Advice from Investment Bankers about M&A

One of our portfolio companies is exploring a sale as a result of some interesting inbound acquisition interest as of late.   As a result, we started interviewing investment bankers right away to help advise us through the M&A and potentially surface other acquirers.  I’m a big believer that a good investment banker can be the difference between a great exit and no exit, and I’m a proponent of at least talking to bankers as soon as you have some real acquisition interest that you would actually consider.  We’ve been ‘banker dating’ as of late and have learned a lot about the markets from these professionals.  Below are some of the interesting insights:

 

-You’re not the only one who wants to exit.  One banker stated “Google sees upwards of 2,500 companies a year they could potentially acquire.”  Another mentioned “Adobe receives dozens of companies every week that want to be bought.”  There are a select group of buyers that are being bombarded with M&A, so your value proposition needs to truly fill a hole for them, because buyers like Google and Adobe only acquire companies that fill a strategic need. 

 

-VC are overpaying for SaaS companies.  More than one banker stated told us a good SaaS business typically sells for 3x to 5x recurring revenue.  Think about that next time you see a Series A or B company asking for a valuation that is 20x revenue. 

 

-You need to get to $5mm in ARR.  According to some of the bankers, $5mm in revenue is the point at which large acquirers consider you to have truly proven there is a market for your product that they can then scale.

 

-If you don’t have $5mm in ARR, then someone is acquiring you because they really want your tech and team, and if it’s a price you like, then in all likelihood the price they pay will have a non-sensical multiple.  In order for an investment banker to get excited about helping you, in this case you need to have a real buyer at the table now so the banker can use that offer to entice other acquirers to the table.        

 

-Selling the business takes time.  A good banker needs at least 4 to 6 months to fully explore the market for acquirers, help you negotiate the highest price with one, and do the legal docs to close the deal.    

 

-Establish partnerships.  One of the CEO’s most important roles is to establish partnerships with bigger players that could be acquirers down the road.  Familiarity breeds comfort and your most likely acquirer at a crazy multiple will most likely be a partner.  It’s hard to get acquirers to pay big numbers when they’ve only known you for a few months.    

 

The overall take-away from many of these conversations is that getting acquired is much harder than it looks so make sure you’re growing your revenue base to at least $5mm (it shows scale), establish partnerships (partners will be your most likely buyers), and be patient.

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