How do you maximize value when beginning an M&A process? At Morse’s 2019 VC and M&A Forum on May 2, a panel of experts – including an entrepreneur, a venture capitalist, a banker, and a VC and M&A attorney – shared their thoughts on the keys to success when negotiating an M&A deal.
- Focus on alignment of interests. Panelist Brady Bohrmann, Managing Director of venture capital fund Avalon Ventures, encouraged companies to look for “the strategic sweet spot” – that convergence of interests that results in a target bringing a lot more to the acquirer than just its revenue and a strong team. Particularly when considering a strategic acquirer, companies should look for synergy between the target and acquirer’s businesses – like common customers or common distribution channels. Panelist Alan Fullerton of investment bank Mirus Capital agreed, noting that strategic buyers are often looking to fill a hole in their offerings. He encouraged entrepreneurs to find a shared vision of the market with their potential acquirers, and focus on how the acquirer will have a more complete market strategy when combined with the target. When you hit that sweet spot, panelists said, companies are able to demand a much higher valuation than a basic multiple-of-revenue calculation would indicate.
- Highlight your strengths. Panelist Matt d’Arbeloff, Head of Finance & Operations of Paytronix Systems, Inc., a customer engagement company that was acquired by a private equity firm, counseled entrepreneurs to know their strengths and be able to make a solid case to a potential acquirer as to why the acquisition makes sense. With a strategic buyer, panelists said, this may be highlighting the synergies between the target and the acquirer. With a private equity fund, this may be focusing on the strength of the management team and the team’s ability to bring the company to the next level with the PE fund’s guidance. Be able to justify your worth, both from a quantitative and from a qualitative perspective, said Brady. Be able to make the case for what the company can do for the acquirer, and how the company can drive growth. Know what buyers are looking for, urged moderator Jon Gworek, partner at Morse. This typically includes growth in the business, a strong and predictable business model, and a solid management team, but many acquirers have their own unique indicators that they look for.
- Let them come to you. All panelists agreed that ideally the buyer should make the first offer. The company’s role is to know the market for potential buyers and make the right contacts – and of course, not to lose sight of running the business itself. If they fulfill their role well – and engage a banker where appropriate to help in that process – they should attract the attention of potential strategic and/or financial buyers. Panelists also stressed the importance of timing, and that ideally acquisition talks would begin when a company is still growing and on the upswing, rather than stalled or struggling.
- Don’t commit too early. Panelists cautioned entrepreneurs not to enter into exclusivity with a particular buyer until they knew all the key terms – not just the top line valuation. Management hold back, escrows, indemnification, vesting, and other terms can have a big impact on the economics. Companies should be wary of signing a binding letter of intent before receiving a full term sheet (though many acquirers, particularly strategics in the tech world, are pushing for this), and should make sure they’re comfortable with the acquirer before moving to the next stage. The time to negotiate for key points, advised Alan, is before signing anything, as acquirers are much less motivated to concede a point after entering exclusivity.
Stay tuned for our next panel recap: Current M&A Deal Terms: Complexity Simplified.