Collectively and individually, our global team at Corum has sold, started, operated, advised, recapped and raised capital for more tech companies than any other firm in the world. If you choose to work with us one day, you’ll have access to over thirty technology CEOs who have experienced a lot, changed lives, created a lot of wealth, and helped people fulfill their dreams. Through our work and events, we’re fortunate to talk to thousands of CEOs and founders every year, and I’m often surprised by statements made by CEOs when they think about their M&A and growth playbook. Some examples include:
- Our board wanted to see if we could close this one deal ourselves because they didn’t want to run a process, and we thought there was a good fit.
- It felt right, so we shared information with them and received a low offer.
- I know we left money on the table.
- I’ll use my law firm to help with the business terms of an M&A deal.
- Mentally, I’m fried, but my investors want me to keep going.
M&A can be counterintuitive. Why sell when things are good? We just signed a new contract with a tier-one vendor to open up a new market – we’ll wait to see what happens with that, and we’re super excited about the new partnership. We’ll wait to reach a financial milestone before entering the market because our investors want a certain return. On the surface, these all make sense. However, you can’t time the market. Not only are technology markets moving too fast but given what is happening with paradigm-shifting technologies such as generative AI, there is no certainty about what the market will look like in 12 months. What will you do if your technology stack is not up to date and your customers ask whether your products are GenAI-enabled, for example? Your sector, customers, competitors are all changing in ways we haven’t seen before.
In the example above regarding not having AI in your tech stack, your pipeline will likely stall. That new partnership that you’re excited about; those companies are going through a transformation themselves. What happens when the champion leaves, or they do a reorganization? Your go to market is blunted and it is back to the drawing board. We see this happen all the time.
You may have attended one or some of our conferences. We talk a lot about the single biggest failure in tech M&A, dealing with only one buyer. Right up there next to that is failing to calibrate the market early enough to understand what is happening in your sector. Certainly, you know what is happening when you’re trying to win and lose customers, but do you have an objective understanding of the macro conditions in your market from the perspective of your business surviving and thriving over the next 12 months? By the time a press release comes out for a competitor or new market entrant, it may be too late. Most companies only think about answering these questions when considering their exit or recapitalization. But is this enough? Is this too late? Should you rethink your approach to M&A or a recapitalization?
As a firm, we talk to thousands of buyers, investors, CEOs, founders and CFOS every year. There are patterns that, at first glance, aren’t that obvious. We see companies that want to test the market on their own, have board members that have no idea what the company is worth and turn off buyers by professing to be the next unicorn with less than five million in ARR. Or CEOs who don’t understand the negotiation fabric between themselves and prospective buyers and damage it or unknowingly set a ceiling on the value of their company. Optics matter.
As the CEO of your technology company, you are the key determinant of the company’s future ability to deliver business results and shareholder returns. Over and over again, we do see CEOs miss the mark because they don’t understand the state of play in tech M&A. You don’t know what you don’t know, or there is a bit of hubris because they’ve done it before.
Let’s delve into some common themes we see repeatedly.
Wasting your shot: Responding to an inbound inquiry from one buyer in a vacuum is a common approach for the CEO. “We wanted to get a sense of what we were worth and just signed a NDA.” Not only will you likely anchor your company to a valuation, but you’ll also lose a lot of leverage with a buyer. The shortest path is often the least optimal. Signaling to a sophisticated acquirer that you’re accepting their terms without others at the table is playing with fire and could hamper your ability to do an optimal transaction with a likely acquirer.
Running a process distracts the CEO and business: It can be if you try to do it yourself. I’m 100% sure that if you talk to the market, you’ll think about your business differently. These insights may be more important than the transaction itself. Not only for you personally but for your stakeholders. Moreover, if you look carefully at the time and energy you invest in talking to one buyer, you could talk to 100 if you run a process with the right investment bank.
What about the structure-It’s not just the multiple or EV: This always surprises me; CEOs always want to know what their business is worth but don't understand that structure is more important than price. They also haven’t educated themselves on how the balance sheet works in M&A and get a wake-up call when it is time to negotiate the working capital and indebtedness.
Failure to understand the leverage you’ll need: In M&A negotiations, leverage is sometimes obvious, but other times, it is hiding behind corners you can't see. These are complex negotiations and a journey. This is a two-way street with your acquirer/investor, and you’ll want to have the confidence to complete a transaction and walk away if it isn’t the right fit. If you are dealing with a single buyer, you’ll lose this leverage, and it is not only about the enterprise value or key terms. What are you going to do if a buyer re-trades the deal? What will you do when, a couple days before closing, the acquirer tells you they will move your team from Vietnam to India? Will you accept the re-trade or have the confidence to move in another direction?
Looking for bidders versus looking for partners: When is the bid date? I hear this a lot from acquirers. It’s the right question if you are looking for a bid. Is that what you are looking for, however? Your tech company isn’t real estate. For many of you, it’s your life’s work. Or perhaps it’s your legacy. Or it’s the realization of getting your idea to the next level. Knowing you were “right” about solving for something in the market. Knowing that you saw something nobody else saw, people used that idea you packaged up in software or a service and paid you for it. Do you want a bid for your company or something more?
Fiduciary responsibility: Do you have a fiduciary responsibility to see if you can get multiple offers on your business? By the way, not only for your shareholders, but do you have this responsibility to yourself? It’s important to understand this when qualifying investors and how they think about the exit. I hear CEOs talk about “smart money” – investors that can help with more than just a check. You know, connections and access to channels, for example. But what about “really smart money”? Investors you are aligned with on the timing of an exit or recapitalization in the future. What is the investor(s) perspective on an exit or recapitalization, and how they can help you by being on your cap table? Do you know? Have you asked? The company you keep is critical and could impact you and your business. This is not something where you can “kick the can” and see what happens after you’ve taken on an investor. Get this on the table early with your potential or existing investors.
Move with the herd: Most transaction metrics aren’t disclosed publicly. How will you know what your company is really worth without calibrating the market? No two companies are the same, and no two acquirers are the same. So, how will you, know your company’s strategic value without running a process? What will you do – listen to board members in a vacuum? Guess at some comps with smart money? Choose any sector; maybe 10% of the transaction values are disclosed. Are you going to rely on that sample size to make a determination of your company’s value? Does the knowledge matter more than the valuation?
Preparedness: The truth is, you’ll never be completely prepared. There will always be things to work on in the business. Building a good business inherently means that you're always changing and improving, whether it is the team, the product, or something else. Adapt or stall, or worse, die. Also, remember that calibrating the market doesn’t require you to take an offer. When you choose to go out to market to run a process should be considered carefully and your team should be aligned on the goals.
In today’s M&A and recapitalization environment, good enough is sub-optimal. Unless you run a professional process, you may never know what is possible. Sure, a transaction with one buyer may be a good, but the stakes are too high, and the waters are moving too fast to do this yourself. We see it all the time. Timing is everything, and you can’t time the M&A markets. Contact us if you want to discuss M&A and recapitalization activity in your sector.