This is the first post of a series on Mergers & Acquisitions (M&A). I’ve experienced both the buyer side and the seller side of this process and plan to share some of my insights on buying and selling companies, and the M&A process.
I know way too much about PowerPoint. I no longer had “hat head”. I had “headset head”. With the number of times I spoke to potential suitors, I got to know the lady from the Skype “Call Testing Service” better than my wife. For close to a year, my life was about creating and adjusting presentations while spending inordinate amounts of time on the phone with scores of technology firms, private equity groups and venture capitalists. As a result of my experiences, I learned a thing or two about exit strategies and what makes M&A people tick.
My organization was in the midst of switching markets. We had traditionally relied on revenue and profit generation from the state and local government markets, but due to budget crunches within government we needed to diversify. After significant research of various markets, including energy, financial and healthcare, we decided to focus our efforts on electronic health records. We needed capital to support this transition, and I made the decision that the best source of this capital was to either take in venture or private equity funding, or to sell the business outright.
After successfully selling my company to a private equity firm, I also had the opportunity to be on the other side of the table – performing opportunity analysis and helping organizations understand whether it made sense to invest or acquire companies for their portfolio.
Lesson #1 – There’s always a reason why companies are selling.
I tell my friends and peers, “When you are enjoying life the most, sell your company.” Their general response is invariably, “It’s not time yet. I can still make it better.”
The majority of companies actively seeking to be acquired are distressed in some way. In some cases it may be financial distress. Profits are down, growth isn’t where it should be or markets have shifted. In other cases, it may be emotional or cultural distress. The leader of the group may be burnt out and ready to move on. Win-loss ratios may be trending downward and de-motivating the employees.
Whatever the reason, most acquirers or investors know that, generally, companies being actively marketed for sale are on the market for a reason. They will proactively seek the reason and look for inconsistencies in the responses.
As a seller, it’s important to be honest with potential buyers and investors. This still means that you can put a positive spin on the reason you’re selling, but it does mean that you should NOT be trying to hide the reason. I can tell you – they will either find the real reason, or they’ll walk away if they feel you’re concealing something. Don’t fret – if you’re having some issues there are numerous buyers for distressed companies. It’s all about positioning.
And that brings me to Lesson #2 – Sell on a high, not on a low.
This is fairly similar to the last lesson, but still bears some discussion. Some time ago I had a great consulting engagement with the COO of a $400M IT firm. They were looking to move into a specific market with a specific service and were interested in acquiring a company to allow immediate entry. After defining the markets and the service offerings, we talked about the attributes of an acquisition. One of the leading characteristics was that the company to be acquired should not be actively marketing itself for sale.
When your company is doing really well – high customer acquisition rate, good profit margins, excellent customer satisfaction, soaring win/loss ratio – you are loving life. You have money for growth and for yourself and you’re having immense amounts of fun. You’re getting call after call from M&A specialists saying that they have a buyer interested in your company. Why would you ever be interested in selling?
Just like banks, who you never want to go to when you actually need money, you’ll do best to sell your company when it has the most value. If you’ve had two years of consistent straightline growth, it’s time to sell your company. If you have so many service sales that you have a delivery backlog, it’s time to sell your company.
If your profits haven’t been consistent, or if your key performance indicators have been trending downwards, or your hardware vs. services mix is going in the wrong direction – these are all situations that aren’t as attractive to potential suitors. The healthier your company is, and the more consistent your numbers are – especially when they are trending appropriately – the more acquirers will pay to bring your company into their portfolio.
Chris Labatt-Simon
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