December 2023
Matt Compton & Alline Akintore
The M&A process can be daunting and, if poorly executed, excruciating. It doesn’t have to be. At our recent workshop for portfolio company leaders, Matt sat down with OVF venture partner Brad Gevurtz to talk about what businesses should be doing now to prepare for an optimal exit.
Brad is a managing director of the investment banking group at D.A Davidson, focused on the technology sector. He started his investment banking career at J.P Morgan and has over 30 years of experience in investment banking with expertise in M&A, strategic capital, public equities, and structuring debt securities.
Some takeaways from the workshop:
BRAD’s M&A TRUISMS:
M&A always takes longer than expected.
CEOs can only negotiate as good as their backup offer. Note: do not bluff to try to drive up the purchase price
Time kills all deals, especially between LOI signature and closing. Move as fast as feasible from the letter of intent to deal close. Only bad things happen with delays.
The most important thing a CEO can do once the company is in a deal process is hit the numbers.
BE PREPARED - Getting the process right will likely make a difference in the outcome:
For CEOs, the M&A process starts before it kicks off.
Have a bench of top tier management, especially an experienced, impactful CFO. The CFO is instrumental in preparing material to tell the company story. The CEO will be almost completely occupied by this process and so the rest of the leadership team will need to be able to run the business and deliver on the operating plan during the M&A process.
Where possible, cultivate trusted relationships with potential buyers in advance, this can take quarters or even years.
Meet or exceed the operating plan, especially leading up to and during the M&A process. This builds trust and credibility. Do not give the buyer(s) an excuse to re-trade. In the current market conditions, buyers do not need much to justify changing the deal.
Profitability is a valuation driver as much as pure revenue growth in today’s market.
Pick the right investment banker for you and your business. Ideally your banker has a recent track record of success in your specific sector, i.e. understands the company’s product, potential acquirers, and industry dynamics; and importantly, will listen to you and stay with you through to the end of the deal.
Keep your board involved throughout the process. Transparency allows the CEO, the board, and the investment banker to stay on the same page and avoid surprises.
WINNING APPROACH
Consider a two-stage process with potential acquirers:
First, an Indication of Interest (IOI) and then a Letter of Intent (LOI).
The management team should be ready for a well-prepared process after the IOI.
Where possible, do not rush to an LOI; rigorous due diligence before the LOI allows the acquirer and the seller to address any sticky issues that could affect the close. The more diligence an acquirer can do before an LOI, the less likely they can re-trade the deal on price.
Brad shared how CEOs can negotiate from a position of strength:
Hit your numbers. Also, make reasonable assumptions about company growth as part of the prospectus.
Be over prepared: Carry out independent sell-side quality of earnings, with an accounting firm and, when possible, an independent legal opinion on the company to identify problems before kicking off the process.
CLOSING THE DEAL
CEOs should think like “buyers” as well. Ask questions and prioritize learning about an acquirer’s previous acquisitions:
How are those companies doing today?
Were earnouts achieved? What earnout issues surfaced?
Connect with acquired company CEOs and learn from their experience.
When a CEO receives an LOI and a Purchase/Sell Agreement, make sure it is understood in its entirety. The purchase price is important, but many a CEO has lost a deal because they unintentionally violated the terms of the agreement. Most common trip-ups are the definition of knowledge and the qualifiers in the representations sections.
Have a credible back up deal. This is the single most important factor in closing the deal you want.
Matt Compton leads portfolio support and success for OVF and works with our portfolio company CEOs to navigate M&A. Alline Akintore leads the fund’s research and diligence.