One of the things we are most frequently asked for as Corporate Finance Advisers, is to support clients and private equity firms in the execution of a buy and build strategy. The logic for acquisition is clear; inorganic growth delivers scale, fills capability gaps and offers the opportunity for “multiple arbitrage” – ie to acquire at a lower multiple than you hope to ultimately sell for.
That is the theory. In practice, it can be incredibly challenging to implement such a strategy for the following key reasons:
Frog Kissing….
Finding transactable targets is a bit like looking for a handsome prince in a pond full of frogs. Would-be acquirers often have a list of criteria, which include; geography, size, capabilities and price. With information in the public domain unlikely to be sufficient to test against those criteria, it is necessary to try and dig into what a business does and how much it is likely to be worth without committing oneself to being interested and without offending any potential acquisition target. Inevitably only a handful of those businesses, originally identified as of potential interest, will turn-out to have prince-like qualities.
The Clarity/Realism paradox
In trying to identify potential acquisition targets, it is obviously helpful if a client knows what they are looking for and why. By the same token, a set of criteria that is too narrow will almost certainly result in failure and frustration. To find transactable targets, an acquirer will need to set criteria which are broad enough to capture a meaningful number of businesses – but still meet their strategic objectives. In considering potential targets they will need to be pragmatic, and avoid persuading themselves that a frog is a prince.
Vendors and the “unsolicited approach” mindset
There is a definite tendency for vendors to believe that an unsolicited approach from an interested party means that the potential acquirer is prepared to pay a premium for their business. There is no logic for this belief, but it can create a disconnect in discussions and undermine trust between the parties.
Healthy Scepticism
This exists on both sides of the table. A potential acquirer is looking for their thesis about the potential charms of a target to be disproved. While flirting wildly with their targets, they are checking them out for flaws and weaknesses (customer concentration, over-reliance on shareholder management, unsustainable margins etc). At the same time the potential vendor is neurotically concerned about disclosing commercially sensitive information, looking too enthusiastic and ensuring the potential acquirer can afford them. Several rounds of dancing around handbags whilst edging towards sensible questions, and realistic answers, is likely to be required, before anyone can determine whether there is a match. This is particularly true in cases where you are going to need to raise external finance to fund the acquisition. The ”prove you can afford us” chicken and the “if you give me enough information to go to my bank/private equity investor I will” egg, represent a common quandary.
Dastardly advisers
If the business which is approached takes advice, they are likely to be advised to go to a wider pool of potential purchasers – before accepting any offer you might make in any case. This has the advantage of setting a market price, but loses you all the benefit of approaching cold in the first place and can be extremely frustrating. You might refuse to participate in an auction process but that arguably just serves to demonstrate to the vendor that you were never that serious anyway! You might hope that your potential target doesn’t take advice, but you probably do want them to have some support due to point 6 below…
Financial information
When acting for a potential acquirer in a search situation, our clients are usually financially sophisticated and have an existing clear view on market valuation parameters, the information they need to come to a view on price and standard sector KPIs. By the same token, when approaching potential acquisition targets off market we often find that the businesses we approach don’t have the financial analysis necessary for us or our clients to form a quick view of valuation. There are two challenges here. The first is simply the time it can take to get the financial information we need and the second is the risk that even once it has been provided, it is not presented in a way that would allow us to get to the “right” valuation. For example, based on realistic outturn figures and with appropriate addbacks and adjustments to optimise the profit. For this reason, we would always prefer targets to be advised rather than unadvised, so that someone working with the target understands the nature of, and reasons for, specific information requests and will minimise the risk of a canyon-like gap between buyer and seller views of value.
So, you can see how the apparent charms of a long list of businesses – selected via keywords analysis, market knowledge, Companies House and websites – can quickly evaporate into only a handful of those targets who are of serious interest and are prepared to engage in a blind date. In practice the process of moving from a completely cold approach to a meaningful engagement is a highly iterative one. It requires empathy, skilled questioning, pragmatism, patience, and a recognition that you are not going to get all the information you really need before you sign heads of terms.
But despite all these challenges, finding and acquiring the right business can be a real accelerant of strategy and once an acquirer is known to be credible within their sector, other opportunities will open up much more quickly. Indeed vendors will start to find you themselves. As advisers our hearts might sink a little when the words “acquisition search” are uttered, but when an acquisition completes the sense of achievement at bringing two compatible strangers to the altar, is immense.
If you are looking to acquire a business, we would be delighted to assist you through the process. Contact our team on 01491 579740.
One of the things we are most frequently asked for as Corporate Finance Advisers, is to support clients and private equity firms in the execution of a buy and build strategy. The logic for acquisition is clear; inorganic growth delivers scale, fills capability gaps and offers the opportunity for “multiple arbitrage” – ie to acquire at a lower multiple than you hope to ultimately sell for.
That is the theory. In practice, it can be incredibly challenging to implement such a strategy for the following key reasons:
Frog Kissing….
Finding transactable targets is a bit like looking for a handsome prince in a pond full of frogs. Would-be acquirers often have a list of criteria, which include; geography, size, capabilities and price. With information in the public domain unlikely to be sufficient to test against those criteria, it is necessary to try and dig into what a business does and how much it is likely to be worth without committing oneself to being interested and without offending any potential acquisition target. Inevitably only a handful of those businesses, originally identified as of potential interest, will turn-out to have prince-like qualities.
The Clarity/Realism paradox
In trying to identify potential acquisition targets, it is obviously helpful if a client knows what they are looking for and why. By the same token, a set of criteria that is too narrow will almost certainly result in failure and frustration. To find transactable targets, an acquirer will need to set criteria which are broad enough to capture a meaningful number of businesses – but still meet their strategic objectives. In considering potential targets they will need to be pragmatic, and avoid persuading themselves that a frog is a prince.
Vendors and the “unsolicited approach” mindset
There is a definite tendency for vendors to believe that an unsolicited approach from an interested party means that the potential acquirer is prepared to pay a premium for their business. There is no logic for this belief, but it can create a disconnect in discussions and undermine trust between the parties.
Healthy Scepticism
This exists on both sides of the table. A potential acquirer is looking for their thesis about the potential charms of a target to be disproved. While flirting wildly with their targets, they are checking them out for flaws and weaknesses (customer concentration, over-reliance on shareholder management, unsustainable margins etc). At the same time the potential vendor is neurotically concerned about disclosing commercially sensitive information, looking too enthusiastic and ensuring the potential acquirer can afford them. Several rounds of dancing around handbags whilst edging towards sensible questions, and realistic answers, is likely to be required, before anyone can determine whether there is a match. This is particularly true in cases where you are going to need to raise external finance to fund the acquisition. The ”prove you can afford us” chicken and the “if you give me enough information to go to my bank/private equity investor I will” egg, represent a common quandary.
Dastardly advisers
If the business which is approached takes advice, they are likely to be advised to go to a wider pool of potential purchasers – before accepting any offer you might make in any case. This has the advantage of setting a market price, but loses you all the benefit of approaching cold in the first place and can be extremely frustrating. You might refuse to participate in an auction process but that arguably just serves to demonstrate to the vendor that you were never that serious anyway! You might hope that your potential target doesn’t take advice, but you probably do want them to have some support due to point 6 below…
Financial information
When acting for a potential acquirer in a search situation, our clients are usually financially sophisticated and have an existing clear view on market valuation parameters, the information they need to come to a view on price and standard sector KPIs. By the same token, when approaching potential acquisition targets off market we often find that the businesses we approach don’t have the financial analysis necessary for us or our clients to form a quick view of valuation. There are two challenges here. The first is simply the time it can take to get the financial information we need and the second is the risk that even once it has been provided, it is not presented in a way that would allow us to get to the “right” valuation. For example, based on realistic outturn figures and with appropriate addbacks and adjustments to optimise the profit. For this reason, we would always prefer targets to be advised rather than unadvised, so that someone working with the target understands the nature of, and reasons for, specific information requests and will minimise the risk of a canyon-like gap between buyer and seller views of value.
So, you can see how the apparent charms of a long list of businesses – selected via keywords analysis, market knowledge, Companies House and websites – can quickly evaporate into only a handful of those targets who are of serious interest and are prepared to engage in a blind date. In practice the process of moving from a completely cold approach to a meaningful engagement is a highly iterative one. It requires empathy, skilled questioning, pragmatism, patience, and a recognition that you are not going to get all the information you really need before you sign heads of terms.
But despite all these challenges, finding and acquiring the right business can be a real accelerant of strategy and once an acquirer is known to be credible within their sector, other opportunities will open up much more quickly. Indeed vendors will start to find you themselves. As advisers our hearts might sink a little when the words “acquisition search” are uttered, but when an acquisition completes the sense of achievement at bringing two compatible strangers to the altar, is immense.
If you are looking to acquire a business, we would be delighted to assist you through the process. Contact our team on 01491 579740.
When you look at the attrition rate between the number of deals that an investor gets to see each year and the numbers that they actually transact (I won’t scare the reader by repeating it here), you can start to understand why, with the odds seemingly stacked against you that fundraising can feel like an uphill struggle and for some will be a race against insolvency.
Successful fundraising is all about being prepared – not just having the business plan and knowing your market, competitors and numbers inside out, but being prepared for the investment process – which may involve a significant number of investor meetings, a lot of time and effort answering early diligence questions, a lot of sharing of private information in the knowledge that most investors after all that effort will still say “I’m out”.
The problem is that fundraising is based on asymmetric negotiation – you need the money and quickly, the funders have the money, but, are speaking to many more companies just like yours, all of whom need their investment. They can therefore afford to take their time to benchmark different opportunities, gather information on market dynamics and could well be speaking to your competitors before they make any decision, which still might be that they decide to not invest in your sector after all!
It can be difficult to know therefore who is genuinely interested, who is tyre kicking or information gathering and who just hasn’t the courtesy to give you a quick ‘No’ (which is worth its weight).
This is where working alongside experienced corporate finance advisers can help – the seasoned adviser should be able to identify those ‘buy’ signals and know when to press harder but also to know when to press pause.
There are several other practical steps that you can take however in preparing for a fundraise to maximise your chances of successfully navigating the funding market. You need to give yourself enough time to keep the process efficient yet competitive and for all the distraction involved in fundraising, remember that no deal is done until the cash is in the bank.
So, take your time to prepare well, run an efficient process and look to avoid the potential pitfalls:
Failing to plan ahead – irrespective of whether you are raising £2million, £5million or £50million, it takes time to raise money so give yourself adequate time to complete the fundraise. At the very least, budget 6-9 months ahead of when you need the money in the bank to start the marketing phase to give you the best chance of closing and avoid negotiating the future of your company from a position of weakness whilst facing financial Armageddon
Weak management team – The management team is all important and you should assemble the best team that you can as early as you can. Gaps in the team can be dealt with and new talent hired but poor management will be found out. Well-connected investors should also be able to help identify a strong Chairperson who can also help coach an inexperienced team.
Hiring The Right Corporate Finance Advisers – Make sure that you get good advisers on board from the outset with adequate experience of your sector and stage. You want advisers who can both critically appraise your plans but also provide sage counsel on what to expect and how best to position yourselves to prospective investors. Ask your advisers who they have done deals with – they should have strong enough relationships to fast track getting you in front of the right decision makers.
Lawyers – Deals don’t complete without an awful lot of paperwork and negotiations continue well beyond the agreeing of a term sheet right up until completion. Seek recommendations as to who to use – your Corporate Finance advisers should be able to point to suitably experienced individuals who are commercially focused and who aren’t going to waste your money arguing immaterial points. Good legal representation costs but is a vital investment.
Talk investor language – Do not fixate on the technology – instead focus on your value proposition, size of your addressable market and be able to clearly articulate your growth and exit strategy. Investors want to know if you can build a scalable business that will deliver them 3-5x returns within five years. Avoid too much industry jargon and acronyms and simplify difficult concepts for your audience. Remember that the investor that you are dealing with will have to first convince and then bring his or her team and investment committee along too.
Choosing the right business model – Investors like SaaS business models because a) they can scale quickly, b) they give good forward revenue visibility and importantly, c) they attract quite frothy valuation multiples. Accelerating the speed of securing and minimising the cost of customer acquisition and demonstrating the all-important ARR of £1M+p.a. should be the goal. Be aware that certain business models might trigger warning lights to investors – capital intensive businesses mean lumpy and unpredictable revenues, enterprise sales scream long lead times and IP models may point to difficulty in scaling (given that you are likely one step removed from the end customer). Sticky, scalable customer relationships with minimal churn are what investors look for.
Avoid complexitiesin the Corporate Structure – Keep the cap table simple and avoid complex share structures for as long as you can. Make sure that you tie in the key people that you need either directly through equity or through options but above all, keep things simple. Investors can and do take flight because the share structure is either overly complex or the bulk of equity is in the hands of the wrong people or long-distant founders. If you do have a long shareholder register, then speak to your lawyers about simplifying the consent process, maybe through a nominee account structure.
Don’t forget the day job – Above all else, do not allow the fundraise to distract you from the day job. Over the course of the diligence process, make sure that you deliver the results and milestones that you promise the investors. This builds confidence in your management and budgeting skills. If results slip, at best the deal will delay, at worst, the deal will fall away. Keep laser focused on the day job and hitting your numbers.
Fundraising can feel like it is a full-time job (and to some of us it is) and outside of the excitement of negotiating the deal itself, there are aspects of it that are unglamorous and monotonous and the process itself – with its own language, range of complicated structures and financial instruments as well as different investor approval processes can feel to the uninitiated a little opaque.
So, prepare in advance, prepare well and surround yourself with a quality management team and advisers that you trust to maximise the chances of ultimately securing that deal.
If you are looking to raise funding for your next stage of growth, we would be delighted to assist you through the process. Contact our team on 01491 579740.
When you look at the attrition rate between the number of deals that an investor gets to see each year and the numbers that they actually transact (I won’t scare the reader by repeating it here), you can start to understand why, with the odds seemingly stacked against you that fundraising can feel like an uphill struggle and for some will be a race against insolvency.
Successful fundraising is all about being prepared – not just having the business plan and knowing your market, competitors and numbers inside out, but being prepared for the investment process – which may involve a significant number of investor meetings, a lot of time and effort answering early diligence questions, a lot of sharing of private information in the knowledge that most investors after all that effort will still say “I’m out”.
The problem is that fundraising is based on asymmetric negotiation – you need the money and quickly, the funders have the money, but, are speaking to many more companies just like yours, all of whom need their investment. They can therefore afford to take their time to benchmark different opportunities, gather information on market dynamics and could well be speaking to your competitors before they make any decision, which still might be that they decide to not invest in your sector after all!
It can be difficult to know therefore who is genuinely interested, who is tyre kicking or information gathering and who just hasn’t the courtesy to give you a quick ‘No’ (which is worth its weight).
This is where working alongside experienced corporate finance advisers can help – the seasoned adviser should be able to identify those ‘buy’ signals and know when to press harder but also to know when to press pause.
There are several other practical steps that you can take however in preparing for a fundraise to maximise your chances of successfully navigating the funding market. You need to give yourself enough time to keep the process efficient yet competitive and for all the distraction involved in fundraising, remember that no deal is done until the cash is in the bank.
So, take your time to prepare well, run an efficient process and look to avoid the potential pitfalls:
Failing to plan ahead – irrespective of whether you are raising £2million, £5million or £50million, it takes time to raise money so give yourself adequate time to complete the fundraise. At the very least, budget 6-9 months ahead of when you need the money in the bank to start the marketing phase to give you the best chance of closing and avoid negotiating the future of your company from a position of weakness whilst facing financial Armageddon
Weak management team – The management team is all important and you should assemble the best team that you can as early as you can. Gaps in the team can be dealt with and new talent hired but poor management will be found out. Well-connected investors should also be able to help identify a strong Chairperson who can also help coach an inexperienced team.
Hiring The Right Corporate Finance Advisers – Make sure that you get good advisers on board from the outset with adequate experience of your sector and stage. You want advisers who can both critically appraise your plans but also provide sage counsel on what to expect and how best to position yourselves to prospective investors. Ask your advisers who they have done deals with – they should have strong enough relationships to fast track getting you in front of the right decision makers.
Lawyers – Deals don’t complete without an awful lot of paperwork and negotiations continue well beyond the agreeing of a term sheet right up until completion. Seek recommendations as to who to use – your Corporate Finance advisers should be able to point to suitably experienced individuals who are commercially focused and who aren’t going to waste your money arguing immaterial points. Good legal representation costs but is a vital investment.
Talk investor language – Do not fixate on the technology – instead focus on your value proposition, size of your addressable market and be able to clearly articulate your growth and exit strategy. Investors want to know if you can build a scalable business that will deliver them 3-5x returns within five years. Avoid too much industry jargon and acronyms and simplify difficult concepts for your audience. Remember that the investor that you are dealing with will have to first convince and then bring his or her team and investment committee along too.
Choosing the right business model – Investors like SaaS business models because a) they can scale quickly, b) they give good forward revenue visibility and importantly, c) they attract quite frothy valuation multiples. Accelerating the speed of securing and minimising the cost of customer acquisition and demonstrating the all-important ARR of £1M+p.a. should be the goal. Be aware that certain business models might trigger warning lights to investors – capital intensive businesses mean lumpy and unpredictable revenues, enterprise sales scream long lead times and IP models may point to difficulty in scaling (given that you are likely one step removed from the end customer). Sticky, scalable customer relationships with minimal churn are what investors look for.
Avoid complexitiesin the Corporate Structure – Keep the cap table simple and avoid complex share structures for as long as you can. Make sure that you tie in the key people that you need either directly through equity or through options but above all, keep things simple. Investors can and do take flight because the share structure is either overly complex or the bulk of equity is in the hands of the wrong people or long-distant founders. If you do have a long shareholder register, then speak to your lawyers about simplifying the consent process, maybe through a nominee account structure.
Don’t forget the day job – Above all else, do not allow the fundraise to distract you from the day job. Over the course of the diligence process, make sure that you deliver the results and milestones that you promise the investors. This builds confidence in your management and budgeting skills. If results slip, at best the deal will delay, at worst, the deal will fall away. Keep laser focused on the day job and hitting your numbers.
Fundraising can feel like it is a full-time job (and to some of us it is) and outside of the excitement of negotiating the deal itself, there are aspects of it that are unglamorous and monotonous and the process itself – with its own language, range of complicated structures and financial instruments as well as different investor approval processes can feel to the uninitiated a little opaque.
So, prepare in advance, prepare well and surround yourself with a quality management team and advisers that you trust to maximise the chances of ultimately securing that deal.
If you are looking to raise funding for your next stage of growth, we would be delighted to assist you through the process. Contact our team on 01491 579740.
