Calibrating your company’s value and the current market are important steps in preparing for an M&A. And it's more important in today's market for CEOs of software and IT companies who are mulling over their options — worrying about facing an economic downturn and a long recovery. But how do you as a CEO approach your board members to get their support? What's the best way to show them the value of calibrating the company and the market right now? In short, how do you get your board on board?
Clearing up misconceptions
Some common misconceptions about calibrating your company’s value and the current market, as well as misconceptions about the M&A process can stand in the way of getting your board on board. So let's clear them up.
Misconception #1: Starting a tech M&A process is legally binding
Starting a tech M&A process doesn't lead to a legally binding commitment. You don't have to accept any offers. It's about exploring your options and making sure you have all the information you need to make the best decision about your company's future. How will you know the true market value of your company unless you work through the process? That alone is worth the time and investment.
What's more, making sure you exhaust all options to ensure survivability in the current market speaks to your fiduciary duty. You don't want to be found liable for not taking precautionary measures if you're forced to take down round financing. Your investors wouldn't be happy to hear that you gave away big chunks of the company for a fraction of what they're worth. Are you going to have the answers when the questions start coming? Did you seek additional funding before the situation became dire? Did you get a third party valuation prior to financing to ensure a fair value? Did you appoint a committee to consider the transaction?
You need to partner with an experienced outside advisory group who’s been through the downturns with software companies. You need a partner who can guide you through the minefield, avoiding anything that's going to erode your company’s value. This is where our dealmakers at Corum have done their research. There's an 80% rate of failure for companies that go into M&A by themselves. And that's during a bull market. It's far worse during a recession.
Misconception #2: The M&A process is time-intensive with little or no return
Some people think the M&A process is time-intensive with little or no return if you end up not selling. It's completely the opposite. You've heard it before, "It's the journey, not the destination." When it comes to tech M&A there's significant value in both. The journey of going through the steps has profound benefits. Corum has discussed the five major benefits of committing to a full tech M&A process in various webcasts and podcasts and at our Growth and Exit conferences.
The preparation phase helps to forge a better business model for your firm because it exposes where you're weak and where you're strong as a company. And with the level of inspection from due diligence, nothing is hidden under the rug. You'll come out of it learning things you might not have known about your own company. Your strategic position will improve because you will know where you stand and what needs to change.
In addition, contact with potential buyers provides invaluable data and insight that you wouldn't be able to obtain otherwise. What are they looking for? What are the deal breakers? Often the relationships you create from the process yield opportunities going forward. It's not just about shaking hands with some potential buyers. Competitors can end up becoming strategic partners down the road.
Misconception #3: M&A is akin to giving up or defeat
Some people think M&A means giving up or admitting defeat. Far from it. At the very least, starting the M&A process serves as an insurance policy when things go from bad to worse. Recessions can take years to hit the bottom and even a few more to rebound. Judging by previous events, that's an average of seven years.
A lot of people think waiting and reducing cost are the only strategies to survive in a recession. But staying put isn't going to get you anything. Corum has been in the M&A business for more than 30 years, and they've seen it before. Staying put means, at best, you're the last man standing when no one's looking to buy, a time when you're losing value.
Does your company have the balance sheet to make it through? If not, you'll have to partner with someone who does. It's a matter of survival. It's not as simple as another round of investments. You'd be hard pressed to get the capital you need without giving away everything.
But M&A gives you an option for growth. When Corum's client Bizview was acquired by insightsoftware, the goal wasn't a successful exit. It was a global outreach through strategic partnership. The process for them meant getting the right partner for the growth they could not have achieved alone.
M&A opportunity: Get liquidity now, larger exit down the line
Starting the M&A process provides you an opportunity that's sometimes missed. You can get some liquidity now and bet on a larger exit down the line. Calibrating the market and getting the opportunity to roll some equity into a new entity can create a second bite of the apple for your board. We've heard of CEOs facing board members dead set against any action, fearing dilution from a down round, or even some looking to force a down round to grab a larger proportion of the company. So, whose interest is at play? And what are your options at that point? Remember, the board might not be feeling the same pressure that you are. When you get down to it, you have to ask yourself, "Am I getting the right advice?"
The truth is there isn't a clear answer for all situations. But depending on where and how your company is structured, getting board approval may not be necessary to start an engagement. Again, you don't have to accept an offer. Please understand, I’m not advocating any divisive action here. What I’m saying is seeing the numbers from the process will provide a better understanding all around and make for better decision making as a result ‒ one that works for everyone.
So, let’s sum up.
- There is no commitment to sell by calibrating the market.
- The process has many benefits for your company and is worth the investment.
- Calibrating the market is a good insurance policy.
- You have to make sure you're looking at all the options to ensure that you’re not missing your window of M&A opportunity to achieve maximum value.
- It's in the best interest for you and your company to have all the information you need to make the best decision. You might have the chance to have your cake and eat it too.
- If done right, the result of the M&A process is a successful merger, an asset sale, or a financial recap of your company.
If you're still struggling to get your team on board, I strongly recommend that you reach out to us at Corum. We’d be happy to talk to you about your situation.