What No One Tells You About Selling Your Company for [Hundreds of] Millions or More w/ Woodside Cap

All right. Welcome to our final session of the day. We are going to be talking about what no one tells you about selling your company for hundreds of millions or more with Woodside Cap. I am delighted to welcome Mark Bagley and Tricia Salarino from Woodside Cap, both of you. Thank you so much for joining us. I'm going to pass it over to you to take it away.

Thank you very much. Welcome everyone and well done for getting through the last two days. This is the last session, I believe, so we've saved the best to last. Hopefully, like you just heard, we are going to talk about we're essentially going to give away the secrets of how to get a good valuation for your company. Now I'm a bit nervous about this, Tricia, because I feel like the magician about to give away our secrets. And I imagine there's going to be an angry horde of virtual bankers chasing after us virtually after this if we're not careful.

Yes, indeed.

So Tricia, why don't you tell us a little bit about your background and why you should be good at talking about this topic.

Sure. Thanks, Mark. So I've been working in mergers and acquisitions for 20 plus years, done nearly 100 transactions and mostly represented sellers. And so during the presentation today I will be giving some of the seller tips, some of the things that you might be interested in implementing ahead of time in terms of pre acquisition positioning, but generally talking from the seller angle. And Mark, maybe you can get a little of your background and talk about your focus.

Yes, I'm more recently into banking but before that I was on the buyer side, I was on the corporate side. So I saw a lot of these conversations from the other side are being pitched to. And so I will bring that perspective to the learnings here and how best you can pitch to a buyer and have a successful engagement. So why don't we get straight into it? Like you said, we're talking about selling your company. So Tricia, tell us how it all gets started.

Sure. Happy to sort of share where this often comes in terms of the beginnings of getting to know a buyer. So sometimes you'll get a corporate development inquiry, you'll get someone from corporate development, large public company, small public company, someone from a private equity backed company that will come and say, hey, this is an area of interest, we'd like to get to know you better. Sometimes you'll get an email, you know, cold email from a private equity firm. It might be more likely from someone who's junior, someone who's been straight out of college Spends two years sending thousands of emails to companies. And you know, that's a typical approach that private equity will, will employ to get that first conversation going. And sometimes it will be a partner. And so a partner might say, let's explore having a stronger relationship. Let's explore deepening our relationship. That's all code for hey, I think I might be interested in buying you. The ultimate secret here is that selling your company is an enterprise sales job. So in the same way that you're doing B2B SaaS, sales large enterprises, that's how you have to think about selling your company. You're creating awareness through public conversations and things like that. On your website, maybe you're telling stories about usage of your product, but creating that awareness through PR is very important. Second, you're really trying to understand what does that pipeline look like. How do you take the large number of companies that might be interested and whittle it down through gauging their interest through this process and then getting to the right decision makers. We all know when you're selling a product that you need to understand who are your buying influences, who are the decision makers, who's going to write the check. It's the same in mergers and acquisitions. If you're selling your company, you're selling yourself as a product, you're selling the company as a product and finding out who those decision makers is a big deal and a big part of that process. And then again, it's a sales funnel. So how do you take action on that as well? And we're happy to go through some of those action points along the way.

That's right.

And then in terms of building that funnel, building that sales funnel for your company, what we found is that there is a long tail of acquirers. So you may actually think that there is the top three, four, five companies I want to talk about, what does that really look like? When we look at the number of acquisitions of VC backed startups, about 7,000 of them over the last five years, but they were made by a number of companies. Mark and I tallied that the top 20 acquirers, about 6% of that total number of companies. While Google and Facebook and Salesforce might all be on your list in terms of the perfect acquirer, more likely it's going to be a company that is in that long tail, a company that's going to do maybe one deal over that five years. And so it's very important to extend that network and understand who are those companies in the long tail. And that can send a larger message about your company. It can also increase your odds quite frankly on getting something done.

That's right. So we talked about this inbound from a buyer and I wanted to talk to the signs that you can get that a buyer is serious. Well, we already said this is an enterprise sales process so it won't come as a surprise for us to sell you that you don't really know a buyer is serious until they get to that very end when you get the offer, when you get the deal. But there is a continuum of things that you can look for. I'm gesturing here, some one hand, I hope you can see my hands. But you know, there's a whole continuum that you can, you can look for. On the one hand you start off with, you know, no interest. On the other end is the offer. But in between this there's behaviors you can look for and those behaviors are generally around a buyer, increasing the amount of people that are involved in the deal. So now you've got to be a bit careful of course, because we all know corporates, they have, you know, a core discipline, a core skill of theirs is that they, they have no shortage of people to have meetings. So you do need to look for people being involved that are not sideways moving but are upward moves. So let's go through a few of those. So the NDA, of course the NDA is a signal to say I want more than public information so you know, give me the inside details. But also what's not known is that it's a non trivial thing actually to get an NDA signed inside a court but it has to go to another department. They'll redline the documents to send it back. And anyway it's an aggravation to some extent. So that actually is a small signal that you're on this continuum of now the corporate is saying, well I like this enough that I want to go through the hassle of doing that. So you've started on the process. A more interesting development is when you get to the business lead, maybe that's head of product, it's head of engineering, head of strategy, someone like that. And then you get to present in front of them, that's clearly you're on your way then that's a decent presentation to have. It's a good threshold to put on your, and you use these thresholds basically to say should I allocate resources, how much of my time should I get it to? So you want to get further down. So that's definitely a stage where you want to get involved and Then further on, closer to the area where you're going to get an offer, this is where you're talking to the person that owns the budget, whether it be the partner, the senior person in the private equity P and L responsibility in a corporate. And so now you'll get into a very serious situation and you're on that serious continuum of getting quite close to the deal. So let's, let's talk a little bit more about acquirers and what they would like, how you can more easily get on that continuum. So what's the process moving on that continuum a lot quicker? So a corporate acquirer is really looking for a surprisingly narrow set of things. And these things generally speaking of there's usually a few secret things, but I don't know, 80, 90% of the things you can find out by looking publicly. And obviously with a public company there are public filings as well. So you can actually look in the public filings, but they're also going to present at conferences. You'll actually be written in blogs about where they're going with the product, what they want to do there. So there's no real surprise of where they are in the market. And even if you don't manage to glean any of that from the very private company, they don't publish anything, maybe like an Apple, you can also glean where they're going to go by what their competitors have done, right? Because generally speaking, if a competitor is launched in the space, there's a good chance that they're going to do that as well. So you can get this information. So when you go to a corporate acquirer and a corporate, and you say, would you like X? You have to know that's a rhetorical question. You have to know the answer is yes. And that's what you're expecting, right? So, so it's very important that you are familiar with the corporate and their products and where they're going. But it's also even better on that continuum is that the corporate is familiar with you. And it's kind of the pinnacle of that, is that you're already a partner again. There's stages before that, but being a partner is going to get you way along that continuum. So this is where you say, well, this is worth me putting some effort into it. So now when you present to a corporate, please don't present in the same way you present to an investor or to, for a sales pitch to get some deals, you want to be presenting a very clear view of the value proposition of your asset. Your company to that acquirer. So you need to put it in the context of where it would fit in that company and where the value comes. So if you buy my company, this will enable you to do X, move into market. Yes. Gives you a stepping stone to Z or helps you compete with competitor A. So you need to put it in that context. Right. And the same for the financials. Yes, they're interested in the raw financials, but actually interested in the subset of the financials that say here's what my company would look like as a business unit inside of your organization. Now, on the financial acquirer side of things, it's a little bit the same, but a little bit different. And Trisha is going to talk to that.

Sure. So financial acquirers, and typically they're private equity firms, they might be a family office, those acquirers who are trying to do either an add on to their existing portfolio company or they're trying to find a platform company that they can then add on additional acquisitions over time, grow it, refine it, and then sell again. So when they look at that, they're looking at what's a critical mass for them to start as a platform company. And typically that critical mass is really around kind of the $10 million, 10 million ARR. Revenue point. And so that's sort of the first metric. The second metric is if you're profitable, that's even better. You're opening up really the realm of companies that can be interested in you. So there are a smaller set of groups that will be interested in acquiring companies that are still growing very fast but losing money. There's a larger set where once you have a million dollars worth of EBITDA that will be interested because of that metric. And then above sort of $3 million in EBITDA, there's a much, much broader option in terms of the number of private equity firms that you can go to. Oftentimes it's good to go and look at their portfolio companies. You'll get inbound calls from these private equity firms, but they might not always be the best fit because they don't have enough on the portfolio company side to be truly interesting. And so really go look for that synergy. Just in the same way that you treat them like a buyer, like Mark had been talking about, they're looking for motivated management teams. Are you going to stay or if you are looking at what are succession opportunities, maybe. I've been running my business, I'm not as enthusiastic about it anymore. I'm trying to take some chips off the table. If it's a succession opportunity. Really be upfront about that because they often have managers that can come in and run the business after you're gone or after some sort of transition period. The magic words here, honestly, a rule of 40. So the rule of 40 is taking your growth rate percentage plus your EBITDA margin. And if that is 40% plus 40 plus, that is, you know, magic words to private equity. They're really looking for how do we accelerate growth, how do we put efficiency in the back office, how do we merge this with other portfolio companies if that's part of their strategy? And how do we drive good margin? Because they will be measured on that in a subsequent acquisition. And so they're really looking for that efficiency monitor. And I think there are a number of private equity firms out there and it's often good to put a large number on the list and get them information because that list will whittle itself down through this process. Private equity firms will come back and say, this isn't a great fit because it doesn't meet our metrics. This isn't a great fit because we don't have a portfolio company in the space, we don't have a manager. If you want this to be a succession opportunity, again, it's about finding the right blend of those ideas to get to the right person. Again, when we talk to you about who does the approaching, it's typically a junior person, it's an analyst, it's an associate. Make sure that as you're getting through this chain of conversations that you get to a partner, you know, someone who has a decision making at the private equity firm and can move forward, you know, under their own power. They're essentially taking P and L responsibility for the opportunity.

All right, let's see. We know these folks. Everyone wants an easy life, right? So how do we make it easier on what can we do as a seller to make things easier? Let's talk about that a little bit.

Absolutely. So there are a number of things that you can do 6, 12, 18 months in advance, but things that make you easier to review, assess, and ultimately digest, if you will, are clean financials. Make sure that you have them professionally reviewed. Auditing is not necessary, but, you know, have someone take a look at them to make sure that they're sort of consistent with gap and so generally acceptable.