“Price is what you pay. Value is what you get.”
One question I am most often asked is, “What is my company’s valuation?”
In addition to the customary, “It depends,” my answer is usually followed by, “It depends on who the buyer is, market factors and trends, and cost of capital.”
As Warren Buffett said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Tech buyers and financial sponsors are always looking for good, scalable companies. A good investment banker does many things for a client. He finds the right buyers, creates a sense of competition and urgency, positions the company for the highest valuation with each potential buyer, negotiates terms, conditions, and employment agreements, and most importantly, acts like a therapist when, inevitably, the deal looks like it is going south twenty times before it actually closes as parties are fatigued, frictions rise, and common sense is replaced by ego.
Strategic buyers can act as large, efficient distribution channels for the right IP. As tech companies are cash-rich, and the pace of internal developments can’t possibly keep up with the necessary growth expected by Wall Street, the corporate development departments are actively seeking growth opportunities through M&A.
One of the early tasks is finding the right buyers. Any good investment banker knows that there is one buyer out there that is willing and able to pay the extra premium for that asset because it is accretive for him to do so. Finding that special buyer, positioning the asset accordingly, and justifying the premium valuation requires domain expertise, deep industry relationships, and a disciplined process.
When a strategic buyer is at the table, the following are the important points that will frame the conversation:
• The ability of the buyer to monetize that IP
• The scalability of the IP
• The quality of the existing clients
• Company’s Leadership Position in Its Segment
• The scarcity of the asset
• Timing & the macro Environment
• The competitive nature of the process
Knowing the dynamics of a particular industry is imperative as the goal is to change the nature of the negotiations from a multiple-type discussion to the ability of the buyer to monetize that IP. That can only be done if the quality of your clients validates the viability and scalability of your product. These buyers also are likely to acquire companies they already know in one way or another, as a competitor or partners.
So when the time is right for you to check the market for an exit, take the time to fully understand the landscape, hire a banker specialized in your segment, and make sure your potential buyers understand and focus on the strategic and accretive nature of the transaction.