Founder friendly, 100% of the time
We’ve been itching to write this article for a long time!
We’ve covered the front-end (fundraising, frugal origination) and the back-end (HoldCo design, CFO playbook). Now, it’s time to address the bottleneck in getting from A to B: getting deals done.
Serial acquirers are value buyers. The multiples they pay are influenced by a combination of:
- Investor expectations of consistent 20%+ ROIC
- Opportunity set consisting of decent but not stellar businesses
- Sensible leverage
Unfortunately, many founders aren’t simply ready to part with life’s work for a multiple of EBITDA.
What can you do to get them over the line?
Turns out, there are a few recurrent themes. We picked our favourite pushbacks and paired them with our best rebuttals. To be clear: we’re not mocking founders. These are legitimate pushbacks. We’re here to help acquirers win the argument.
Happy negotiation!
Pushback #1: “I’m expecting an ARR multiple” (Pavel)
Warm up with an easy one.
Every time we hear a broker saying “the owners expect an ARR multiple”…let me guess…the business is loss-making!
So when does an ARR multiple make sense?
Excluding venture grade businesses – which aren’t a fit for most serial acquirers – I can think of only one instance. If you are running a business with standout unit economics. Think of Net Dollar Retention (NDR) of 130%, high single digit LTV/CAC etc.
In a situation like this, it makes sense to maximise user acquisition, and therefore future – rather than current profits.
Very few businesses are able to maintain such standout metrics however.
Consider two scenarios:
- Company A is an enterprise focused SaaS with $2M ARR growing at 20% per year and is breakeven. Churn is moderate and NDR is close to 100%
- Company B is an SMB self-service SaaS with $2M ARR, growing 20% with 50% EBITDA. Churn is higher and NDR is lower, however, growth comes with limited marketing investment
Would both companies be valued at the same ARR multiple? No!
The truth about Company A is that enterprise clients typically require more heads and more investment to grow. Unless you achieve superior NDR, it’s hard to value it at the same ARR multiple as Company B.
Pushback #2: “Your offer is not valuing my IP” (Pavel)
This pushback tends to come from two types of businesses:
- Subscale software companies that struggle to gain customers
- Capital-inefficient businesses with decent revenue but wafer-thin margins
The rationale is clear. From a sellers’ point of view, current cash flows do not capture the emotional and financial sunk cost of building the product.
However, is that really so?
Unlike pharma or defence, SaaS businesses rarely write code for someone else to commercialise it – custom dev shops excluded. Why? Because the costs to develop software are constantly decreasing – thanks to cloud computing, low/no code tools, deep labour pools in places like India and Vietnam etc.
Most SaaS and productized services businesses did not take years or millions of dollars to reach MVP. More often than not, the “yet-to-be-unlocked IP value” is a disguise for a failed Go To Market strategy or an inefficient organisational setup.
Back to the negotiation table though. Sure, let’s put a price tag on the IP. As a seller, tell us how would YOU monetize it?
Pushback #3: “There are so many things you can do with the business…” (Alex)
…hence you should pay up. Sell-side advisors LOVE this argument.
They have a point.
Cost and revenue synergies that result from pooling multiple subscale software businesses can be significant. On paper, everything looks compelling:
- Sources of cost synergies: rent, cloud computing, payment processing, shared services (Finance, Tax etc.)
- Sources of revenue synergies: cross-sell and increased BDR productivity
However, consider two counters.
First, in a scenario where synergies are driven by the acquirer, why should the seller capture most of the resulting value?
Second, paying up for synergies upfront shifts execution risk entirely to the acquirer. Instead, consider an earnout structure in which the risk is borne equally. Be careful though. When negotiating earnings-based earnouts, “war game” everything. What percentage of a BU’s cost base is genuinely standalone vs. coming from Group allocations / shared services? How much scope does the management have to manipulate earnout financials?
More on that in a future article.
Pushback #4: “I have strategics in the process” (Alex)
Dirk Sahlmer said it best: “these exits are very rare. This is especially true for small SaaS companies (<$5M ARR). The IP and/or customer list (“moat”) is usually not strong enough to arouse strategic interest. The fact that corp dev teams of big companies still reach out to you is because that’s their job. They want to have a very good understanding of the market and the players”.
Having worked in corporate development twice (a bank and a tech firm), I can 100% relate to this. Most corporates are afraid of M&A. They move slowly. They are reliant on outside advisors. Their approval processes are arcane. So when they do acquire, they tend to overpay and ultimately destroy shareholder value. If you can get hold of such a suitor, definitely sell to them.
And then you have to factor in the platform risk. I keep hearing about one website building platform that views its app marketplace as an extension of the product roadmap. All third party apps that reach a certain scale are offered two options: sell for a discounted valuation or prepare to face off against an in-house clone.
Still want to open the books to a friendly corporate?
