The Market Provides Many Opinions on The Value of a Tech Business:
We are deep into the sell-side process for one of our clients. We have received several competing bids from industry buyers, private equity groups, and private equity groups with platform companies similar to our client. To assist our clients in evaluating the proposed transaction we compile in an Excel spreadsheet our deal comparison worksheet. We capture various components of the deal and enter it into a column for each buyer. Variables we highlight are purchase price, cash at closing, seller note amount and interest rate, earnout, owner’s transition salary, and any other component of value identified in the respective letters of intent.
With this fresh on my mind, I receive a call from an entrepreneur who has developed a transformative technology and has had some initial sales wins in B2B and B2Government. He has hit the wall of sales growth on his own because his technology is such that it will be used in large business and governmental applications. Those buyers want to deal with large companies.
One of the companies that has a companion product to his (in a client installation both products will be used together) has expressed an interest in buying this company. The owner’s impression, without any specific information on value from the potential buyer is they will offer a number that would be a 40 X multiple of current revenue – off the charts, but not unusual for me to hear from similar prior tech entrepreneurs’ inquiries.
So after some exchange of data and a couple of conversations, I try to pin this guy down on what he would like me to do for him. He says he wants me to help him negotiate a deal for him with this one buyer. Well of course, I go into my Pavlovian response of “the only way to determine the true value of your technology is through a professionally directed full M&A engagement where you invite qualified buyers into a soft auction process.”
Well he is not buying my point and keeps moving me back to a limited engagement where I would help drive maximum value from this one buyer. I was trying to find a better way to communicate my message and I decided to draw on my deal comparison worksheet from above. I told him that this client was a pretty well defined company, steady predictable revenues, a modest growth rate, stable profit margins, and no proprietary technology. In other words it would be very easy to value this company. It would be 3.9 X EBITDA, 70% cash at close and a seller note for 30% all day long.
So I am explaining to him that with highly qualified and sophisticated buyers, I expected the variance in the bids to be 10-15%, maximum. Well, was I ever wrong and was I ever surprised about the magnitude of difference from low bids to high bids. The spread was over 40%. We had hundreds of buyers when we started, 50 NDA’s executed and 13 LOI’s. I can tell my client with confidence that we know the value of his business and he feels confident he is not leaving money on the table.
I explained to my potential new client that the process he was trying to convince me to launch on his behalf would not be one that I could have confidence that I was providing the highest and best price his technology could warrant. It is even more variable for these tech companies who have potentially exponential technology. The opinions of value are even more dramatic and the differences between top and bottom could be Millions of dollars. Which one is this single buyer, the top, the bottom, or somewhere in between.? Even the smartest venture capitalists guess wrong more than 80% of the time.
Why would you agree to a process that tries to shortcut this proven market value discovery process? The best case is that every time you hear about the latest Unicorn $ Billion start up, you wonder if that could be me. The worst case is that you actually left $ millions on the table because of a flawed exit process.
Dave Kauppi is the editor of The Exit Strategist Newsletter and a Merger and Acquisition Advisor and President with MidMarket Capital, Inc. MMC is a private investment banking, merger & acquisition firm specializing in providing corporate finance and intermediary services to entrepreneurs and middle market corporate clients in information technology, software, high tech, and a variety of industries. Dave began his Merger and Acquisition practice after a twenty-year career within the information technology industry. His varied background includes positions in hardware sales, IT Services (IBM’s Service Bureau Corp. and Comdisco Disaster Recovery), Software Sales, computer leasing, datacom, and Internet. The firm counsels clients in the areas of merger and acquisition and divestitures, achieving strategic value, deal structure and terms, competitive negotiations, and “smart equity” capital raises. Dave is a Certified Business Intermediary (CBI), is a registered financial services advisor representative and securities agent with a Series 63 license. Dave graduated with a degree in finance from the Wharton School of Business, University of Pennsylvania. For more information or a free consultation please contact Dave Kauppi at (630) 325-0123, email davekauppi@midmarkcap.com or visit our Web page https://www.midmarkcap.com/mmc