Start with the Exit in Mind

Start with the Exit in Mind
Building M&A Value from Startup to Exit
Featured Presenter: Nat Burgess, Founder - TechStrat
Wednesday, March 27, 2019 | 10AM PDT
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About TechStrat
A strategic advisory firm which specializes in software, SaaS, and Technology Enabled Services
mergers and acquisitions.

Today’s Presenters
Nat Burgess is 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

Today’s Presenters
Steve Peltier was 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

● Identify a problem 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

Source: TechCrunch (http://tcrn.ch/2pMo1QI)
1 in 6, or 16.7%

What happens to the other 83.7% of startups that
successfully raise funding but aren’t acquired?
As for the others...

● IPO (less than 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. . .

● 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

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

● “If things don’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

● What is the 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
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
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

● What is the Target Valuation?
NWC Adjustment
Debt
Transaction Fees
Options Taxes Shareholder
Distribution
Price Adjustments
Escrows
2. Alignment

● Buyers want to 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

● 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

● Passive vs. Active Shareholders (continued)
2. Alignment

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

● 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

● 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

● Finance is a 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”

● Maintaining a virtual data room is a basic corporate best practice
5. Data Room

● Find the overlap
6. Buyers
Companies that we
should partner with
today
BD
FOCUS
Companies that
should acquire me
eventually

● “Companies that should 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

Objective
Raise money to execute and build value
Concept
7. Timing
Valuation Driver(s)
Acqui-hire (save on recruiter fees)

Objective(s)
Deploy technology at a live customer
Validate ROI to customer
Validate technology
Refine business model
Early Stage
7. Timing
Valuation Driver(s)
Strategic technology purchase
Accelerate time to market

Objective(s)
Re-architect product for scale
Refine UVP (Google AdWord test)
Get reference customers
Build towards a profitable financial
model
Growth Stage
7. Timing
Valuation Driver(s)
DCF (earnout)
Replacement Value

Objective(s)
Growth
IPO and M&A Readiness
EBITDA
IP Strategy (Patent Portfolio)
Mezzanine Stage
7. Timing
Valuation Driver(s)
DCF (earnout)
Replacement value
Market multiples

Objective(s)
Market Dominance
Sustainable Earnings
Exit Stage
7. Timing
Valuation Driver(s)
DCF (earnout)
Replacement value
Market multiples

Investor ROI
GROWTH MEZZANINE EXIT
%ReturnonInvestment
CONCEPT
7. Timing

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

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)

8. Execution
Valuation defense - Software or SaaS

8. Execution
EBITDA $3,000,000
Cash at 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

8. Execution
Responding to inbound 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.”

9. Advisors
Legal
● Inexperienced lawyers 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

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?

X. The “X Factor” 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%

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