2020 and 2021 have been record years for tech M&A, with values and volume reaching all-time highs. And that momentum appears to be continuing through the early part of 2022. In this high volume deal climate, tech companies are being approached more than ever by prospective buyers. As a tech company CEO, it may be flattering to know that someone is interested in buying your company, but there are certain things you should know and do before accepting any offer. We asked two key members of the Corum team, Senior Vice Presidents Martin Lowrie and Arnaud Viviers, for their advice. Here is what they said.
Decide if you are ready to sell
Before you take any actions on an inbound offer, you need to determine if you're actually ready to sell your company. In order to do that, you need to address the following questions:
· Is the market ready for your company?
· Is your company ready for the market?
· Are you and your shareholders prepared to give up control of the company and deal with the financial and liability consequences of selling your company?
Lowrie says, "Having multiple inbound calls about buying your company is a sign that there may well be a market for it and today’s M&A environment is the best we have ever seen. But are you and your company prepared for the intricacies of the tech M&A process? If the answer to any of the questions above is no, then the calls should be falling on deaf ears."
Ignore the time wasters
Currently companies are being incredibly aggressive about deal sourcing. Lowrie notes that most of these companies have put in place junior associates who are combing through company lists trying to set up appointments for more senior members of staff to contact companies and propose deals. In fact, this is turning into a real nuisance for some companies. Viviers said he recently spoke to a client who said it is typical now for a company to get three, four, or five calls even in the same week. Lowrie notes that the vast majority of these kinds of inbound interests are nothing more than fishing expeditions, and it's often time wasted taking those calls. His advice: "Unless it's a senior deal guy who's getting in touch with you with a specific strategy in mind, you should just ignore the call. If they’re really interested, they’ll call back."
Qualify the buyer
Even if it's clear that the inbound request isn't a fishing expedition, you need to qualify the buyer. Not all prospective buyers have the means to make an attractive offer. So you need to assess their ability to pay what your company's valuation demands. Lowrie sees many prospective buyers with the right strategy, good ideas, and even a good knowledge of the seller's company, but they may not be financially qualified to execute an optimal deal for a seller. According to Lowrie, questions like do they have sufficient cash, do they have the ability to raise money through loans, is their stock something that they could potentially use as currency, are all part of qualifying a buyer. Lowrie underscores the importance of qualifying the buyer this way: "If you get an inbound offer from one of those guys and don't have the ability to qualify them, you're likely to end up in a situation where you'll get into due diligence and spend $100,000 on a lawyer, only to find out that the acquirer can't raise the money. Then you're out $100,000."
Viviers adds that vetting a prospective buyer is an important part of Corum's due diligence process. He notes, "We need to determine if the buyer has the financial capability and what their reasons are for wanting to buy your company. At that stage we can either qualify or disqualify the buyer quite easily. And if we disqualify them, that's one less meeting that the seller has to have with the buyer."
Don’t get locked in
Often a prospective buyer tries to lock a company into in an exclusive arrangement where they only deal with that one buyer. Although the prospective buyer may make an offer that's well thought out and strategically sound for both parties, it's still better to go through a full (global) price discovery exercise. Lowrie sees this tactic from buyers frequently. He says, "A prospective buyer will say, 'I'm willing to give you a Letter of Intent in the next week. All I need is preliminary information. Then we can go to due diligence and we can close this out in forty five days.' What they're trying to do is prevent the seller from talking to other people." Lowrie underscores the fact that getting locked in prevents a company from doing the price discovery that would come out of a full global search for multiple interested parties or companies. Remember, as the CEO, you have a fiduciary responsibility to your shareholders to get the best deal. If you only deal with one party how will you ever know what others might have bid?
Additionally, progressing with only one prospective buyer can be problematic. The issue, according to Lowrie, is if you then pursue other prospective buyers, you now have one horse (the initial prospective buyer) out in front of all the others. It's very difficult to pull that horse back and let the other horses catch up. And because of that, you can't generate the competitive tension between multiple prospective buyers that is proven to result in better offers.
Compounding the problem are the differences in the time it takes companies to make offers. Viviers points out that some strategic buyers take a long time to decide whether to make an offer. Others, especially financial buyers such as Private Equity firms, are typically much quicker to make the decision. Alluding to the horserace metaphor, Viviers says, "What we try to do at Corum is create an auction process where all horses get to the finish line at the same time ‒ think of it as a reverse horse race ‒ and so the seller gets multiple competing bids to compare. These offers normally vary quite a bit in terms of purchase prices and deal structure. The seller can then decide who might be the best partner to purchase their company and then move forward to the due diligence process."
The clear advice here is don't get locked in with a single prospective buyer. Find other potential buyers and talk to them. The thing to remember is before signing an agreement such as an LOI, the seller has the power. After signing it, the buyer has all the power. Eventually you do want to sign these agreements ‒ they protect your company and its assets ‒ but you should do it after you engage with multiple potential buyers and assess the relative pros and cons of each offer.
Develop an auction process
The best way to get optimal value for your company is to develop competition between multiple potential buyers. Having multiple suitors competing for your company creates an auction process in which one potential buyer will likely try to outbid the other. This results in a better offer than simply dealing with one buyer.
The following statistics bear this out:
· 11%: Buyer solicitations that actually result in a transaction.
· 48%: Average improvement from the first offer to closing with an auction process.
· 75%: How often another firm is willing to pay more than the first bidder.
· 100%: Percentage of deals involving only one bidder that are suboptimal.
If one prospective buyer is interested in your company, it's likely that others are too. So engage with several prospective buyers. Ultimately, you will get a better deal.
Engage an experienced advisor
Viviers cautions CEOs not to go it alone. He says that as a former CEO ‒ in fact, every Corum dealmaker is a former CEO ‒ the biggest single distraction he had when selling his business was trying to run it at the same time as orchestrating the sell process himself. "The first thing I tell people when they get unsolicited offers is to contact Corum to run the process for you. If nothing else, we can calibrate the value of your company in the market."
Viviers underscores how not having an experienced advisor backing you up during a sale can be painful. He recalls a situation where a CEO had gotten an inbound offer to sell his company. He approached Corum, but eventually decided to run the process himself and accept the inbound offer. However, after six months the CEO told Viviers that he would never do that again alone. He said during the process he felt isolated, bullied, and was certain that he left a lot of money on the table. Viviers estimates the company lost out on more than half of what they got in the offer.
Lowrie adds, “If you inject an advisor into your conversations with a prospective buyer, the buyer is going to know that there's a potential for other players to enter the fray, something that can push valuations higher. Conversely, if you do not have an advisor and you start negotiating with a potential buyer, they are going to know they are most likely the only game that you are considering.” And that almost ensures that you will get a much less attractive offer.
Take advantage of the Corum process
Corum has years of experience shepherding clients through the M&A process. Backed by a proven eight-step M&A process, Corum has helped sell more technology companies than anyone. One benefit of Corum's M&A process that Viviers highlights is getting a true company valuation. He says, “A typical problem that exists with a lot of technology companies is their CEOs have an inflated vision of what the enterprise is worth. So I'll say let's run the process. We can calibrate what the market is prepared to pay for your company. Then when we solicit offers, you can make the determination whether you want to accept any of them."
Another benefit of the Corum process is handling the inevitable issues that arise during due diligence. Viviers put it like this: "We defuse the landmines during the due diligence process. We try and normalize things. Without Corum the chances of handling these issues and getting through due diligence are significantly less than with Corum. Problems in due diligence usually arise because of a lack of preparation."
Taking advantage of the Corum process can mean a lot of extra dollars in a seller's pocket. Viviers points out a recent example. "There was a company that I sold last year. They had gotten an unsolicited offer and ran the deal by themselves. However, when they got to due diligence, boom! The whole thing blew up. Weeks later they went with Corum and we ran the process for them. Ultimately we got them $10 million more than they would have gotten on their original deal."
Lowrie also points outs that it’s not the end of the world if you have already started talking to a potential buyer. He says, “We have handled the situation many times where we are brought into negotiations after initial conversations have taken place. We can bring additional buyers to the table in a matter of weeks and coordinate the process to achieve a competitive bidding situation without alienating the initial prospective buyer.”