As part of a video series produced by Dave Kauppi, president of MidMarket Capital,
Full Transcript
Hi. I'm Dave Kauppi, president of MidMarket Capital, a technology focused Mergers and Acquisition firm and the Editor of the Exit Strategist Newsletter.
The Key to driving strategic value in the sale of a technology company is to move buyers up from their starting price based on a conservative Cash Flow multiple. As a seller, you must first earn your strategic value by building a great company. In your business sale, that must be captured and articulated in a competitive M&A process in order to unleash your optimized selling price. In this series of videos we will present 7 factors that we use to drive maximum strategic value.
Most acquirers could write the code themselves, but we suggest they analyze the cost of their time to market delay. Believe me, with first mover advantage from a competitor or, worse, customer defections, there is a very real cost of not having your product today. We were able to convince one buyer that they would be able to justify our seller’s entire purchase price based on the number of client defections their acquisition would prevent. As it turned out, the buyer had a huge install base and through multiple prior acquisitions was maintaining six disparate software platforms to deliver essentially the same functionality.
This was very expensive to maintain and they passed those costs onto their disgruntled install base. The buyer had been promising upgrades for a few years, but nothing was delivered. Customers were beginning to sign on with their major competitor. Our pitch to the buyer was to make this acquisition, demonstrate to your client base that you are really providing an upgrade path and give notice of support withdrawal for 4 or 5 of the other platforms. The acquisition was completed and, even though their customers that were contemplating leaving did not immediately upgrade, they did not defect either. Apparently the devil that you know is better than the devil you don’t in the world of software and information technology.
We want the buyer to consider the potential value creation of your assets in their hands post acquisition and to base their price on this view, not your 5 X multiple of EBITDA. As psychologists will tell us, the motivation for loss aversion is often far stronger than the opportunity for potential gain. So positioning the company as a way to lower their time to market and to help avoid customer defections we were able to appeal to the very powerful motivator – loss aversion.