Approached by a Strategic Buyer - thoughts?
March 10, 2023
by a searcher from Harvard University - Harvard Business School in Fairfax, VA, USA
Anonymous for NDA reasons, but I'm an operator (former successful self funded searcher) who has been approached by a Strategic acquirer who owns one of our main competitors. Our company is a Compliance related tech-enabled services business with strong recurring revenue and no assets/Capex. We'll hit EBITDA of ~$500k (unadjusted) end of this year and the Strategic is probably 15-20x larger than us. If we combine, they'll get client/geo expansion, price uplift, cross-sell, and cost-out synergies (plus the EBITDA of course). I am interested in selling since this could mark a good exit (and would very beneficial for our current employees as well)
Main question is what sort of transaction price/exit multiple should we aim for? Any thoughts or watch-outs on negotiating with them? How can I protect my employees? I'm humbly requesting any input or advice because these guys are much larger and I'm worried they'll lowball or take advantage of a young inexperienced operator.
Thank you!
from The University of Chicago in Chicago, IL, USA
1) You need to assess "barriers to entry" and/or "risk of "losing customers or employees". Such risk depends on your product/service, as well as who the buyer is. In general, PE buyer is riskier. "Barriers to switching" by your customers also play a role in this decision. Keep in mind before closing, you will wind up disclosing lots of data (customer name, key customers, product details, pricing, location etc.). DO NOT depend on the NDA.
2) There are many ways (each situation specific) to minimize. almost eliminate, such risk. ^redacted as pointed out some ways. I have done multiple deals where we managed critical/sensitive information disclosure till later (in few cases AFTER closing) while making sure buyer is made comfortable with needed data. This can involve things like timing, camouflaging, escrow, white-out, etc.). We clear-up this subject before the LOI is signed,
3) Valuation: I will make an over-simplifying statement that I have done in my classes. Strategic buyer (A) pays the same multiple as a non-strategic buyer (B). The difference is EBITDA for A is more than B. An example: Sold a cloud-based product company (when these were just coming up) for 3 x gross-profit but it was 60x EBITDA. Client had few years of history and growing recurring revenue. But had 2 M of R&D that the buyer would not need. The adjusted EBITDA was $100 k, but to the buyer it was $2.1 k.
4) Example #2: Recently I was representing a strategic buyer (10-20x more than the Target). Seller insisted on LOI w/o before sharing a single piece of financial info (no sales, no profit, but he shared the number of employes). He wanted 12x, we offered 9x and then negotiated. After the LOI, we found that his sales were half of what we expected, and his $ profit was twice what we expected. We proceeded to close but could not b/c the European parent made a large acquisition UK which derailed ours. Seller was not at-risk b/c his business could not be duplicated.
5) My main point is protect yourself first.
from Tufts University in Jersey City, NJ, USA
If there's any brokers/intermediaries in your industry that you trust, I'd give that strong consideration. A bad broker is just another mouth to feed, but good brokers do exist and add value to everyone involved in the transaction. They'll be able to help you validate valuation, but also to keep the transaction driving forward logistically.
For a strategic acquisition, it would be worth thinking about what tangible "extra" value a strategic buyer might be getting out of the deal that a non-strategic buyer might not and see whether you can structure that in. If there's some sort of clear line that you can draw to higher pro forma performance than current (both based on your own growth, and synergies gained by rolling into their company), whether baking that directly into initial valuation or structuring an earn-out, if your company is worth more to them than to a random buyer - you should have that value reflected to you in the sale.
As far as "protecting" existing employees - at a minimum, never take a verbal commitment when you can get something in writing. Buyers aren't going to like that, but for the exact same reasons why you'd want things in writing. This is where a good broker will help as well, as they're going to be familiar with smart structures to ensure value and protections are delivered to employees without undermining the process or value to you as a seller.