Dear SaasCo,
As discussed during our investment process, to ensure we are in a position to maximise the shareholder value it is essential that we are properly prepared. Being properly prepared isn’t something which happens in the last few months before we decide to market the company – or even in the couple of years before. It’s something which needs to start now – and the output needs to be reviewed and refreshed regularly. It’s part of the CEO’s job to make sure this happens.
It’s worth highlighting the importance of timing in a corporate transaction. The right time for us isn’t necessarily the right time for our buyers – but to get the strategic valuation we are all looking for we need the timing to be right for the strategic buyers. As discussed below, we should try to understand as best we can who our strategic buyers are and what the right timing is for them. We also need to ensure that we are in a position to quickly react should we get an unsolicited approach. Being prepared means that we have options in that circumstance – we can easily produce the key marketing information for the business and have to hand a current understanding of who else might buy the business and why. If we get an approach we may want to extend the process – we also may not want to for very good reasons – but we need to ensure that we have options. Being prepared is therefore crucial to maximising the value of SaasCo.
I have outlined five things that we need to do start doing now to ensure SaasCo is properly prepared.
Document preparation
This is obvious and what most management teams consider being “prepared for sale.” However, it is rarely done – where it is done, it is typically done badly. You should use professional advisers such as corporate financiers, transaction services professionals and your corporate lawyers to get a good idea of the information required and build a living repository which is updated as your documents change. This repository needs to cover the critical areas of the business – commercial, financial, legal, technical and management – as a minimum.
Understand the buyer landscape
We must be proactive in this regard and maintain a piece of living “exit review” document. What are the features of SaasCo that are most unique and valuable and who in the market would most value those aspects? We should attempt to understand why those acquisitions are being made (the “strategic rationale”), at what valuations (absolute and multiples) and what structures are being used (and why). This isn’t just a piece of desktop work – you should try to speak to those involved: management of buyer and seller, advisers, lawyers, funders – all will have a unique insight.
Properly understanding the buyers is critical to the question of timing. How would you know when is a good time to go to market if you don’t understand when is a good time for buyers? Opening a long-term dialogue with buyers is therefore critical – and puts SaasCo on their radar.
Build a suite of quality Management Information and act on it
Buyers will want to understand SaasCo – we must be on top of the information and ahead of them in analysing the company’s metrics. If we are analysing on the fly according to requests from a prospective buyer, then we are going to be uncovering issues in real time and managing problems on the fly. This is bad for shareholder value. So, we must understand in advance how a buyer will look at the business and analyse the financials accordingly. These metrics are what will dictate the valuation, so we must (a) have the right metrics to hand and (b) continually focus on improving them. We should also understand how SaasCo’s metrics benchmark against industry “standards” – how we compare and where we are different, why are we different?
We, as your investors, and your finance director can assist in this regard but there’s lot’s of other ways to get as broad a view as possible: speak to competitors or similar businesses who have already exited; get an introduction to some transaction services professionals; maybe even some of the strategic acquirers identified in the buyer research.
Understand your margins as well as your ARR
Understanding SaasCo’s run-rate revenue metrics is important – it’ll be question number one. But there will be many more – so our monthly analysis of the profit and loss should go deeper. Ultimately, with the exception of some outlier examples, businesses need to generate profits to be valuable. SaasCo makes a significant monthly loss – which is fine – we expect it to as an early stage business investing to scale quickly. But we need to demonstrate that the business can be profitable. So we must understand and analyse the variable and fixed costs of the business – are we making a positive contribution to profit and are the fixed cost investments improving contribution margin over time? If they aren’t, we have a problem.
Understand and analyse your balance sheet
Your earnings matter – the quantum and quality are fundamental drivers of shareholder value. But the balance sheet is also important – the price you get will be adjusted by what is on the balance sheet and working capital dynamics over time. We will discuss why this is important and how it works in the future, but for now it’s essential that we manage the balance sheet – collect debtors, pay creditors on time but not early, maximise cash. Cash is the cheapest form of equity – so don’t allow it to be sucked up into working capital. This approach will help minimise dilution on the journey and maximise shareholder value at the end.
Kind regards
Keith Benson
Partner, DSW Ventures