You've been set up for failure and our industry is at fault.
Let me explain.
I didn't start out in finance, nor real estate like most in investment banking. I’m a tech entrepreneur like you who raised record funds in my day and built the fastest growing tech company in the world. That company became the industry’s largest vertical market software company, Accountants Microsystems. Based on that experience, and business modeling research while at Harvard Business School, I wrote a book called Power Planning - how to structure your software company for Success. After I sold AMI, I founded Corum to mentor fellow tech entrepreneurs based on the principles in that book.
Corum was successfully doing strategic audit and retainer work. Everything changed when, one day, I got a call that a client had been killed in Eastern Oregon coming home from seeing his daughter. It’s a desolate country out there, populated by two-lane roads. Late at night a farm truck swerved and hit their vehicle head on. Dick, who was driving, died instantly. Judy, his wife and business partner, miraculously recovered.
After Judy was back on her feet we met in Portland. She told me that didn’t have the heart to go on without Dick and felt she should sell the company, a leader in landscape software. She asked if I could research firms that sold software companies like theirs and make a recommendation.
I looked at all the options from bulge bracket firms in New York down to local real estate brokers and one-man guy and a dog operations. I talked to many associations and scores of people who had sold, and really dug into the best practices and models used, or lack thereof as it turned out.
The report I gave Judy was not encouraging. I basically told her the industry existed to work their way between you and a buyer or investor for the sole purpose of getting a commission, encouraging that you take the first offer. Not much investment or effort on their part with little added value.
As all of them relied on referrals for their business, they had to provide many services to keep the lights on. None were sell-side only as once they sold a company, they had to find another, then go through months to sell them. They didn’t have enough referrals to be so focused. This is still true today.
Often their hook to get clients was that they claimed that they had a buyer or that they could do a valuation for free, then take you to market. In the first instance, they had you dealing with only one bidder, which you should never do. In the other, valuations don’t create the final value, the process of creating buyer tension does that. Unfortunately, no one had a professional, detailed process to do a true global search and create an auction environment.
If they did a search, it was to only a handful of potential buyers, 7 not 70, as that requires serious effort and teams of researchers, writers and valuators. Forget about contacting the “B” list of buyers where 40% of the interest comes from during the M&A process. Keep in mind 25% of deals done are with someone you’ve never heard of.
These types of negotiators, who had their fingers in many pies, seldom had any operating experience. Also, they had minimal domain expertise. The work was generally done by a junior investment banker, especially for smaller firms.
All of these conditions are still generally true today as investment banks still follow this pathetic norm. There is not much value provided by these firms. With such practices, are you beginning to understand why our industry may have set you up for failure?
The one thing I expected from these firms was that they could bring to table strong, well-documented relations with buyers. Unfortunately, no one ever wrote down what they had done in an engagement. The reason was simple, there were no data collecting systems in place nor the discipline, and deal makers didn’t want to share. Call it job security. By keeping that critical information in their head, they could jump around from firm to firm, taking critical buyer information with them.
Another condition that still exists to this day.
Back to Judy Buffo.
She was disheartened when I didn’t come up with anyone she trusted. In desperation she asked me if I could try to sell her company. We were friends, I hated to see the physical and spiritual pain she was in, so I agreed to help.
Having seen how not to do it, I had strong ideas on how to build a completely different type of investment bank, one focused on getting an optimal outcome, not just an offer. One where you would say no to most offers, building to the one that secured the maximum value to set your family up for generations.
I gave it a try and learned a lot about the weaknesses of this industry.
Corum was built based on that experience and, over the past four decades, has developed the leading M&A educational seminar, Selling Up Selling Out, and honed an M&A process that achieves the most optimal outcome for the sellers of tech companies.
The investment banking community is fraught with weaknesses. What I've learned is that advisors must be:
- Focused on technology, selling software and IT companies. Tech M&A requires a firm that handles only technology deals, specifically sell-side engagements.
- Utilize a professional M&A process as this is the key to higher value. The process starts with preparation, mapping you to best practices, detailed research to position your company best, methodical building of the buyer database and exhaustive contact and follow-up leading to negotiations. A good advisor helps you craft your story, hooking buyer interest that leads to interest from multiple parties. An optimal process creates buyer tension, leading to an auction process that secures you the best deal.
- Know the place for valuations. What is your tech company worth? No magic formula can answer this question. Ultimately, your company is worth what an informed and motivated buyer would pay for your business, and the process that underpins that is called price discovery. This is the process that occurs in a marketplace where buyers and sellers interact to determine the price of an asset, whether it’s stocks, real estate or a private tech company.
- Hone the right message. How you communicate with buyers is critical. Communicating the story and vision of your company is key. Great writing gets great results.
- Assign a stellar team. The M&A process requires a tremendous amount of work. Between both buyer and seller, it takes on average 3 to 5 person-years to get good transactions done. That’s quite the workload. Due diligence is tougher these days, and no CEO has the time to take away from their business. You can't risk your company missing targets when you must meet or exceed them. The best approach is to assign a team, not just one person, to the M&A process. You need valuations experts, writers, researchers, presentation coaches and financial analysts. At Corum, our dealmakers are all former CEOs who have sold their own tech company.
- Research is critical in the M&A process. Most companies we talk to have been approached by a buyer and some even have offers in hand. Having sold more tech companies than anyone, our experience shows that 75% of the time, another firm will buy you. It's not the first bidder that will make the best offer. Talking to only one buyer is the biggest mistake company owners make in tech M&A. So, do a thorough partner search as there is a constantly changing world of global buyers out there, many of which have deep pockets.
- Assign Senior Dealmakers. A seasoned M&A advisor knows that getting the deal done is not easy and getting through due diligence and contract preparation is even more complex these days. Half of all transactions die during due diligence. Experienced advisors have the credibility to get a thoughtful response from buyers and carry their weight in negotiations.
We talk to thousands of tech CEOs that attend our events held around the globe. This year alone, we estimate that over 10,000 companies will attend one of our events. We're hearing from a lot of folks out there that they have previously attempted an M&A process and got burned. Now, they are fearful of embarking on the process again.
Is that you?
Over one-third of Corum's clients have been in a similar position and have successfully completed a transaction.
Having gone through a failed transaction, you've learned a lot. There are four important questions you should ask yourself. What did you learn? How many buyers did you go out to? Were there buyers that were overlooked? What did the buyers say? Did the transaction fail in due diligence?
You've been given a golden opportunity to take that feedback and further grow the business, make changes, release new products, confirm your model, improve your strategy, and return to the market with a more attractive company.
Backed up by an experienced and tech-focused advisor, a proven M&A process, valuation expertise, professional writers, a seasoned team of senior dealmakers, the world's most extensive M&A knowledgebase and a full team of experts offloading you of the entire burden of the process, you can successfully complete a transaction for an optimal outcome.
There are a record number of buyers determined to commit trillions instead of letting their funds wither with inflation. This is not the time to hunker down or you will miss your opportunity. Quality, well-positioned tech companies are getting strong valuations.
Prepare yourself by getting educated and attending one of our half-day M&A boot camps, Selling Up Selling Out. We would also be happy to have a confidential, no-obligation conversation about your company and opportunities in the current M&A market.
Reach out to firstname.lastname@example.org.