M&A advice from an investment banker

One of our portfolio companies is exploring a sale, so we’re talking to investment bankers. Below are some of the interesting insights from those conversations:

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, and for some bankers, $10mm.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.

Having a buyer in hand helps. If you’re under $5mm of ARR, 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. Investment bankers either want you to have scale ($5mm+ of ARR) or they need to believe they’ll lose you because you have someone else ready to buy.

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, and do the legal docs to close the deal. Make sure you have enough cash to get through the process.

Establish partnerships. One of the CEO’s most important roles is to establish partnerships with bigger players that could be acquirers down the road. 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.