This week on NVTC’s blog, NVTC Small Business and Entrepreneur Committee Chair Norm Snyder and his colleague Andrew Newton, both of Aronson LLC, share highlights from the committee’s November event, Positioning Your Company for Acquisition, showing how a good company is bought, not sold.
On October 21, 2015, NVTC sponsored a panel of experts to discuss the topic “Positioning your Business for Acquisition”. The panel included Larry Davis, a partner in Aronson Capital Partners; Dana Duffy, the CFO of Invincea; Michael Pratt, serial entrepreneur and managing partner & co-founder of Select Venture Partners LLC; and Mark Spoto, managing director at Razor’s Edge Ventures. The event was moderated by Committee Chair Norm Snyder, lead partner in Aronson’s Technology Industry Services.
The panelists spoke to a number of questions from the moderator and members of the audience. Topics covered included timing of selling a business, including initial planning; how to minimize due diligence headaches; how to find potential buyers and the need to find more than one possible suitor; and the characteristics of potential acquisitions that potential buyers typically consider.
A significant discussion involved how long in advance a company should start planning for acquisition, with a general consensus that it varies. The panelists gave examples ranging from acquisition planning beginning six months before closing to as far out as nine years. All of the panelists emphasized that an entrepreneur should always be preparing for an acquisition in an orderly way and should reevaluate possible exit strategies at each inflexion point during the life of the business. This built into another theme common throughout discussions: sell your business while it is on its way up, not on the way down. By constantly evaluating exit strategies, especially exit timeline, an entrepreneur can weigh the benefits and costs to each exit strategy at different times during the life of the business so as to not miss a good opportunity, which may be affected by external factors such as the state of the economy, as well as internal factors such as company performance
Another big topic was how companies can minimize the headaches of due diligence work. Again there were multiple answers to this question. The panelists focused on the benefits of having quality, competent advisors throughout the life of the business. One panelist, who had been a key management member in selling several companies, stressed the importance of making important investments in administration during the life of the business as the costs of not doing so may be far greater near the time of sale if significant regulatory, compliance, tax or accounting issues emerge during the due diligence. Panelists noted that some key areas where companies can get themselves in trouble are trying to draft legal documents without an attorney, not saving electronic copes of all signed legal documents, not paying payroll taxes when due, not complying with federal, state and international tax rules (including sales taxes), not having necessary IP legal protection and by not ensuring proper accounting treatment of transactions from day one, especially for complex areas such as revenue recognition. Problems (and surprises) that arise during due diligence can reduce prices, delay closings or even kill deals.
As for valuation, the panelists stressed the importance of being able to demonstrate continuing revenue streams. One time sales are great but all of the panelists spoke to how a company that can demonstrate year over year revenue streams will be more attractive to potential buyers. The other piece to valuation was context, and in particular, the fact that entrepreneurs to ask what their company can bring to a potential buyer. In many cases a smaller company being acquired is merely a rounding error on the acquirer’s financial statements, and the attraction is the potential of the acquiree’s products or technology, including synergies with the acquirer’s existing lines of business. A key concern of the acquirer is damage to its reputation, e.g. in the event of non-compliance with regulations or a law suit. The panel emphasized the need for depth, rather than breadth in the value the potential acquiree can add to the buyer’s business. The overall conclusion was that those entrepreneurs who best determine how their companies can add value to a potential buyer, are most likely to sell, and sell at a good price.