advice to sellers is to learn from others who have gone through the process. She counsels sellers to do this a year or more before starting the process for a sale. Her recommendation: "Have informal conversations with advisors, with prospective buyers, with other CEOs of companies and other founders who have gone through a similar process. And really find out what it is that they went through. So that when you're in the transaction phase, there's a sense of certainty and purpose that you can go through the path in a smooth fashion."
Having sellers be honest and open is of utmost importance to Christina Wheless. She recalled an instance where a seller came to Volaris assuring them that she would stay on to run her company after it was purchased. Volaris is a buy and hold company, so knowing that the seller would stay on to run the acquired company is an important factor in their buy decision. However, nine months after the purchase, Wheless learned that the seller admitted that she only said she was staying for three years because she thought that's what Volaris wanted to hear. In reality she wanted to leave immediately. Volaris was able to run the company after the former owner left. But that lack of transparency impacted the former owner's earnout. The moral of this story is be honest. Wheless stressed, "Don't tell the acquirer what you think they want to hear. Just tell us what you're thinking. We're going to work with you regardless of what your decision is. All of this is going to go way better the whole M&A process if we can just basically sit down and have open and transparent conversations."
How do buyers value companies?
Amber Hilkene said her PE firm, AnaCap Financial Partners, starts the valuation process by setting a benchmark through the use of transaction comps in the market, and in some cases also public market comps. But other things are factored into the valuation, things like the growth prospects of the business, both organically and inorganically, as well as potential risks and issues that the firm can be taking on. The bottom line is that the valuation has to satisfy both parties. According to Hilkene, “Ultimately, this really has to be a meeting of minds because we're looking to partner with management teams. We don't want them to feel like they did not get value for the business and we want them to continue to partner with us."
Because her company Paycor is a publicly traded, Jyothsna Tremblay's said that public market comps usually serve as the foundation for their valuations. However, she pointed out that the valuation really comes down to what the asset is that her company is buying, and what the possibilities are once the two companies come together.
By comparison, SITA uses discounted cash flow in its valuation approach. Laetitia Pariente noted that other approaches to valuation such as using multiples can result in an overvaluation of a company because the size, growth, and trajectory of the company can be very different. What SITA looks to achieve in its valuation is a good compromise with the seller. Pariente also said it's important for a seller's advisor to manage valuation expectations so that the seller has a good handle on the true market value of his or her company.
What are due diligence deal breakers?
One of the interesting questions posed to the panelists was what are some of the critical deal breakers they’ve experienced during due diligence. For Sharon Van Zeeland, it is unsupported financial statements. If Rockwell can't substantiate the growth rates or the market presented by the seller, that’s a deal breaker. Zeeland also stressed that Rockwell values integrity and ethics very highly. So if they identify any unethical behavior on the part of the seller, it’s a definite deal killer.
Potential deal breakers for The Riverside Company are loss of customers by the seller or deterioration in the seller’s performance. Cheryl Strom noted that those things may not cause a deal to fall through entirely, but they might put it on pause. And because The Riverside Company is a financial buyer that sometimes competes with strategic buyers that have big checkbooks, her company tries to stand out by moving quickly. As a result, a pause in the process could jeopardize the deal.
When Volaris buys a software company it also acquires the company's product and source code. So IP due diligence becomes quite important. Cheryl Wheless mentioned that her company looks carefully at copyright ownership, the existence of prior licenses, and any other infringement risks. If they discover that the IP isn't owned by the seller, that’s a potential deal breaker.
What it means for the buyer and the seller
Jyothsna Tremblay capped the session with her take on what her company's goal is in acquiring other companies and what it means for the sellers. Although her company, Paycor, is a strategic buyer, some of what she said also holds true for financial acquirers. In Tremblay’s words, "As a strategic buyer, we're buying technology or a product. But the team and the talent are equally important in the deal. And so we try to make it as attractive as possible for key executives as well as the team under them. We want them to stay on and be excited. And we want them to be energized about working on the integration and realizing the synergies."
The next WFS Symposium
The next WFS Symposium, titled "Growth & Exit Strategies: Building for Scale, Building for Sale," will be held on May 25, 2023. Get insights from private equity, VC, angels, strategic buyers, M&A advisors, and CEOs who've had a successful exit.
- M&A Market Update & 2023 Top 10 Disruptive Tech Trends
- Investors Panel: Will your strategy get funded?
- Tech Valuation Metrics: What is your company worth & how do you get it?
- Buyers Panel: Do you have what they want?
- Special presentation: Getting Your Team on Board
- Sellers Panel: Advice from CEOs who've successfully sold
For further information, see https://www.wfs.com/upcomingconferences/growth-%26-exit-strategies%3A-building-for-scale%2C-building-for-sale