Insights into Value Creation and Exit Trends for Technology Companies
This Edition's Topic
Insights from Corporate Strategic Investors:
How to achieve a successful strategic exit and obtain an optimal valuation.
98% of all tech company exits are done via corporate strategic acquisitions. They also happen fast with the most common age at exit being year 4. With these facts in mind we interviewed corporate development executives that are making acquisitions to uncover advice they would give to tech companies seeking a successful exit at the optimum value possible.
The Quick Advice
Build a market leading solution, create buzz, and generate rapid revenue growth
Identify potential strategic buyers early, assess the value an acquisition would bring to them, align the solution and
business model to maximize attractiveness to multiple potential buyers, and get in their line of sight
Demonstrate a merged solution, model revenue potential, and provide an ROI on buy vs. build their own
The Longer Advice
We asked corporate development directors from the technology sector a series of questions pertaining to their strategic acquisitions. Following are the questions and the common themes that developed from their responses.
How do you find potential companies to acquire?
Be Visible to
Corporate development executives are actively shopping for target acquisitions on their own. They are looking for technology that fills a near term gap as defined by the market and/or customer base, that is likely less expensive to buy than to build, that will bring access to new customers, or all of these things. They find them by doing internet research, attending industry events, and asking their network.
These same executives receive inbound prospects from intermediaries on a daily basis. Most of the companies get an immediate “pass” because they are not aligned with strategic objectives. Those that do get through are done so via an intermediary that has done their homework and presented the right company to the buyer.
What attributes drive you to pay a higher price for an acquisition?
Build exceptional technology and a solid business.
The technology meets identified demand, the technology is a market leader, there are limited other players in the space, the solution can be integrated quickly, the tech stack is current, and the solution is extensible to other verticals.
The business has a subscription revenue model, the YOY Growth > 30%, there is high customer retention, and there is solid account expansion. Margins are not as important but good margins will drive up the price.
There is a solid customer base with attractive logos, relationships exist with these companies, and there is an ability to cross sell.
There is a talented team of engineers and product managers that desire to remain post acquisition.
Patents. Companies with valuable patents tend to drive to higher prices.
What attributes drive to pay a lower price for an acquisition?
Stay current on tech, metrics, and sales.
The technology is aging and there are limited use cases of the solution.
A significant portion of revenue comes from services, there is low growth (<30% YOY), and there is high churn.
The company is unable to prove the historical financials and important KPI’s.
Revenue targets were missed in recent quarters.
There are alternatives on the market.
Building the solution could be done at a reasonable cost in a relatively short amount of time.
Do you typically pay less, more, or on par with an asking price of an acquisition?
Create a competitive bidding situation.
The final price paid is typically at or below the original asking price.
A higher price has generally only been paid in competitive bidder situations, if the buyer business case pencils out (current and potential revenue is exceptional / cost to build on their own and get to market is excessive), and there are no alternative sellers on the market (now or in the near future).
What advice do you give to companies that would like to exit via strategic M&A at or above their target valuation?
Build a business with buyers in mind and be ready to sell at any time.
Have a market leading technology that is talked about (there is buzz), exceptional revenue growth (and margins), or both.
Identify several potential strategic buyers, assess the benefits your technology and customer base bring to the buyer, be aware of what their competition is doing, and stay focused.
Be in the line of sight of potential buyers through marketing, events/conferences, relationships, and partnerships.
For the pitch, mock up how the product will work with theirs, define how customer cross sell / upsell could occur, identify the likely expansion potential, and prepare an ROI based on the time / cost to build a solution vs buy your company.
Be respectful of the buyer and be honest.
Be ready to sell sooner than you think and have the story and the data ready to prove your value.
Ask for a fair price that reflects all factors for the market, the buyer, and the potential to achieve post M&A objectives.
Five corporate development executives were interviewed for this article. They are all in the technology industry
and have varying ownership models. Given the sensitivity of this information they asked to have anonymous attribution.
Corporate Development Director, Public Company – 2 interviewed
Corporate Development Director, PE Backed Company – 2 interviewed
Corporate Development Director – VC Backed Company – 1 interviewed
We are thankful to all of them for sharing their time, experiences, and insights for this article.