Mergers and Acquisitions: Strategies for Optimizing ROI for Investors

By Bill Leetham

All privately-funded companies reach a point when, at some point, investors and founders want to receive a return on their investment. And while some startups exhibit the business models, revenue growth, market share and earnings potential to go public through an IPO, very few check all the boxes and make this move. Thus, acquisition becomes the most likely exit scenario and liquidation event for many startups and their investors. But as most of us know, in sell-side acquisition scenarios and transactions, a lot can go wrong. And every misstep can reduce investor returns and future growth potential for the acquiring company.

While a partner at FLG, over the last six years, I have personally helped manage seven M&A transactions delivering $240 million to investors with another $40 million in investor equity. Over the course of my career, I have learned how to successfully plan and execute sell-side deals so that investor expectations are met, and investor returns are maximized.

A good rule of thumb is this. If you are a CEO at a startup, every time you consider a new investment from an outside investor, you should always conduct a “What if I sold?” analysis. Why? Because prior to every investment, you must always decide how to maximize return to existing shareholders. In most cases, after an investment, you will not only have dilution in the company’s value, but you will likely also have a previous investor with a preference to receive cash ahead of company founders. You need to be able to show that taking and effectively using the new investment over the longer term offers superior investor returns (present value of future earnings + sale) to selling the company outright today. This analysis can be somewhat tricky, but a seasoned CFO can help CEOs analyze alternatives and negotiate transaction terms. FLG Partner’s experienced M&A CFOs are a perfect place to start.

POSITIONING A COMPANY FOR ACQUISITION

Always Be Prepared

So how do you effectively position your company for acquisition?  I recommend always keeping yourself “ready” for an acquisition because frequently, acquisition opportunities to sell arrive unexpectedly and you should be ready to move quickly so that your term sheet gets negotiated and your deal closes before a competitor’s.

Network with Potential Buyers

Preparation for an acquisition begins with networking. The CEO should establish a relationship with potential buyers in their market and then internally explore the opportunities for synergy between the two parties. The CEO should be clear on the benefits of executing the acquisition via different strategies and structures to optimize market and customer opportunities. Assets and risks should be reviewed along with proprietary rights and barriers to entry that the combined entity might benefit from. A strong CFO can often be a “multiplier” in the planning and execution of an acquisition. If they work with the company long enough prior to the acquisition, they can help highlight these opportunities and drive strategic change in addition to managing the transaction itself and maximizing company valuation.

Get Prepared for Due Diligence

There are many, many terms to negotiate in an acquisition beyond the sale price itself. All $10.0 million offers are not the same in terms of value to investors. A strong CFO can deliver better performance analyses, more detailed and grounded revenue and profitability forecasts and solid due diligence to prospective buyers. These important foundations enable a company to reduce buyer risk in the acquisition transaction and typically, put more money in the hands of the company’s investors by optimizing the company’s selling price. Many buyers also insist on an escrow of some percentage of the sale proceeds to pay for unknown liabilities of the seller. Better forecasts and due diligence assistance can often reduce the escrow percentage demanded by buyers.

Update Cap Tables Annually

Capitalization tables are a list of shareholders and shareholder rights. Unfortunately, cap tables as they are referred to in the finance arena, are often poorly maintained and managed within the Company and even by outside counsel. Don’t let this happen to you. Buyers will always ask for your capitalization tables and if they aren’t kept up to date, it is a nightmare to retrospectively compile prior year data. Each year, your CFO should reconcile your payroll to the general ledger and keep current a list of total compensation paid to every employee. Keep all third-party agreements and contracts (including those with employees and contractors) scanned and available on a server or in the cloud.

Retain the Right Legal Counsel & Banker

If you are preparing for an acquisition, your existing legal counsel may or may not be the right choice to assist you through this transaction. Make sure you know whether your outside attorney is experienced with other acquisitions. If not, get one who is.

But what about your investment banker? I am often asked “do I need an investment banker for our acquisition”? While not strictly needed typically for most acquisitions, an investment banker can help manage more complex acquisitions which involve multiple potential buyers as well as assist with price negotiations. A skilled investment banker can negotiate a price that is higher than what a company might have received otherwise and well in excess of the bank’s fee. Just be aware that most investment banks will require 4-6 months to execute an acquisition, so they are not usually engaged at the last minute.

EXECUTING THE ACQUISITION TRANSACTON

During the acquisition transaction itself, the CEO and CFO have to work very closely to close the deal and must trust each other implicitly. While the CEO will typically work with the buyer on product positioning and the post-acquisition integration, the CFO partners with the myriad accountants, lawyers and tax people to conclude the transaction.

Acquisitions go much more smoothly if the CEO and CFO develop clearly defined areas of responsibility and trust each other to deliver. Post-acquisition, the CFO will work with the buyer to make sure all accounting issues are closed and the transaction concludes as expected.

If your company is considering an acquisition as an exit strategy, you’ll want a experienced M&A CFO sooner rather than later. FLG’s CFOs deliver outstanding results on both buy side and sell side transactions. Give us a call.  We’re happy to help.