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Start with the Exit in Mind
An M&A bootcamp for CEOs and investors
Growth – Funding – Exit
www.TechStrat.com
● Managing Partner, TechStrat (mid-market software, SaaS and
TES M&A firm)
● 20+ Years in Tech M&A, transactions in 25 countries
● 100+ deals (Google, Microsoft, Intel, Symantec)
● Extensive PE Network (Completed transactions with Vista,
Apollo, Tailwind, Intel Capital, Battery Ventures, Marlin, others)
● Angel investor, board advisor (Exits to Google, Microsoft,
Yahoo, TNS, others)
● Frequent guest on CNBC and a nationally recognized speaker
at industry conferences
Your Presenter: Nat Burgess
Nat Burgess,
TechStrat Founder
Undisclose
d
$203mm
Minority
Recap
At some point, every mid-market company will need to make an M&A decision.
Let an expert dealmaker guide yours.
We are a Seattle-based M&A advisory firm with a global outlook
● TechStrat is an advisory firm that helps technology and tech-enabled service companies grow through M&A.
● Through our work, we are transforming the tech landscape, improving careers, and enhancing organizations.
Our Process
● Creating and executing an M&A strategy requires a multidisciplinary approach that includes legal, financial and management
expertise, and maintains strict confidentiality.
Our Mission
● We help clients open new chapters in their lives and create opportunities for others.
○ When a deal closes, we want you to say "I'm glad I did that."
Our Experience
● We've been at this for 20 years and have closed more than 100 transactions in dozens of verticals and with industry leaders like
Google and Microsoft.
About TechStrat
Our clients are builders. They're smart people who have created value for themselves, their employees,
and their partners.
Typically, our clients are founders or Investors whose companies have:
● an enterprise value of $10-$150 million.
● differentiating technology and/or service that supports a competitive advantage in software,
services or content.
● constraints to growth that are solvable through partnership/acquisition or capital.
● a genuine interest in effecting positive change for management, owners, employees, and partners.
Team
TechStrat Clients & Team
Nat Burgess
Managing Partner
nat@techstrat.com
Michael Bolotin
Sr. Associate
michael@techstrat.com
Richard Horsman
Sector Professional
Ed Ossie
Sector Professional
ed@techstrat.com
Vladimir Savoskin
Sr. Analyst
vladimir@techstrat.com
Julia Tsemokh
Sr. Analyst
julia@techstrat.com
Thank you for Welcoming us Back to Helsinki!
Partners Past Clients
Out of all the companies that raise Seed,
Convertible or Series A funding, how many
go on to be acquired?
Question
Source: TechCrunch (http://tcrn.ch/2pMo1QI)
1 in 6, or 16.7%
What happens to the other 83.3% 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
What is the most common reason for
emerging tech companies to sell?
Question
● Running out of money
● Competitive Pressure
● Extended timeline
● Fatigue
● Conflict
The sale is Reactive
● “Getting acquired by LRW positions us to achieve our 5 year
plan in 2.5 years” - Amy Balliett, Killer Visual Strategies
● “Joining forces with Accenture gave us a complete security
portfolio that will allow us to triple our revenue per customer” -
Adam Cecchetti, CEO, Deja Vu Security
● “Together with Simpleview we cover 80% of the top tourist sites
in the world, which makes us the leading global data provider in
our segment” - Richard Veal, CEO, Tourism Media
Strategic exits are proactive
Start with the Exit in Mind: Key Considerations
1. Process
2. Alignment
3. Structure
4. Finance
5. Data Room
6. Buyers
7. Timing
8. Valuation
9. Execution
10. 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
1) Process
● Creates value
● ≠ “for sale”
● Keeps buyers honest
● Is inherently resilient
● Makes a market
● Takes only one buyer
Outreach Diligence Close
Launch
Meeting
CIM
Negotiation
Financial
Model
Valuation
Data Room
Independent
Strategics
Financial
Sponsors Networkin
g -
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
Preparatio
n
6 Months
What is the desired timeline, return, and tolerance for risk?
2. Alignment
Sell now at
4x Revenue
Sell in 3
years at 4x
revenue
Raise money,
then sell in 4
years at 6x
revenue
Sell
Exit Date: 12/31/2018
Revenue Multiple:
2020 2021 2022 2023
Revenue $3.00 $3.80 $5.00 $8.00
Equity Cash Flows $12.00
Business as
Usual
Exit Date: 12/31/2020
Revenue Multiple:
2020 2021 2022 2023
Revenue $3.00 $3.80 $5.00 $8.00
Equity Cash Flows $20.00
Raise Capital
Exit Date: 12/31/2021
Revenue Multiple:
2020 2021 2022 2023
Revenue $3.00 $6.00 $10.00 $16.00
Equity Cash Flows -$3.00 $61.00
Low risk,
known
return
Mid risk,
variable
return
High risk,
highly
variable
return
● Have the stockholders agreed on a target valuation?
● Are the stockholders sufficiently informed and sophisticated to understand the
risks associated with a structured deal, and how the distribution waterfall
works?
2. Alignment (continued)
● Tech leadership is highly valued, unemployment is near 0%
● Buyers place a high value on teams, and optimize offers in their favor
Ownership:
Management: 30%
Institutional Investors: 65%
Angel Investors: 5%
Sellco term sheet:
“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.”
2. Alignment (case study)
Good news, Sellco
shareholders! The board has
received a buyout offer for
$40 million!
● Investors want a return for the capital they put at risk
● Management wants to be compensated for their contributions, past and
future
2. Alignment (case study)
Motivation and Incentives
● Shareholders
○ IRR
○ Confidence (lack of confidence) in management
○ Status
● Board
○ Fiduciary duties, GRC considerations, shareholder value
● Management
○ Momentum, upside potential, valuation
○ Timeline
○ Future role, status
2. Alignment (continued)
What happens when deals fail over lack of alignment? (case study)
● Buyout offer initially supported by management and shareholders
○ 8x ARR ($40 million)
○ 250% revenue growth (slowing); break-even
● CEO change of heart; “we have too much opportunity to sell now”
● Repercussions
○ Damaged relationships (shareholders, board, team)
○ Reputational damage; buyers talk to each other
○ Buyer immediately launched a search for a similar company
and will invest $50 million competing head-to-head
2. Alignment (continued)
“C” Corp
3. Structure - US Corporate Structure
Investor and Management Considerations
● Investors don’t pay tax based on
operating results
● Liability shield for investors
● Employees are used to getting
options in a C-Corp
● No restriction on who can hold
shares
● Clear separation of shareholders
and management
● Potential for double taxation on
distributions to shareholders
Investor and Management Considerations
● “S”, LLC, Sole Proprietorship
● Flexibility in deal structure (asset or
stock sale)
● Tax-efficient distributions to
shareholders
● High flexibility in structuring rights
associated with equity
● Limitations on ownership (“S”)
● 5 year look-back on change from a
“C” to a pass-through
Pass-Through Entity
Stock or Asset sale - “C” Corp vs. Pass-Through Entity (e.g. “S” Corp)
3. Structure - US Transactional Considerations
Finance is a strategic investment
4. Finance
Finance impacts valuation:
● Quality of Earnings
○ Revenue Recognition
○ Reconciliation
● Accrual vs Cash
● EBITDA add-backs
● NWC
● Confidence in forecasts
Example: Add-Backs captured $4M+ 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.
“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”
In Diligence, you are judged by your agility in reporting financial data
4. Finance (continued)
SaaS Metrics:
● % ACV Growth
● Bookings, Recurring Revenue and
Revenue Growth
● ACV and Net Expansion Revenue Growth
● Customer Churn (revenue and logo)
● ARRPA (Average Recurring Revenue Per
Account)
● Customer LTV
Service Metrics:
● Contribution Margin, Growth
● Utilization
● Customer concentration
● Average Revenue Per Customer
● Weighted Pipeline
Cross-border considerations
4. Finance (continued)
IFRS
● Principles-based
● Heavily reliant on notes
● IFRS is followed in must jurisdictions
outside of the US
● International subsidiaries of US
companies will usually have to report up
in GaaP
US GaaP
● Rules-based
● Less reliant on explanatory notes
● Required for US public listings; standard
for sharing financials between US entities
● Maintaining a virtual data room is a basic corporate best practice
● Delay sensitive disclosures until you have high confidence (purchase
agreement)
LOI
CLOSING
Week 5
5. Data Room
● “Vendor Diligence” concept - using the data room assembly process to prep
for third party diligence
○ Customer contracts requiring consent for assignment, or consent to
transfer upon change of control of the company
○ Vendor contracts requiring consent for assignment, or consent to transfer
upon change of control of the company
○ Defects in formation and/or organizational documents
○ Conflicting documents or other questions relating to the capitalization of
the company
○ “Work for hire” agreements for employees responsible for developing IP
5. Data Room (continued)
Big companies stagnate. They make acquisitions to spark culture and innovation
6. Buyers
But they need you to build a company to their standard
6. Buyers
Image credit: Michel Baudin (www.michelbaudin.com)
● “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 (continued)
Find the overlap
6. Buyers
Companies that
should acquire
me eventually
Companies that we
should partner
with today
BD
FOCUS
6. Buyers (continued)
○ Fewer publicly traded companies now than in 1976
○ Pubco P/Es and growth rates are down, acquisition targets are bigger
● Line between “financial buyers’ and “strategic buyers” has blurred
○ Private investors are capturing and holding companies during their
highest value creation period ($20 to $200 million in revenue)
○ Value is created through growth, multiple expansion (via scale and sector
migration), and profitability
○ EBITDA still rules - both for inbound valuations and exit modeling
➢ Many portfolio companies have M&A credit lines pre-approved within
EBITDA ranges (target and/or consolidated)
○ Sophisticated software investors will invest on a revenue multiple
➢ Focus on growth, retention, CAC, LTV
○ Investors (PE funds) are staffed by former M&A bankers, and are highly
transactional
○ Assets typically trade up to the next tier of PE
6. Buyers - (continued)
6. Buyers (continued)
Announced Acquirer Target Target Country Acquirer Country Total Deal Amt. Revenue EBITDA Val./Rev.
11/23/2019 Creades AB
PRNT Printing
Solutions
Sweden Sweden $26,500,000 $12,965,600 2.04 x
7/4/2019 Vind AS StruSoft Sweden Norway $8,870,000
6/28/2019 Vaaka Partners Lyyti Oy Finland Finland $4,600,000
6/24/2019 Verdane Capital Reachmee Sweden Norway $5,550,000 4.00 x
6/19/2019
Thomas H. Lee
Partners
AutoStore Norway USA $1,880,000,000 $126,530,000 14.86 x
6/17/2019 Main Capital Partners Assessio International Sweden Netherlands
6/14/2019 Axcel PhaseOne Denmark Denmark $230,000,000 $69,920,000 3.29 x
6/6/2019 ABRY Partners DL Software Finland USA
6/6/2019 ABRY Partners
Computer Program
Unit
Finland USA
6/6/2019 ABRY Partners Cash-In Consulting Finland USA
4/11/2019 Nordic Capital Signicat Norway Sweden $19,980,000
4/3/2019 Francisco Partners EG Denmark USA $560,000,000 $182,000,000 3.00 x
9/6/2018
Insight Venture
Partners
Episerver Sweden USA $1,100,000,000 $75,862,069 14.50 x
4/19/2018 Apax Partners Solita Finland UK
This trend is very prevalent in the Nordics
6. Buyers (continued)
Source: http://www.nasdaqomxnordic.com/
Robust Finnish market
● Stable public companies
● Active investors
○ Seed
○ Venture
○ PE/Mezz
○ IPO
● Cross-border collaboration
○ Co-investments
○ Local ompetition for local
deals
6. Buyers (continued)
Source: http://www.clairfield.com/wp-content/uploads/2019-Q3-Nordic-Software-Report.pdf
https://www.nordhaven.com/Pdf/4818-news-nordhaven-quarterly-nordic-software-mocha-report-q3-2018.pdf
http://www.clairfield.com/wp-content/uploads/2017/11/Steinvender-Q3-2017-Software-Report.pdf
Q3 2019
24
Nordic software
transactions in Q3
2019
14
deals in Sweden,
Finland and Norway
11
transactions were
conducted by Trade
Buyers
9
transactions have
been identified as
PE – Add-on
17%
as PE-platform
investments
63%
of the transactions
had Nordic bidders
29
Nordic software
transactions in Q3
2018
22
deals in Sweden,
Finland and Norway
13
transactions were
conducted by Trade
Buyers
2
transactions have
been identified as
PE – Add-on
48%
as PE-platform
investments
45%
of the transactions
had Nordic bidders
Q3 2018
13
Nordic software
transactions in Q3
2017
9
deals in Sweden,
Finland and Norway
8
transactions were
conducted by Trade
Buyers
0
transactions have
been identified as
PE – Add-on
35%
as PE-platform
investments
46%
of the transactions
had Nordic bidders
Q3 2017
GROWTH MEZZANINE EXIT
%ReturnonInvestment
CONCEPT
7. Timing - Race Between Value Creation and Equity Dilution
● Reaching an exit will take longer than anyone thinks. Keep your burn under
control (on average, US companies exit 14 years after formation)
● Revenue is your best source of capital
● External capital allows you to say “no” to the wrong revenue
● Being “for sale” for extended time periods paralyze companies. Don’t do it
● Potential customers assume you will be gone in a few months. Convince them
otherwise, or they will be correct
● Know what a “champion” looks like. If you find one, latch on
● Get comfortable with M&A discussions. Don’t play games. Be confident,
forthright, and credible
You can win the race
7. Timing - Market Considerations
5 Year NASDAQ
5 Year Fed Funds Rate
● Sell Now?
○ Each day we are one day closer to a
recession
○ Fortunes are made by selling too early
○ Unprecedented appetite for tech deals
● Wait?
○ “Recession” may have happened in H2
2018 and Q1 2019, which means we are
at the front end of a new cycle
● Key Decision Factors
○ Time horizon (3+ years?)
○ Momentum, TAM, competitive threats
○ Vulnerability to market factors
Concept Growth Mezzanine Exit
8. Valuation
Acqui-hire Acqui-hire Acqui-hire Acqui-hire
Technology Technology Technology
Replacement Value Replacement Value Replacement Value
Time-To-Market Time-To-Market Time-To-Market
DCF DCF
Multiples - Peers
Multiples - Deals
Valuation Workshop - Summary
Valuation Workshop - Peer Group
Workshop - Precedent Transactions
Valuation Workshop - DCF
8. Valuation - Services
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
9. 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” standard, 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)
9. Execution (continued)
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. Execution (continued)
No Shortcuts
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
10. 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
10. Advisors (continued)
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?
Key Takeaways
● Start with the Exit in Mind
○ Do your homework
○ Align shareholders, management,
board
○ Understand the implications of
structure on deal value
○ Invest in financial agility and
reporting
○ Adopt a virtual data room early
○ Collaborate and communicate with
potential buyers early and often
○ Understand the valuation metrics at
different stages; agree on triggering
events that will launch a process
● Close a successful transaction
○ Hire experienced counsel
○ Hire the right M&A advisors
○ Run a process that creates, rather than
destroys, value
● Be hopeful and aggressive in leveraging technology and networks to disrupt
your market
● Build a brilliant, high-performing team that can inspire a larger company
● Study the “state of the art” in tech company building and build your company
to that standard
○ Tech platforms, architecture, documentation, methodologies
○ Strong leadership, aligned team
○ Clean and accurate financial reporting
○ Capital structure that enables cross-border M&A or capital raise
● Face outward. Communicate with potential partners, customers, M&A
champions
● Build a real business – an entity that will deliver profits to its shareholders
What did we just cover?
Execution - “Why Not Us? Why Not Now?”
Dynamic, Relentlessly Disrupted Market
● Google Search volume grew from 1 to 2+ Trillion in last 10 years
● In that period, “never seen before” searches held steady at 15%
Increasingly Efficient Private Capital Markets
● Capital available at every stage of growth; good teams with solid
plans will get funded
● Buyers for companies at every growth stage
Recent clients: leveraging technology to disrupt the market and win
Contact
Nat Burgess
Managing Partner
nat@techstrat.com
+1 (206) 920-4922
Michael Bolotin
Sr. Associate
michael@techstrat.com
+1 (425) 240-1947

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Start with exit in mind ! / Nat Burges

  • 1. Start with the Exit in Mind An M&A bootcamp for CEOs and investors Growth – Funding – Exit www.TechStrat.com
  • 2. ● Managing Partner, TechStrat (mid-market software, SaaS and TES M&A firm) ● 20+ Years in Tech M&A, transactions in 25 countries ● 100+ deals (Google, Microsoft, Intel, Symantec) ● Extensive PE Network (Completed transactions with Vista, Apollo, Tailwind, Intel Capital, Battery Ventures, Marlin, others) ● Angel investor, board advisor (Exits to Google, Microsoft, Yahoo, TNS, others) ● Frequent guest on CNBC and a nationally recognized speaker at industry conferences Your Presenter: Nat Burgess Nat Burgess, TechStrat Founder Undisclose d $203mm Minority Recap
  • 3. At some point, every mid-market company will need to make an M&A decision. Let an expert dealmaker guide yours. We are a Seattle-based M&A advisory firm with a global outlook ● TechStrat is an advisory firm that helps technology and tech-enabled service companies grow through M&A. ● Through our work, we are transforming the tech landscape, improving careers, and enhancing organizations. Our Process ● Creating and executing an M&A strategy requires a multidisciplinary approach that includes legal, financial and management expertise, and maintains strict confidentiality. Our Mission ● We help clients open new chapters in their lives and create opportunities for others. ○ When a deal closes, we want you to say "I'm glad I did that." Our Experience ● We've been at this for 20 years and have closed more than 100 transactions in dozens of verticals and with industry leaders like Google and Microsoft. About TechStrat
  • 4. Our clients are builders. They're smart people who have created value for themselves, their employees, and their partners. Typically, our clients are founders or Investors whose companies have: ● an enterprise value of $10-$150 million. ● differentiating technology and/or service that supports a competitive advantage in software, services or content. ● constraints to growth that are solvable through partnership/acquisition or capital. ● a genuine interest in effecting positive change for management, owners, employees, and partners. Team TechStrat Clients & Team Nat Burgess Managing Partner nat@techstrat.com Michael Bolotin Sr. Associate michael@techstrat.com Richard Horsman Sector Professional Ed Ossie Sector Professional ed@techstrat.com Vladimir Savoskin Sr. Analyst vladimir@techstrat.com Julia Tsemokh Sr. Analyst julia@techstrat.com
  • 5. Thank you for Welcoming us Back to Helsinki! Partners Past Clients
  • 6. Out of all the companies that raise Seed, Convertible or Series A funding, how many go on to be acquired? Question
  • 8. What happens to the other 83.3% of startups that successfully raise funding but aren’t acquired? As for the others. . .
  • 9. ● 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. . .
  • 10. ● 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
  • 11. What is the most common reason for emerging tech companies to sell? Question
  • 12. ● Running out of money ● Competitive Pressure ● Extended timeline ● Fatigue ● Conflict The sale is Reactive
  • 13. ● “Getting acquired by LRW positions us to achieve our 5 year plan in 2.5 years” - Amy Balliett, Killer Visual Strategies ● “Joining forces with Accenture gave us a complete security portfolio that will allow us to triple our revenue per customer” - Adam Cecchetti, CEO, Deja Vu Security ● “Together with Simpleview we cover 80% of the top tourist sites in the world, which makes us the leading global data provider in our segment” - Richard Veal, CEO, Tourism Media Strategic exits are proactive
  • 14. Start with the Exit in Mind: Key Considerations 1. Process 2. Alignment 3. Structure 4. Finance 5. Data Room 6. Buyers 7. Timing 8. Valuation 9. Execution 10. 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
  • 15. 1) Process ● Creates value ● ≠ “for sale” ● Keeps buyers honest ● Is inherently resilient ● Makes a market ● Takes only one buyer Outreach Diligence Close Launch Meeting CIM Negotiation Financial Model Valuation Data Room Independent Strategics Financial Sponsors Networkin g - 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 Preparatio n 6 Months
  • 16. What is the desired timeline, return, and tolerance for risk? 2. Alignment Sell now at 4x Revenue Sell in 3 years at 4x revenue Raise money, then sell in 4 years at 6x revenue Sell Exit Date: 12/31/2018 Revenue Multiple: 2020 2021 2022 2023 Revenue $3.00 $3.80 $5.00 $8.00 Equity Cash Flows $12.00 Business as Usual Exit Date: 12/31/2020 Revenue Multiple: 2020 2021 2022 2023 Revenue $3.00 $3.80 $5.00 $8.00 Equity Cash Flows $20.00 Raise Capital Exit Date: 12/31/2021 Revenue Multiple: 2020 2021 2022 2023 Revenue $3.00 $6.00 $10.00 $16.00 Equity Cash Flows -$3.00 $61.00 Low risk, known return Mid risk, variable return High risk, highly variable return
  • 17. ● Have the stockholders agreed on a target valuation? ● Are the stockholders sufficiently informed and sophisticated to understand the risks associated with a structured deal, and how the distribution waterfall works? 2. Alignment (continued)
  • 18. ● Tech leadership is highly valued, unemployment is near 0% ● Buyers place a high value on teams, and optimize offers in their favor Ownership: Management: 30% Institutional Investors: 65% Angel Investors: 5% Sellco term sheet: “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.” 2. Alignment (case study) Good news, Sellco shareholders! The board has received a buyout offer for $40 million!
  • 19. ● Investors want a return for the capital they put at risk ● Management wants to be compensated for their contributions, past and future 2. Alignment (case study)
  • 20. Motivation and Incentives ● Shareholders ○ IRR ○ Confidence (lack of confidence) in management ○ Status ● Board ○ Fiduciary duties, GRC considerations, shareholder value ● Management ○ Momentum, upside potential, valuation ○ Timeline ○ Future role, status 2. Alignment (continued)
  • 21. What happens when deals fail over lack of alignment? (case study) ● Buyout offer initially supported by management and shareholders ○ 8x ARR ($40 million) ○ 250% revenue growth (slowing); break-even ● CEO change of heart; “we have too much opportunity to sell now” ● Repercussions ○ Damaged relationships (shareholders, board, team) ○ Reputational damage; buyers talk to each other ○ Buyer immediately launched a search for a similar company and will invest $50 million competing head-to-head 2. Alignment (continued)
  • 22. “C” Corp 3. Structure - US Corporate Structure Investor and Management Considerations ● Investors don’t pay tax based on operating results ● Liability shield for investors ● Employees are used to getting options in a C-Corp ● No restriction on who can hold shares ● Clear separation of shareholders and management ● Potential for double taxation on distributions to shareholders Investor and Management Considerations ● “S”, LLC, Sole Proprietorship ● Flexibility in deal structure (asset or stock sale) ● Tax-efficient distributions to shareholders ● High flexibility in structuring rights associated with equity ● Limitations on ownership (“S”) ● 5 year look-back on change from a “C” to a pass-through Pass-Through Entity
  • 23. Stock or Asset sale - “C” Corp vs. Pass-Through Entity (e.g. “S” Corp) 3. Structure - US Transactional Considerations
  • 24. Finance is a strategic investment 4. Finance Finance impacts valuation: ● Quality of Earnings ○ Revenue Recognition ○ Reconciliation ● Accrual vs Cash ● EBITDA add-backs ● NWC ● Confidence in forecasts Example: Add-Backs captured $4M+ 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. “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”
  • 25. In Diligence, you are judged by your agility in reporting financial data 4. Finance (continued) SaaS Metrics: ● % ACV Growth ● Bookings, Recurring Revenue and Revenue Growth ● ACV and Net Expansion Revenue Growth ● Customer Churn (revenue and logo) ● ARRPA (Average Recurring Revenue Per Account) ● Customer LTV Service Metrics: ● Contribution Margin, Growth ● Utilization ● Customer concentration ● Average Revenue Per Customer ● Weighted Pipeline
  • 26. Cross-border considerations 4. Finance (continued) IFRS ● Principles-based ● Heavily reliant on notes ● IFRS is followed in must jurisdictions outside of the US ● International subsidiaries of US companies will usually have to report up in GaaP US GaaP ● Rules-based ● Less reliant on explanatory notes ● Required for US public listings; standard for sharing financials between US entities
  • 27. ● Maintaining a virtual data room is a basic corporate best practice ● Delay sensitive disclosures until you have high confidence (purchase agreement) LOI CLOSING Week 5 5. Data Room
  • 28. ● “Vendor Diligence” concept - using the data room assembly process to prep for third party diligence ○ Customer contracts requiring consent for assignment, or consent to transfer upon change of control of the company ○ Vendor contracts requiring consent for assignment, or consent to transfer upon change of control of the company ○ Defects in formation and/or organizational documents ○ Conflicting documents or other questions relating to the capitalization of the company ○ “Work for hire” agreements for employees responsible for developing IP 5. Data Room (continued)
  • 29. Big companies stagnate. They make acquisitions to spark culture and innovation 6. Buyers
  • 30. But they need you to build a company to their standard 6. Buyers Image credit: Michel Baudin (www.michelbaudin.com)
  • 31. ● “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 (continued)
  • 32. Find the overlap 6. Buyers Companies that should acquire me eventually Companies that we should partner with today BD FOCUS
  • 33. 6. Buyers (continued) ○ Fewer publicly traded companies now than in 1976 ○ Pubco P/Es and growth rates are down, acquisition targets are bigger
  • 34. ● Line between “financial buyers’ and “strategic buyers” has blurred ○ Private investors are capturing and holding companies during their highest value creation period ($20 to $200 million in revenue) ○ Value is created through growth, multiple expansion (via scale and sector migration), and profitability ○ EBITDA still rules - both for inbound valuations and exit modeling ➢ Many portfolio companies have M&A credit lines pre-approved within EBITDA ranges (target and/or consolidated) ○ Sophisticated software investors will invest on a revenue multiple ➢ Focus on growth, retention, CAC, LTV ○ Investors (PE funds) are staffed by former M&A bankers, and are highly transactional ○ Assets typically trade up to the next tier of PE 6. Buyers - (continued)
  • 35. 6. Buyers (continued) Announced Acquirer Target Target Country Acquirer Country Total Deal Amt. Revenue EBITDA Val./Rev. 11/23/2019 Creades AB PRNT Printing Solutions Sweden Sweden $26,500,000 $12,965,600 2.04 x 7/4/2019 Vind AS StruSoft Sweden Norway $8,870,000 6/28/2019 Vaaka Partners Lyyti Oy Finland Finland $4,600,000 6/24/2019 Verdane Capital Reachmee Sweden Norway $5,550,000 4.00 x 6/19/2019 Thomas H. Lee Partners AutoStore Norway USA $1,880,000,000 $126,530,000 14.86 x 6/17/2019 Main Capital Partners Assessio International Sweden Netherlands 6/14/2019 Axcel PhaseOne Denmark Denmark $230,000,000 $69,920,000 3.29 x 6/6/2019 ABRY Partners DL Software Finland USA 6/6/2019 ABRY Partners Computer Program Unit Finland USA 6/6/2019 ABRY Partners Cash-In Consulting Finland USA 4/11/2019 Nordic Capital Signicat Norway Sweden $19,980,000 4/3/2019 Francisco Partners EG Denmark USA $560,000,000 $182,000,000 3.00 x 9/6/2018 Insight Venture Partners Episerver Sweden USA $1,100,000,000 $75,862,069 14.50 x 4/19/2018 Apax Partners Solita Finland UK This trend is very prevalent in the Nordics
  • 36. 6. Buyers (continued) Source: http://www.nasdaqomxnordic.com/ Robust Finnish market ● Stable public companies ● Active investors ○ Seed ○ Venture ○ PE/Mezz ○ IPO ● Cross-border collaboration ○ Co-investments ○ Local ompetition for local deals
  • 37. 6. Buyers (continued) Source: http://www.clairfield.com/wp-content/uploads/2019-Q3-Nordic-Software-Report.pdf https://www.nordhaven.com/Pdf/4818-news-nordhaven-quarterly-nordic-software-mocha-report-q3-2018.pdf http://www.clairfield.com/wp-content/uploads/2017/11/Steinvender-Q3-2017-Software-Report.pdf Q3 2019 24 Nordic software transactions in Q3 2019 14 deals in Sweden, Finland and Norway 11 transactions were conducted by Trade Buyers 9 transactions have been identified as PE – Add-on 17% as PE-platform investments 63% of the transactions had Nordic bidders 29 Nordic software transactions in Q3 2018 22 deals in Sweden, Finland and Norway 13 transactions were conducted by Trade Buyers 2 transactions have been identified as PE – Add-on 48% as PE-platform investments 45% of the transactions had Nordic bidders Q3 2018 13 Nordic software transactions in Q3 2017 9 deals in Sweden, Finland and Norway 8 transactions were conducted by Trade Buyers 0 transactions have been identified as PE – Add-on 35% as PE-platform investments 46% of the transactions had Nordic bidders Q3 2017
  • 38. GROWTH MEZZANINE EXIT %ReturnonInvestment CONCEPT 7. Timing - Race Between Value Creation and Equity Dilution
  • 39. ● Reaching an exit will take longer than anyone thinks. Keep your burn under control (on average, US companies exit 14 years after formation) ● Revenue is your best source of capital ● External capital allows you to say “no” to the wrong revenue ● Being “for sale” for extended time periods paralyze companies. Don’t do it ● Potential customers assume you will be gone in a few months. Convince them otherwise, or they will be correct ● Know what a “champion” looks like. If you find one, latch on ● Get comfortable with M&A discussions. Don’t play games. Be confident, forthright, and credible You can win the race
  • 40. 7. Timing - Market Considerations 5 Year NASDAQ 5 Year Fed Funds Rate ● Sell Now? ○ Each day we are one day closer to a recession ○ Fortunes are made by selling too early ○ Unprecedented appetite for tech deals ● Wait? ○ “Recession” may have happened in H2 2018 and Q1 2019, which means we are at the front end of a new cycle ● Key Decision Factors ○ Time horizon (3+ years?) ○ Momentum, TAM, competitive threats ○ Vulnerability to market factors
  • 41. Concept Growth Mezzanine Exit 8. Valuation Acqui-hire Acqui-hire Acqui-hire Acqui-hire Technology Technology Technology Replacement Value Replacement Value Replacement Value Time-To-Market Time-To-Market Time-To-Market DCF DCF Multiples - Peers Multiples - Deals
  • 43. Valuation Workshop - Peer Group
  • 44. Workshop - Precedent Transactions
  • 46. 8. Valuation - Services 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
  • 47. 9. 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” standard, 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)
  • 48. 9. Execution (continued) 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.”
  • 49. 9. Execution (continued) No Shortcuts 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
  • 50. 10. 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
  • 51. 10. Advisors (continued) 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?
  • 52. Key Takeaways ● Start with the Exit in Mind ○ Do your homework ○ Align shareholders, management, board ○ Understand the implications of structure on deal value ○ Invest in financial agility and reporting ○ Adopt a virtual data room early ○ Collaborate and communicate with potential buyers early and often ○ Understand the valuation metrics at different stages; agree on triggering events that will launch a process ● Close a successful transaction ○ Hire experienced counsel ○ Hire the right M&A advisors ○ Run a process that creates, rather than destroys, value
  • 53. ● Be hopeful and aggressive in leveraging technology and networks to disrupt your market ● Build a brilliant, high-performing team that can inspire a larger company ● Study the “state of the art” in tech company building and build your company to that standard ○ Tech platforms, architecture, documentation, methodologies ○ Strong leadership, aligned team ○ Clean and accurate financial reporting ○ Capital structure that enables cross-border M&A or capital raise ● Face outward. Communicate with potential partners, customers, M&A champions ● Build a real business – an entity that will deliver profits to its shareholders What did we just cover?
  • 54. Execution - “Why Not Us? Why Not Now?” Dynamic, Relentlessly Disrupted Market ● Google Search volume grew from 1 to 2+ Trillion in last 10 years ● In that period, “never seen before” searches held steady at 15% Increasingly Efficient Private Capital Markets ● Capital available at every stage of growth; good teams with solid plans will get funded ● Buyers for companies at every growth stage Recent clients: leveraging technology to disrupt the market and win
  • 55. Contact Nat Burgess Managing Partner nat@techstrat.com +1 (206) 920-4922 Michael Bolotin Sr. Associate michael@techstrat.com +1 (425) 240-1947