Far too many CEOs and owners of software and IT companies are not getting what they are really worth or are not even calibrating their value in the current M&A market, which is the hottest in history. One of the main reasons is that they believe in “Merger Myths and Misconceptions” that are often completely false. Here are six of the major ones:
TRUTH: YOU MUST CONTROL THE PROCESS
Do you just wait for the phone to ring? Really?! Unfortunately, that first call is usually from a “bottom feeder” trying to lock you into exclusive negotiations to keep you from calibrating your actual value by speaking with other buyers. They want to control what will be the most important transaction of your life. Don’t wait for buyers to call — control the process, talk to multiple bidders, and calibrate your value.
TRUTH: YOU HAVE TO LOOK FOR BUYERS EVERYWHERE
Sometimes this happens with key customers/partners — the problem is it makes unfounded assumptions about who might buy you. Buyers are constantly changing. Many buyers are ones you’ve never heard of. Things like partnerships, reseller agreements, and licensing tend to happen at the division level, with the technical or marketing teams, while the strategic acquisition decisions and contacts are at the top, corporate, and finance level.
TRUTH: YOUR BALANCE SHEET ALONE DOESN’T DETERMINE YOUR VALUE
Transactions among tech companies seldom have to do with balance sheets and income statements. These are even less important for smaller firms. You represent future opportunity to the buyer with your technology edge, first-mover advantage, user base, and domain expertise you’ve developed.
TRUTH: SMALL COMPANIES ARE ACQUIRED, TOO
This used to be a valid excuse as the buyers didn’t want to talk to anyone smaller than $5 million in revenue. That’s really changed in recent years. Today, with so many global buyers and over $4 trillion in dry powder, buyers are open to smaller firms. Private equity firms are especially interested — they have established many platform companies and are looking for “bolt-on” acquisitions that they want to see early.
TRUTH: EVERY COMPANY HAS PROBLEMS, EVEN THOSE THAT SELL
Buyers are very savvy and know it is hard to build a technology company without problems in today’s litigious society. Thus, they are prepared to work an acquisition that works for both parties simply by using a creative structure that frames the business risks associated with proper cures including escrows, holdbacks, baskets, and income targets.
TRUTH: THE BUYER WANTS THE MANAGEMENT AND STAFF
This last myth is much the opposite of today’s reality. It’s not to say that there isn’t some relocation/redundancy reduction, but it’s not the norm. Further, with today’s full employment, buyers want your staff. Building successful teams is one of the most difficult things for companies to do, so one reason companies do M&A, particularly in growing markets, is to benefit from the work you have done in hiring, training, and building expertise.
It's important to realize that you as a company founder or CEO go through this process only once or twice in a lifetime, and you should work with someone who has more experience with it, just like your acquirer does. That was specifically critical for us with Corum as we still had to run our day-to-day business.