Cashing in is not a simple process.
Software entrepreneurs are highly adept at running their companies, but typically
lack the many diverse skills required to exit successfully for optimum valuation.
The M&A process appears deceptively simple, but the vast majority of entrepreneurs
who have experienced it will invariably tell you it’s a complex, multi-faceted,
and oftentimes emotional process requiring a very special skill set. Doing it right
-- or wrong -- can translate to millions of dollars. Knowing how to position your
company, approach strangers, competitors and allies, field endless inquiries, negotiate
price, structure the transaction optimally, and survive due diligence, can
make all the difference. That's where we come in.
Software Equity Group has more than 15 years of investment banking experience and
success. We put our extensive industry contacts, skilled professionals and proven
methodology to work for our clients. Our goal is to guide them wisely toward the
achievement of their exit objectives.
Our approach to mergers and acquisitions is comprehensive, hands-on, and results-driven.
Though the actual process may vary, here's a step-by-step overview of our typical
We begin with an in-depth briefing
and strategy session. The twofold objective is to thoroughly familiarize our staff
with the client's technology, products, market opportunity, operations, finances
and M&A objectives, and better acquaint the client with our M&A methodology and
time line. We help clarify exit objectives and priorities. And we discuss how to
best present the client as a highly opportune acquisition candidate. This session
also serves as a "mini-audit" of the client, to identify and address likely obstacles
to a successful deal, including financial, operational and legal issues.
Our knowledge and network of software
company buyers is second to none. Developed over the past 15 years and updated by
our financial analysts continually, our database details virtually every buyer of
public and private software companies, all of their publicly reported transactions,
and their current areas of acquisition interest. We cull carefully from our database
to create an initial list of buyers, and each prospect is scrutinized for suitability.
Rather than target just a handful, as customary for many investment bankers, we
typically build a more extensive buyers list based upon our intimate knowledge of
this very dynamic sector, and our ongoing conversations with public software companies
and private equity firms who keep us closely apprised of their acquisition interests.
The final product is a carefully considered, client-specific, customized database
of promising prospective buyers.
Initial impressions are important, and presenting
an M&A opportunity is no exception. To effectively market our client to prospective
buyers, we typically prepare an Offering Memorandum that provides a detailed and
compelling overview of the company, its history, products, technology, target market,
market opportunity, sales and distribution strategy and capital structure. The Offering
Memorandum is not a business plan, but rather an M&A document tailored for a buy-side
M&A professional, CFO or CEO. Our objective is to carefully and strategically position
our client in language the buyer understands, clearly articulate the client’s value
proposition to the buyer, and elicit an enthusiastic positive response.
Even the most compelling exit candidate won’t sell if it
can’t get, and keep, the serious attention of prospective buyers. Most buyers prefer
to deal with a knowledgeable investment banking professional they know and respect.
SEG is well-recognized and highly regarded by most public software companies and
software industry financial buyers. Though we’re known as formidable advocates,
we’ve developed and maintained excellent relationships with these buyers for more
than 15 years. These relationships help to ensure our clients will receive serious
consideration by a prospective acquirer. As important, they provide us with unique
insight into the acquisition objectives and parameters of a great many acquirers,
enabling us to more effectively and strategically position our clients.
Before engaging in price discussions with prospective
buyers, we analyze the current market valuation of comparable public companies (applying
a discount factor because of their liquidity), as well as relevant M&A transactions.
With this baseline, we asses a host of client-specific factors which could enhance
or diminish the company’s value to a prospective buyer. Included in our assessment
are the client’s revenue composition, recognition practices and growth. We scrutinize
recurring revenue, cash flow and operating expenses, as well as margins and profitability.
We also consider the client’s current technology platform, product suite, target
market, market opportunity, competition, sales and distribution model and pricing.
Our objective is to provide our client with both an informed and insightful understanding
of the likely range of offers it may garner from interested buyers before negotiations
Once we’ve qualified interested buyers, we (or
they) typically suggest a get acquainted phone call. Participating on behalf or
the buyer will likely be the VP of Corporate Development, a division head or product
management senior executive, and a technical guru or VP of R&D or Software Development.
The discussion will be both far ranging and detailed, and is a critical step in
the process. Knowing and successfully addressing the different, and sometimes opposing,
roles of these participants is essential if discussions are to continue. We help
each client prepare for this meeting, providing detailed guidance about its PowerPoint
presentation, product demonstration, and many of the questions that are likely to
ensue. And of course, we participate and facilitate this initial discussion, as
well as follow-on meetings and discussions. After each teleconference or meeting,
we follow-up to solicit feedback from the buyer, addressing concerns and building
If the technology and products pass muster, and the buyer
determines there’s synergy and strategic fit, business discussions will likely follow.
A second meeting often demarcates serious from casual interest, and will likely
involve additional and higher level buyer representatives. Subject to a mutually
acceptable Confidential Information Agreement, detailed financials, future product
plans and specific revenue and earnings projections are ordinarily requested and
carefully scrutinized. This is one of the most sensitive stages of the process,
the buyer seeks to build internal consensus for the acquisition, assessing the synergies,
estimating the likely ROI, and addressing issues of concern.
Some buyers probe early on for the seller’s asking price, while
others conduct extensive pre-offer due diligence without ever mentioning price.
We prefer to defer price negotiations until we’ve had an opportunity to build value
and the buyer has begun to “invest” in the prospective transaction. At that time,
the discussions inevitably focus on valuation and price. With millions riding on
the outcome, price negotiations are not for the faint of heart. Success requires
skill, clear thinking, fortitude and patience. We are tried, proven and formidable
negotiators and we bring to the table experience, insight and instinct. Our principal
goal, of course, is to consummate a deal of maximum benefit to our client.
The structure of a transaction can be as important as
the purchase price. Many buyers prefer asset purchases that could have devastating
tax consequences for many sellers. Payment can take the form of cash, stock, options,
debt, earn outs, and post-closing employment and incentive compensation agreements.
There are countless combinations, each with tax ramifications, many with significant
upside, and some with substantial risk. The deal structure must address and accommodate
such disparate factors as the financial needs and risk adversity of the seller's
principal stockholders, the buyer’s financial condition, and the financial, reporting
and regulatory compliance impact the proposed structure will have on the buyer.
Working closely with our clients, in concert with their accountants and lawyers,
we explore options, clarify goals, and help eliminate the confusion.
Once there's agreement on
the price, structure and terms of the transaction, the parties will ordinarily sign
a non-binding Letter of Intent (LOI), which serves as a precursor to a formal contract.
As the LOI is drafted and reviewed by the parties' attorneys, we assist in addressing
and resolving issues as they are identified. Due diligence usually follows quickly
after the LOI is signed, and may consume the client's attention for a period ranging
from 30 days to several months. We acquaint clients with the due diligence process
early on so they can better prepare, and assist in helping resolve issues when they
arise as a result of due diligence. More deals crater at this juncture than at any
other phase of the process, and these potentially fatal issues must be anticipated
and addressed with skill and aplomb.
Timing can vary widely from several weeks to many months depending on the state
of the M&A market, the client’s product category and target market, the complexity
of its products and related technology, the number and type of prospective buyers,
the availability of GAAP-compliant historical financial data and projections, buyer
review processes and approval cycles, the style and experience of each party's lawyers
and accountants, the nature and scope of due diligence issues, and the seriousness
of issues resulting from such due diligence. It ordinarily takes from three to eight
months from the inception of the process until an LOI is signed, and another two
to four months before the signing of definitive agreements and closing.
Our fees are comparable to those charged by other established and successful investment
banking firms. The services we perform for our clients represent a substantial investment
of time and resources. Ordinarily our team of highly skilled and experienced investment
bankers and financial analysts invest many hundreds of hours in each client over
the course of our engagement. We receive a monthly retainer and expenses to defray
these up-front costs. In addition, if a transaction is consummated, we receive a
commission, or "success fee" at closing that is based upon the total value
of the transaction.
For many sellers, this can be a confusing and stressful time. We take seriously
our roles as advisor, advocate, and confidante. While we may not have all the answers,
or a crystal ball, we are committed to listening carefully, communicating frankly,
counseling wisely, and keeping our clients apprised throughout the process.