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Start with the Exit in Mind
The document discusses strategies for building value in mergers and acquisitions (M&A) from the startup phase to exit, featuring insights from Nat Burgess and other experts from TechStrat. It emphasizes the importance of planning for a successful exit, addressing myths about the M&A process, and key elements such as financial readiness, negotiation tactics, and aligning stakeholders. The content also stresses the role of technology and document management solutions, like Securedocs, in facilitating secure and efficient M&A transactions.
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Start with the Exit in Mind
- 1. Start with theExit in Mind Building M&A Value from Startup to Exit Featured Presenter: Nat Burgess, Founder - TechStrat Wednesday, March 27, 2019 | 10AM PDT Hosted by:
- 2. • SecureDocs isa virtual data room designed to help businesses securely share critical documentation during financial transactions. • ContractWorks is a contract management system that allows businesses to sign, store, track and report on key milestones in their corporate agreements. About SecureDocs, Inc. Founded by the team that created and launched GoToMyPC, GoToWebinar, Appfolio, and RightScale, SecureDocs, Inc. creates simple, smart document management solutions to help our customers accelerate transactions and mitigate risk.
- 3. • 20+ yearsof experience facilitating over 100 transactions • Technology focused firm • Works with clients to open new chapters and create new opportunities • Goal is for every client to look back on our achievements together and say “I’m glad I did that” About TechStrat A strategic advisory firm which specializes in software, SaaS, and Technology Enabled Services mergers and acquisitions.
- 4. Today’s Presenters Nat Burgessis the founder and Managing Partner of TechStrat, which specializes in software, SaaS, and Technology Enabled Services mergers and acquisitions (M&A). Burgess brings a diverse background in technology M&A and law, including experience at the Enforcement Division of the U.S. Securities and Exchange Commission, the Strategic Development Division of Morgan Stanley's M&A Group, and Morgan Stanley's Tokyo office. Burgess is frequently quoted in industry publications and mainstream media such as Time magazine, USA Today, CNBC, and The Wall Street Journal’s MarketWatch. Featured Presenter Nat Burgess Techstrat Founder
- 5. Today’s Presenters Steve Peltierwas a professional accountant with a predecessor firm to what became KPMG, one of the world’s leading professional services firms and among the ‘Big Four’ accounting firms in the United States. He has been CEO of multiple companies, growing one to over $100mm in revenue, and achieving two successful M&A exits. Steve advises companies on financial readiness and presentation in the M&A process. Michael Bolotin is a Senior Associate at TechStrat, where he supports deal teams in putting together offering documents, managing data rooms, and working with buyers. Michael has worked as a consultant and venture capitalist and has an MBA from the IE Business in Spain, and an undergraduate degree in finance from Washington State University.Michael Bolotin Techstrat Senior Associate Steve Peltier Techstrat Lead Advisor
- 6. Start with theExit in Mind
- 7. ● Identify aproblem that customers will pay you to solve ● Bring new insight and efficiency to solving it ● Hire a great team ● Build a great product ● Protect your IP ● Establish a profitable, scalable path to market ● Use outside capital cautiously and efficiently Build a great company - M&A will follow
- 8.
- 9. What happens tothe other 83.7% of startups that successfully raise funding but aren’t acquired? As for the others...
- 10. ● IPO (lessthan 3%) ● Liquidated or in the Red Zone: Over 80% ○ Insufficient capital to attract new management ○ Founders and/or management have been diluted, or are stuck behind a big preference stack ○ VCs have lost confidence Most fall into the red zone. . .
- 11. ● Extended timelines ●Changes to deal structure and terms ● Surprises during diligence ● Missed numbers ● Employee defection ● Conflict (founder, management, shareholder) ● Patent bomb ● Loss of confidence in the team Or get injured during a failed M&A process
- 12. 1. Myths 2. Alignment 3.Structure 4. Finance 5. Data Room 6. Buyers 7. Timing 8. Execution 9. Advisors Outreach Diligence Close Launch Meeting CIM Negotiation Financial Model Valuation Data Room Independent Strategics Financial Sponsors Networking - Bankers Deep Synergy Analysis Bus. Dev. Outreach Auction Trigger Auction Process IOI LOI Due Diligence Information Requests Networking - Sponsors SPA/APA Research Readiness Quotient PCL Outreach Transaction Execution Preparation 6 Months Start with the exit in mind: key considerations
- 13. ● “If thingsdon’t work out, we can always sell the company in an acqui-hire” ● “Big tech companies routinely buy startups” ● “My company will be valued the same way by acquirers and investors” ● “Startups should be for sale from day one” ● “If a strategic buyer offers to pay a premium for my startup, I should play hardball and stall them while I shop the company” ● “I can create exit opportunities by offering people commissions on a sale” ● “Companies are bought, not sold” or “I’ll get the best value from a company that approaches me, unsolicited” 1. Myths
- 14. ● What isthe Desired Timeline? Sell Exit Date: 12/31/2019 Revenue Multiple: 4x 2018 2019 2020 2021 Revenue $3.00 $3.80 $5.00 $8.00 Equity Cash Flows $12.00 Business as Usual Exit Date: 12/31/2021 Revenue Multiple: 4x 2018 2019 2020 2021 Revenue $3.00 $3.80 $5.00 $8.00 Equity Cash Flows $20.00 Raise Capital Exit Date: 12/31/2022 Revenue Multiple: 4x 2018 2019 2020 2021 Revenue $3.00 $6.00 $10.00 $16.00 Equity Cash Flows -$3.00 $61.00 Sell now Kick the can down the road Sell in 3 years 2. Alignment
- 15. ● What isthe Target Valuation? NWC Adjustment Debt Transaction Fees Options Taxes Shareholder Distribution Price Adjustments Escrows 2. Alignment
- 16. ● Buyers wantto maximize contingent payments to management. They want to minimize the money going to investors. Retention is a critical problem for buyers: ○ Tight job market ○ Tech leadership is rare and valued ○ Value is created post-closing ○ Key people with little or no equity can take control of the transaction Common Pattern: ○ Six months of integration ○ Six months of work ○ Six months contemplating new ventures 2. Alignment
- 17. ● Passive vs.Active Shareholders “We will pay $40 million for the 100% of the equity. $15 million of the purchase price will be allocated to a retention pool, payable in equal parts over 4 years to individuals identified as key people during the due diligence process. $5 million of the purchase price will be paid as an earnout, based on the Company achieving certain revenue milestones in the first 12 months after closing. . .” Ownership: Management: 30% Institutional Investors: 65% Angel Investors: 5% 2. Alignment
- 18. ● Passive vs.Active Shareholders (continued) 2. Alignment
- 19. Motivations ● Shareholders: ROI,trust & confidence, status, timeline, valuation ● Board: Governance (not management); control of decision to sell ● Management: Momentum, ROI, timeline, valuation, roles and responsibilities 2. Alignment
- 20. ● Pass-Through Entity 3.Structure Investor and Management Considerations ● Flexibility in deal structure (asset or stock sale) ● Tax-efficient distributions to shareholders ● High flexibility in structuring rights associated with equity ● Limitations on ownership ● 5 year look-back on change from a “C” to an S-corp
- 21. ● In Diligence,You Are Judged by Your Agility and Consistency in Reporting Financial Data 4. Finance Service Metrics: ● Gross Profit Margin Contribution and Growth, by Product and by Customer ● Customer Product Utilization ● Customer Revenue Concentrations ● Average Revenue Per Customer ● Weighted Sales Pipeline for Projecting Revenue SaaS Metrics: ● % ACV (Annual Contract Value) Growth ● Bookings, Recurring Revenue and Recognized Revenue Growth ● ACV and Net Expansion Revenue Growth ● Customer Churn (by Revenue and by Customer) ● ARRPA (Average Recurring Revenue Per Account) ● Customer LTV (Lifetime Customer Value) Financial Metrics: ● Accurate Balance Sheets ≥ 3 Years ● Consistent Revenue Recognition ≥ 3 Years ● Detailed Deferred Revenue Reporting ● Accrual-Based Financials
- 22. ● Finance isa Strategic Investment in Valuation and Ability to Close a Transaction 4. Finance Finance impacts valuation: ● Quality of Earnings ○ Revenue Recognition ○ Reconciliation ● Accrual vs Cash ● EBITDA Add-Backs ● NWC (Net Working Capital) ● Effects of Deferred Revenue on NWC ● Confidence on the Part of the Buyer ● Buyer Accounting Principles and Reporting Requirements Example: Add-Backs captured $4+M in value “The Proposal values the Company at an enterprise valuation of 14x last-twelve-months Adjusted EBITDA as of December 31, 2018 (“Total Purchase Price”), and assumes that the Company will be delivered on a debt-free and cash-free basis with ordinary course net working capital at closing. Based on information you have supplied to date, we expect the Total Purchase Price to be approximately $37.38M. ($286,000 in EBITDA add-backs = $4+M in additional Total Purchase Price.) “Adjusted EBITDA” means the Company’s earnings (determined in accordance with generally accepted accounting principles consistently applied), before interest, taxes, depreciation and amortization and plus such other amounts as appropriate and mutually agreed”
- 23. ● Maintaining avirtual data room is a basic corporate best practice 5. Data Room
- 24. ● Find theoverlap 6. Buyers Companies that we should partner with today BD FOCUS Companies that should acquire me eventually
- 25. ● “Companies thatshould acquire me eventually” ○ They can accelerate my growth (distribution, pricing, adjacent product(s)) ○ I can help them defend or grow market share in a changing marketplace ○ Diversification (with synergies) ○ Geographical expansion ○ Response to competitive threat ● “Companies that I should partner with today” ○ I can bring them a significant customer (we can collaborate to serve a customer) ○ They can license technology that fills a gap today, but could become core ○ Cross-sell ○ Energy and momentum in an emerging market 6. Buyers
- 26. Objective Raise money toexecute and build value Concept 7. Timing Valuation Driver(s) Acqui-hire (save on recruiter fees)
- 27. Objective(s) Deploy technology ata live customer Validate ROI to customer Validate technology Refine business model Early Stage 7. Timing Valuation Driver(s) Acqui-hire (save on recruiter fees) Strategic technology purchase Accelerate time to market
- 28. Objective(s) Re-architect product forscale Refine UVP (Google AdWord test) Get reference customers Build towards a profitable financial model Growth Stage 7. Timing Valuation Driver(s) Acqui-hire (save on recruiter fees) Strategic technology purchase Accelerate time to market DCF (earnout) Replacement Value
- 29. Objective(s) Growth IPO and M&AReadiness EBITDA IP Strategy (Patent Portfolio) Mezzanine Stage 7. Timing Valuation Driver(s) Acqui-hire (save on recruiter fees) Strategic technology purchase Accelerate time to market DCF (earnout) Replacement value Market multiples
- 30. Objective(s) Market Dominance Sustainable Earnings ExitStage 7. Timing Valuation Driver(s) Acqui-hire (save on recruiter fees) Strategic technology purchase Accelerate time to market DCF (earnout) Replacement value Market multiples
- 31. Investor ROI GROWTH MEZZANINEEXIT %ReturnonInvestment CONCEPT 7. Timing
- 32. Strategic Sale ● Board,shareholders, and management are aligned around the probable valuation and structure ● You have sufficient internal resources (and external help) to endure the process without damage to your business (the business MUST perform) ● You have received a credible inbound inquiry (or inquiries) Forced Sale ● You have at least six months of runway ● You have a credible value proposition ● You have exhausted the alternatives 7. Timing
- 33. 8. Execution Board Responsibilities ●Decision to sell the company ● Liability for not meeting “Revlon” standard of care ● Protected by business judgment rule ● No protection if self-dealing, putting personal interests ahead of company interests ● No obligation to hire advisors, but hiring appropriate advisors helps meet Revlon, reduces potential for real and perceived conflicts, and protects the interests of the shareholders ● Oversee process through an M&A committee (to monitor, not micro- manage)
- 34. 8. Execution Valuation defense- Software or SaaS
- 35. 8. Execution EBITDA $3,000,000 Cashat Close (%) 30-70% Other (%) 30-70% Cash vs “Other” Allocation Drivers: ● Weighted Pipeline - How certain? How far into the future? ● Contract duration - is revenue locked in? ● Risks controlled through earnout - HR and customer retention, contingencies ● M&A Process Additional Structure: ● Equity (options, SAR, RSU, hybrid) ● Deferred cash (retention) ● Balance sheet (receivable, cash) ● Seller note EBITDA Multiple 3.50x 4.00x 4.50x 5.00x 5.50x 6.00x 6.50x 7.00x 7.50x 8.00x Cash at Close (%) $4,200,000 $4,800,00 $5,400,000 $6,000,000 $6,600,000 $7,200,000 $7,800,000 $8,400,000 $9,000,000 $9,600,000 Earnout (%) $6,300,000 $7,200,000 $8,100,000 $9,000,000 $9,900,000 $10,800,000 $11,700,000 $12,600,000 $13,500,000 $14,400,000 EBITDA Multiple Drivers Segment growth Company growth Profitability Customer Concentration Strength and commitment of the team Valuation defense - Services Assumes 40% Cash, 60% Earnout
- 36. 8. Execution Responding toinbound inquiries: Too Early ● “We are creating value quickly; it is too early for us to sell” ● “We are interested in exploring partnership opportunities (not M&A) that can accelerate our growth” Responding to inbound inquiries: Ready to Engage ● “We periodically get similar inquiries” ● “We have multiple shareholders and a fiduciary duty to protect their interests” ● “We would have to get approval at the board level before we could engage – and they have made it clear that when the time comes, we will run a process.”
- 37. 9. Advisors Legal ● Inexperiencedlawyers kill deals ● Retain corporate counsel that is also experienced in M&A ● If your corporate counsel doesn’t have extensive deal experience, retain M&A counsel for the deal. Make sure they have: ○ Resources in tax, employment and labor, contracts, immigration, securities, compliance. . . ○ And that they have connections with your buyer’s jurisdiction Accounting ● Responsive ● Transaction-oriented
- 38. 9. Advisors M&A Advisory ●Will you have a deal-maker focused on your account? ○ Can that person act effectively as “CEO of the transaction?” ○ Have they directly negotiated multiple transactions? ○ Are they reading a script, or do they know what they are doing? ● Does your advisor know your industry? How is their network? ● Will your advisor give you objective and helpful guidance? ● Are you confident that they will stay with you through the twists and turns, for as long as it takes?
- 39. X. The “XFactor” driving maximum value “The future is already here - it just isn’t very evenly distributed” (William Gibson) CONSOLIDATION DEALS Date Deal Revenue Multiple EBITDA Multiple 5/8/2018 Recruit Holdings / Glassdoor 7.03 x N/M 7/27/2017 Mitel / ShoreTel 1.49 x 53.12 x 7/26/2017 OpenText / Guidance Software 2.15 x -22.58 x 4/25/2017 Infor / Birst 1.88 x N/M 7/7/2016 AVAST Software / AVG Technologies 3.00 x 10.28 x 5/18/2016 NICE Systems / inContact 3.74 x 92.11 x 5/12/2016 Infor / Merit Globe 0.44 x N/M 10/1/2015 Tyler Technologies / New World Systems 5.40 x N/M 8/6/2015 IBM / Merge Healthcare 3.10 x 16.18 x 1/25/2015 Expedia / Travelocity.com 0.70 x N/M MEDIAN 2.58 x 16.18 x DIVERSIFICATION DEALS Date Deal Revenue Multiple EBITDA Multiple 11/10/2018 SAP / Qualtrics 21.48 x N/M 11/6/2018 VMWare / Heptio 137.50 x N/M 10/28/2018 IBM / Red Hat 10.59 x 5265.15 x 10/15/2018 Twilio / SendGrid 13.25 x 28.50 x 3/20/2018 Salesforce / Mulesoft 21.93 x N/M 5/21/2018 Adobe / Magento 11.20 x N/M 6/13/2016 Microsoft / LinkedIn 8.09 x 9.08 x 6/1/2016 Salesforce / Demandware 11.02 x N/M 9/18/2014 SAP / Concur 12.43 x 178.20 x 10/9/2006 Google / Youtube 110.00 x N/M MEDIAN 12.84 x 103.35 x Premium: 398% 539%
- 40. SecureDocs is usedfor: • Audits • Business Valuations • Fundraising • M&A • Licensing Deals • Strategic Partnerships • Legal Events • Secure Corporate Document Storage SecureDocs Virtual Data Room From $250/Data Room/Month | Unlimited Users & Data SecureDocs is an affordable, easy-to-use virtual data room solution with built-in electronic signature for securely storing and sharing corporate documentation.
- 41. Get in Touch SecureDocsVirtual Data Room Get up and running in 10 minutes. Get in touch, today. www.securedocs.com US: 866 700 7975 International: 001 805 259 1269 $250/month | Unlimited users & documents | 24/7 support TechStrat Create new opportunities. Get in touch, today. www.techstrat.com US: 206 971 1141 Europe: 206 971 1141 extension 102 Open a new chapter in your life.