In a recent forum dedicated to software and SaaS Finance leaders, organized by the SIIA and sponsored by OPEXEngine, Netsuite, Intacct and Grant Thornton, one of the best discussions dealt with preparing for and managing the optimal M&A exit for your company, with CFOs from acquired companies and M&A advisors from Grant Thornton.
- Know the current benchmarks for similar types of companies. What you read on the web may not accurately portray what investors and acquirers are seeing from actual companies numbers.
- Be prepared – don’t be sloppy with numbers. Know your key metrics, where they come from, be able to explain clearly how they are defined and how they relate to each other. Don’t change your story halfway through the process. Make sure your customer counts, growth rates, churn rates, LTV/CAC ratios, etc. are validated.
- Address issues proactively so the price isn’t affected and the time to close isn’t drawn out.
- CEO and CFO must be synched – CEO sells the opportunity and business model and the CFO validates that the numbers and projections are realistic, as well as managing the on-going operations of the company. If you are out of synch, buyers may walk.
- If you haven’t done M&A before, work with auditors and other services firms that have – you’ll be more confident and in a better position to negotiate from a position of strength with experienced advisors in the current market. Board directors who sold a company 10+ years ago may not be up to date on current issues.
Know your numbers, how they are defined, and where they came from, so you can clarify any discrepancies that the buyer finds. Address issues proactively, so the price isn’t affected and time to sell isn’t affected. Each issue that the buyer discovers in the due diligence process can reduce the selling price. Multiple issues can indicate systemic problems which leads the buyer to offer a dramatically lower price, or even canceling the acquisition.
Here’s a couple of specific examples where knowing your key metrics and how they are computed, as well as being able to compare to industry benchmarks, puts you in a position of strength.
Example: During the initial presentation of the seller, the seller shows a 95% renewal rate. The buyer is excited and sends a letter of intent. Then, the buyer begins doing due diligence and analyzes the billings files. The buyer finds a 90% renewal rate, based on billings, which means that churn is double or 100% higher than represented.
Potential outcome: Findings lead buyer to drop initial purchase price by 20%.
Buyers will typically look at billings and calculate churn based on billings. If your company’s renewal data isn’t reconciled to billings and financials, then the buyer’s due diligence may not produce the same result. Be sure to document any file adjustments.
Tip: Stratifying renewal rate analysis by channel, product or average contract size or size of customer may give the buyer a way to see how focusing on “better” customers, renewal rates would improve. Comparing your company’s actual renewals to peer benchmarks for churn can help you position your company in the most advantageous light, and downplay customer segments that have higher churn.
Example: The seller says that company’s leadership is committed for the long term.
Due Diligence: The buyer finds that the company’s compensation and benefits are below market, leaving it open to competitor’s efforts to poach talent.
Outcome: The likelihood of key defections erodes the purchase price by 20% due to risk of losing key players.
Tip: Track key benchmarks for compensation and benefits for peer companies and position your compensation correctly vis-à-vis the benchmarks. Then, during the due diligence process, identify key employees – both from the standpoint of value creation and IP – and ensure they are kept in the loop. Manage expectations through robust communications during M&A. Employees often leave companies not only for better compensation but due to uncertainty and/or a desire to impact strategy.
Synching up the CEO and CFO
During the M&A process, the CEO and CFO need to be synched up. The CEO is selling a business model and opportunity, which the CFO has to validate. The CFO has to be able to reign in the CEO if he/she is a bit too optimistic about the numbers and opportunity for the buyer. One experienced CFO suggested working with the CEO to do several different scenarios with some risk analysis, show baseline projections, and upside. If there are a lot more risks than upside to the actual numbers, then it is easier for the CEO to see that the baseline numbers just might have too much optimism in them.
Buyers will be looking at how the CEO and CFO work together. They want to see if the CFO is at odds with the CEO’s projections and if the numbers can be validated.
Several CFOs spoke about selling to strategic or very large tech companies that may not deeply understand the operations of a pure SaaS company, nor are they very familiar with non-financial SaaS metrics. These companies typically use traditional financial models to evaluate acquisitions, and will try to force a SaaS company into their model.
Detailed SaaS operating benchmarks help SaaS companies position their company, educate buyers to the value of their business model, and improve the buyer’s evaluation of the purchase opportunity.
The software and SaaS sector is rapidly evolving, metrics and benchmarks from a few years ago have evolved or changed. Acquirers typically are doing deep dives into many companies, and while they may not understand your business model as well as you do, you need to understand what else they see in the market, and position your company against other opportunities.