How to pull-off that magic phrase: M&A

By Martin

Starting a business has never been easier than today. Building, testing and giving-up-on or creating a company from an idea can be done quite quickly these days. What do you need? A laptop. And an idea.

Across the world, more and more people start companies — which is great! This is how innovation is born and there are many great ideas which turn into real business, generate revenues and create value, jobs and interesting products.

People create startups due to many reasons: hating the nine-to-five routine, not agreeing with their bosses, dreaming of entrepreneurial freedom, helping people, and of course: money.

Building a fast growing start up, created many young (sometimes also very young) multi-millionaires or even billionaires. Mark Zuckerberg is estimated to be worth about US$35 billion. Needless to say, that’s a lot of cash.

Looking back in history, there were no businesses valued at billions of dollars which did not have assets — like oil fields — machines, buildings or physical products. Today, it is common.

Uber, Airbnb, Instagram and of course Facebook — these multi billion dollar business models were created with a laptop. And the Founders? Not tycoons but rather geeks, coders, dreamers.

Also Read: Concrete advice for raising money, straight from an M&A specialist

There is even a long list of startups sold after just a few years, months or even weeks. Some of them probably too early — but that’s another story.

Let’s have a look what selling a company really means for an average founder and test some hypotheses:

  • Selling a company is not more complicated than selling a used car
  • Valuing a start-up is easy
  • I will wait until a buyer will approach me
  • If I don’t sell today, I will sell tomorrow
  • After the acquisition I will sail the world.

Hypothesis: Selling is easy 

Not in many cases.

When a company has reached the point of sale — whether it be to a larger corporate, a financial investor or to a competitor — the Founder has probably spent many years of hard and dedicated work. Now, when it comes to selling the business, it will be an easy move compared to building a company. Right?

But selling an entire company is far more complicated than selling a used car.

There are people involved, assets, product and customers. Data, like KPIs, contracts, financials, which have been collected over years, has to be structured and presented in a clear and understandable form.

The lucky ones will find a buyer who understands their business model, knows the drivers behind the financials, has an idea how to further grow the business.

But, for everyone else, they need to be very well prepared to answer all questions and make sure the business is 100 per cent transparent.

It’s not only about preparing presentations but also the calls and meetings with the buyer’s advisors, tax specialists, product managers, SEO experts, technical consultants and lawyers — just to name a few.

Although leadership can set up an internal team for the transaction, the Founder will be the main contact during the entire process.

Keep in mind, that selling a business or raising funds can take up to six months or longer, and it is essential not to lose focus on operational activities during this time. Many transactions fail because of negative due diligence findings.

I saw many founders struggling. And these are people used to working 60-80 hours a week. But adding at least 20-40 hours a week for a 6 months period can be really tough.

Valuation of a startup is easy

There are several valuation techniques used to estimate the value of a business, let’s have a look on the most common ones:

  • DCF –  Discounted Cash Flows (projects the company’s future unlevered cash flows and calculates the present value and the terminal value using an appropriate cost of capital and terminal value methodology).
  • Comparable company analysis (estimates the value of the business via an analysis of similar companies’ trading and operational metrics).
  • Trading multiples (applies multiples derived from similar or comparable precedent M&A transactions).
  • The most important one, which can be called “sui-generis”. That means the value the seller wants to get for the business.

In fact, there are many numbers, KPIs, uncertainties, market impacts, synergies and other factors which have to be included into a convincing valuation in order to achieve and defend the highest selling-price for the shareholder.

Valuation of startups and fast growing companies are different than valuing an old-economy business with very predictable numbers. Making the valuation process even more complicated.

Relax and wait until the perfect buyer approaches me

While startups are growing and changing fast. Also the market does. If you start building a company, think ahead and think on a potential exit from day one on. When it comes to an exit, whether it is 6 months or in 15 years down the road, all Founders will be better prepared by thinking and planning ahead.

It rarely happens that a buyer approaches a Founder. Once the decision to sell a business is made, in most cases it is the Founders responsibility to find the market and sell the company. That means establishing connections to potential buyers, pitching, negotiating and much sweat and hard work — again.

Also Read: How to pick the right M&A investors for your startup

But be careful how to proactively approach the sale. Running across the market and telling everybody that the company is being sold is dangerous and can scare away customers, employees and potential buyers.

If it is not communicated it in the right way, selling a business can be mistaken for being in trouble.

Timing is key

Within a fast growing industry, timing is everything. Mark Zuckerberg refused to sell Facebook for US$1 billion — a smart move if we look the Facebook’s market cap today.

But it’s a dilemma every business must face. When can a company be sold at the highest price? Should the Founder take 10 million today or wait 2-3 more years and get then 100 million instead?

Or will somebody build a better product during this time period and the company won’t be worth a penny anymore?

Depending on your industry and business, timing can be key and decide about millions on your account.

Done. Company sold. Bahamas here I come!

In 99 per cent of cases, it does not matter if the company is sold to a strategic or financial investor, they won’t let the team walk away immediately.

The founding team knows the business like nobody else and there are long-term relationships that have been built over time.

The buyer is not just buying the business, he is buying the people.

Of course, he won’t keep the Founders around for 10 years they express unhappiness or a with build another business. But for a certain time period — usually between 6 months and 3 years — Founders need to stay on board to integrate the company and educate new hires.

Also Read: Beijing-based programmatic advertising company PapayaMobile goes public to fuel M&A plans

A huge portion of the payout will depend on being a quality captain while the business navigates the M&A ocean. The term is called ‘earn-out’. For example 70 per cent of the purchase price will be paid upfront and the remaining 30 per cent will be paid after the transition period and it usually includes incentives to further work on improving the company’s performance.

What’s the conclusion?

M&A is not easy and probably will never be.

Selling a business if far more complicated than selling cars or any other commodity. Each company is different and each buyer is unique.

Although there are certain standards within the process, none looks like the other. Buyers have experienced M&A specialists on who know how to look at a company and how to handle the deal. There is no reason the Founder should not have this as well.

The right timing, professional preparation and a well executed process help to maximize the price and sell your business effectively.

Searching for a buyer is a very sensitive process, there are many risks included (reputation, customers, your bank), so communication and approach of the right people is key. As already written in my last e27 article, do not hesitate to talk to people who have the experience.

M&A activitivies in SEA have increased dramatically over recent years. In Thailand, just to name one example, more and more international buyers and investors monitor the markets and look for potential acquisition candidates actively.

So be prepared.

This article entitled “How to pull-off that magic phrase: M&A” originally appeared in e27.

Martin is the Founder of GeeXstar, the first and only M&A boutique exclusively dedicated to startups, media and tech companies in Southeast Asia.

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