5 Things Founders Should Pay Attention To When Potential Acquirers Come Knocking
February 15, 2022 | Stefan Palios
- Don’t let excitement get the better of you; focus on preparation in order to maximize your exit outcome.
- Avoid getting a valuation offer until a potential acquirer has seen the good and the bad of your business. You want an offer they will stick to.
- When an offer is on the table, do some soul searching to understand if acquisition is what you really want for your business.
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Whenever a company gets acquired, employees celebrate. But the real winners are the investors who took a big bet and won. In Canada, few have successfully made as many big bets as JMI Equity (‘JMI’), investing in successful companies like Eloqua, Intelex, Benevity, and PointClickCare. Dave Greenberg, a General Partner at JMI, has seen all of these exits and many more in his 15 years of experience. Over the years, he’s also seen trends emerge about what founders need to think about when a potential acquirer comes knocking on their door. JMI focuses on software companies but Dave’s advice is relevant for any company looking to transition or exit.
1. Aim for 1+1 = 3
“As an investor, one of the first things I look at is how excited the potential acquirer is,” said Dave. “That’s the biggest driver of valuation.”
Assessing excitement comes down to one thing, said Dave: Ask how your company will fit into the acquirer’s business. If there isn’t a clear answer around product integrations, data integrations, customer fit, or something similar, then chances are the excitement isn’t there. That doesn’t mean you can’t continue talking, but be aware that it might be more exploratory than serious for the acquirer.
But when there is fit, you can move quickly. This is what happened with AutomotiveMastermind, which exited to a strategic acquirer only 12 months after JMI invested.
“The company interested in acquiring AutomotiveMastermind already owned Carfax, which had significant automotive data,” said Dave. “It was clear that they felt their data would make the AutomotiveMastermind product even better. They were viewing it as a one plus one equals three kind of deal.”
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2. Transparency wins
A common mistake founders make is giving high level details and vision, then asking for a price too soon. Dave said this is a mistake because any “skeletons in your closet” will be found out during due diligence, which could harm the deal.
“People are doing more diligence than ever,” said Dave. “You don’t want to give less information, get an offer, then have the counterparty need to do two months of due diligence to confirm your information. It gives them the opportunity to change their mind or back off, saying they didn’t have the full picture when they made the initial offer.”
Dave’s advice for founders is not to give up all the details in the first meeting. Instead, keep it focused on vision and high level information at first. If there’s real interest, offer to enter a confidential period where you can share everything - the good and the bad - in more detail. Only then should you ask for a valuation.
“Literally say: don’t give me a valuation and terms until you really understand my business - I want something you’ll stand behind,” said Dave.
3. Be a skeptic
Potential acquirers are often very complimentary and might casually throw out huge valuations just to see if you get excited. However, Dave said the first conversation is far more likely exploratory, and those compliments have little behind them.
“Founders are typically salespeople, so they have a propensity to be sold,” said Dave. “But everyone has to be a skeptic when a potential acquirer comes to the table.”
Dave recommends founders ask if the acquirer has ever made an investment or acquisition in a similar space to your company. From there, listen for how they talk about your market: do they mention names of influencers you’re familiar with? Finally, pay attention to their follow up. If they mentioned they would do something on the call, did they follow through? If none of these line up, that’s a red flag that someone’s likely just in it to explore, not make a deal.
4. Go slow to go fast
A big mistake Dave advises against is trying to move too quickly. He said in the vast majority of cases - even when you have perfectly clean and transparent financials - an acquisition deal will not go any faster than 8-10 weeks. With that knowledge, use the couple months you have to get super prepared with your financials and your vision. Then you can move quickly.
“One of the best pieces of advice I can give is: be slightly less excited, and get as prepared as you can so you can maximize your outcome,” said Dave.
This is what happened with Intelex. The company had three likely acquirers reach out in the span of a week, said Dave. But CEO Mark Jaine took a step back and focused on preparation, refusing to be pushed to move quickly over moving correctly. In the end, the company had a huge exit to Industrial Scientific for over $500 million USD.
5. It’s ok to be selfish
When AutomotiveMastermind was on the cusp of acquisition, Dave sat down with the two founders and asked a simple question: is this what you actually want?
Exiting was not initially on the founders’ minds, said Dave because there was still a lot of potential within AutomotiveMastermind to grow as an independent company. By unearthing those concerns, Dave, the AutomotiveMastermind founders, and the acquiring company were able to have a discussion about how the deal would be structured.
“The founders wanted to learn why this company was so interested in the business,” said Dave. “Over a three month period, they spent time learning their culture, talked to other businesses they acquired, and did some soul searching about whether they wanted the company to stay independent.”
In the end, the acquisition went through with a structure that allowed AutomotiveMastermind to operate semi-autonomously within the acquirer’s corporate structure. There were also growth incentives in place for the two co-founders, meaning they could still be the growth-minded leaders they were when the company was independent.
Don’t knock Canadian ambition
Dave is very bullish on Canada, noting that over half of the top 25 largest Canadian exits have happened in the past two years alone.
“Canadian companies are more ambitious and more interested in staying independent for longer,” said Dave. “But there’s also a lot more exit activity, which will be amazing for Canada and for SaaS software. There’s just more people, with more money and more experience, in the angel and startup executive community.”