Dear SaasCo is the new DSW Ventures blog series focused on founders and board members of start-ups and scale-ups. In the first edition, Keith Benson discusses the importance of being prepared for exit – even in early-stage companies.
Subject: 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. It’s part of the CEO’s job to make sure this happens.
Preparation work needs to start now – and the output needs to be reviewed and refreshed regularly. To get the strategic valuation we need the timing to be right for the strategic buyers – so we should understand who our buyers are and the right timing for them. We also need to ensure that we can quickly react to an unsolicited approach. Being prepared means that we have options – we can quickly produce the key marketing information for the business and have to hand a current understanding of strategic buyers. If we get an approach we may want to extend the process to other buyers. We also may not want to for very good reasons – but preparation ensures 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.
Create a business plan
Being able to quickly and easily communicate the business to an investor or buyer starts with a well thought-out up-to-date business plan. It should describe the business, its market and management; set out goals and clearly communicate strategy and provide a dispassionate analysis of value drivers and drags – how to build on the former and remediate the latter. An understanding of shareholder appetite and timing for an exit that fits with the financial plan is important.
Understand the buyer landscape
We must be proactive in this regard and maintain an “exit review” document. Who in the market would most value SaasCo’s USPs? We should analyse acquisitions in the market, the buyers’ “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 – speak to those involved: management of buyer and seller, advisers, lawyers, investors, funders – all will have a unique insight. It should be continually updated as new deals and investments happen.
Properly understanding the buyers is critical to the question of timing. The best time to go to market is when the buyers are ready to buy. 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 in great detail – we must be on top of the information and ahead of them in analysing the company’s metrics. In a sale process, if we are reacting to information and analysis requests, 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 them 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 can then deal with these differences up-front rather than reacting.
Understand your margins as well as your ARR
Understanding SaasCo’s run-rate revenue metrics is important – it’ll be question number one from a buyer. 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 P&L matters – the quantum and quality of earnings are fundamental drivers of shareholder value. But the balance sheet is also important – the price you get on exit will be adjusted by what is on the balance sheet and the 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 – proactively 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.
As well as buyers, these considerations will all be relevant in attracting investment from VCs, private equity and lenders – they all want to exit ultimately. Being well prepared is a very powerful message to a buyer, maximises shareholder value and has the added bonus of saving them some effort. A win-win – what’s not to like!
Any questions, please email me on firstname.lastname@example.org.