Recently, World Financial Symposiums (WFS) hosted a Growth & Exit Strategies virtual conference focused on women leaders in tech. The conference was highlighted by three panels comprised of women executives representing investors, buyers, and sellers of tech companies, respectively. The panelists shared insights and tips on a variety of topics such as which sectors investors are excited about, what buyers want to see in companies for purchase, and how to prepare for an exit.

This second part of a multi-part series of articles about the conference focuses on the Buyers panel. Part 1 of this series covers the investors panel. Here are some highlights of the buyers panel discussion.

Buyers panel

Corum Vice President Amber Stoner led a panel of five women executives representing a wealth of experience in corporate development, mergers and acquisitions, and private equity investments:

• Cass Ziebel, principal at ParkerGale Capital, a small private equity firm that buys profitable technology companies in the lower-middle market.

• Carolyn Campbell, Managing Partner and Chief Operating Officer at Emerging Capital Partners (ECP), a private equity firm focused on investments in Africa.

• Krista Morgan, General Partner at Stage, an early-stage private equity fund that buys software companies that have lost their venture funding.

• Laetitia Pariente, Senior Manager, M&A Corporate Development at SITA, a Switzerland-based IT provider for the air transport industry.

• Meg Baldini, Vice President of Corporate Development at Procore Technologies, an American construction management software as a service (SaaS) company.

The panel was asked various questions of particular importance to tech company sellers, such as how to prepare for an M&A process, how buyers valuate companies, what deal killers buyers sometimes encounter, and what post-acquisition agreements typically look like. Here are some of their responses.

How sellers should prepare

Asked how a tech entrepreneur should prepare for an M&A, Baldini stressed the importance for sellers to have a clear vision of their goals and align closely to that vision. A major part of achieving those goals is building proper relationships early. The deals Baldini likes the least are those that are sterile and focused on numbers. The good ones extend previous conversations and reflect the natural evolution of a relationship.

For Campbell it's a matter of sellers having a good understanding of what they want to get out of a deal. Campbell advises entrepreneurs who seek investment from her PE firm to ask themselves what value they're looking for. Do they want to connect with other customers or investors or go into new markets? Are they looking to benefit from her firm's experience, portfolio, and what they've done with other companies? Or are they looking for a deep pocket investor that will expand their investment over time?

Surfacing priority needs early is a key for Morgan. For instance, it's important for her to know early whether the seller is selling because they have to sell versus they're looking for growth capital. In fact, surfacing priority needs late in the game can be a deal killer. Morgan cited a recent situation that soured the deal in that way. The seller stated late that they wanted severance pay for anyone on their team who would be fired subsequent to the deal. Morgan said that her firm told the seller three months prior that they were probably going to let some people go. The fact that the seller waited months before making their severance request spoiled the relationship with the investor and killed the deal.

Underscoring Morgan’s point, Zeibel said she has seen what she terms "death by a thousand cut negotiations," where additional requirements keep popping up ‒ something she says disintegrates the trust built up going into the process. Her advice to sellers: the more you have the mindset of laying out your needs early, the better it is for your own negotiation, your own strategy, and your own trust as you're working with the other side. In parallel with that, Zeibel stressed the importance for a seller to have someone on their team provide good, detailed financial reporting. She noted that doing that often undervalued back-office work is huge in making for a successful deal. She added, “You don’t want to be in the position of trying to understand at the last minute why certain aspects of your business dropped over the last few years.” Ziebel pointed out that having that data available keeps the seller informed. It also gives the buyer the confidence that the seller has his or her house in order.

And for Pariente, getting advice and asking for help, especially about the presentation of financial, legal, and tech structuring, is of paramount importance, because she said a poor presentation of that information can break a deal early.

How buyers valuate

Another pair of questions posed to the panelists addressed valuation. How do the panelists valuate a company, and are there common misconceptions sellers have about valuations?

Campbell said her firm always uses a number of different methods to develop a valuation. The methods depend on the sector that the seller's company is in and whether the company is in an asset-type business or is primarily dependent on cash flow. In all cases, her firm does a discounted cash flow (DCF) valuation as part of their assessment. In addition, they factor in the seller's projections of future performance. However, those projections can be warning signs to the buyer if they're overly rosy. Campbell stressed that if the projections are extremely unrealistic, it doesn't bode well for her firm to get a deal done. In fact, no matter what the projection is, her firm will tend to lower it. Campbell said that when a seller puts out what she considers a wild projection, it begs the question is the seller really ready to sell?

Liability is yet another factor in valuation, something that Morgan highlighted. Her PE firm looks at things like the seller's accounts payable status and other types of debt they have on their books. She pointed out that in buying a company, the acquirer also absorbs the seller's liabilities. So when sellers say that a purchase price is too low, they need to understand that often there is debt accompanying the purchase. Morgan said that when her firm acquires a company with $4 million of liability that is real cash that her firm will need to pay. She also said that her firm sees the actual value of cash very differently than an equivalent liability assumption. For example, they see paying someone a million dollars differently than absorbing a million dollars of debt, something that they can control and manage. In general, Morgan advised founders not to get caught up in the valuation number because there is much more to a deal. It's also about what going forward looks like; what the future upside looks like; and whether it will be a straightforward cash-out or if some of the proceeds will be invested. She stressed that it is critical for sellers to let go of any emotional attachment to the valuation number, especially in the world that we currently live in.

Zeibel reinforced Morgan's advice about detaching emotionally from a valuation number. There are many ways, she said, that sellers can get the upside they want beyond the valuation. Rollovers and future compensation through earnouts are just two approaches to reach that goal outside of the initial valuation conversation. Zeibel noted that thinking about these approaches really does help when a seller gets to the negotiation table.

What buyers experience in due diligence

Due diligence was another important topic of discussion. Stoner led this part of the discussion with the following questions: What percentage of transactions do not make it through due diligence? How long does that process typically last? And what are some things uncovered in due diligence that end up being deal breakers?

There was general agreement from the panelists that most of the deals they involve themselves in make it through due diligence. A major reason is that the buyers typically invest a lot of time, effort, and money prior to due diligence assessing the potential deal. For example, Campbell said that before the due diligence process starts, her PE firm holds two or three investment committee meetings with very robust presentations by their deal team. If the decision is then made to proceed with due diligence, Campbell said her firm tends to go through the process completely because there has been a big lead up to it.

As far as how long the buyers spend in due diligence, the general answer is they try to get through it as quickly as possible. Morgan said that in the space her PE firm is in it is important to be viewed as being able to quickly get through due diligence. She said, "If we get known for coming in and needing three months to get a deal done well, then no one will bring us business.”

However, the length of the process does vary. It can depend on the size of the deal, and whether there are other buyers competing for the target company. For Pariente's company, SITA, a strategic buyer, due diligence can be anywhere from four to eight weeks. Other factors can also come into play, adding time to the process. For example, Baldini said if there are regulatory steps that need to be performed, it could add several months to the process.

Zeibel pointed out that unlike a strategic buyer who might be in the same market as the company they're interested in buying, her PE firm, a financial buyer, often needs a better understanding of  the seller’s market. To gain that understanding, they do a lot of commercial due diligence. However, her firm also typically depends on a third party provider to supplement their market investigation.

The buyers also mentioned a number of things that can kill deals during due diligence. Anything that comes up during the process that causes a breach of trust can be a deal killer. Last minute surprises can also negate a deal, such as learning late that the target company's technology doesn't scale or there are unanticipated dependencies of significance. Zeibel stressed that while these things do happen, it is rare ‒ especially after already doing so much work prior and during due diligence.

What do post-acquisition employment agreements look like

An important aspect of any M&A is what happens to the selling company’s founder and management team after the deal. In that vein, Stoner asked the panelists what their post-acquisition employment agreements typically look like, and how long do they like to keep the seller’s executives on after the deal. Perhaps the overall perspective on this was best stated by Campbell. She said, "The big lessons learned from a 25 year history of investing large amounts of money is that you live and die by the management team you acquire. You can have the best quality of earnings review. You can have the market going gangbusters. But if you don't have great alignment with the acquired management team, with everyone working along the same path, you won't do well.". However, she also admitted that there are some times when you do need the seller's management team to leave. The big lesson, she noted, is to have the ability to make management changes when needed.

In reality, deals vary and buyers do differ in their approaches about holding on to the seller's management team after the deal. Pariente’s company uses earnouts and retention packages as ways to encourage the seller's management to stay. But she acknowledged that it is always a gamble as to who will stay and who will leave. She said that often buyers are wrong about who wants to remain with the acquiring company and who does not. So buyers need to be adaptable.

As far as post-acquisition employment agreements, Ziebel said that the companies her PE firm acquires typically have an executive, or someone else the founder has tapped, running the day-to-day operations of the business. The employment agreement will typically specify an equity provision and some non-compete wording if that person chooses to stay on post-acquisition. The agreement will also specify a severance pay-out if that person chooses to leave, the value of which depends on experience and length of time with the business. Ziebel added that her firm usually also negotiates some kind of consulting agreement with the founder. And if the founder is interested in doing a rollover, Zieble's firm often negotiates a board role for that founder, which Zieble noted is extremely valuable to the buyer because there may be information that the founder has that might never be picked up in due diligence.

WFS Growth & Exit Strategies Conferences

WFS Growth and Exit Strategies Conferences give you the opportunity to learn about a variety of topics and trends in Tech M&A. Get insights from private equity, VC, angels, strategic and financial buyers, M&A advisors, and CEOs who’ve had a successful exit. Attendees attest to the value of these conferences. Here are some recent comments:

• I loved the live panels - was refreshing to hear “real life” examples and situations described honestly as well as opinions from the panelists (all women in this case) who work day-to-day in the industry.

• I was very impressed, many useful topics were covered.

• The investor panel was just awesome!

• Excellent buyers & sellers panel.

Tech M&A Master Class

Join us at the Tech M&A Master Class, on May 14, 2024. The Tech M&A Ma

ster Class is a 2-day/2-night interactive workshop designed to cover all the must-knows of M&A for Tech CEOs and Founders. REGISTER HERE  or send an email to WFS Director anavictoria@wfs.com for further details.