We interact with great, entrepreneur-driven companies all the time. They have a product that creates value for customers, they make money, they are growing...they have the hardest stuff figured out. But frequently these companies will be missing out on a few things that would make them significantly more attractive to buyers...and that could improve their performance even if they aren't interested in M&A.
With that in mind, below is a checklist of five things that we encourage every Internet/technology entrepreneur to do.
1. Know Your KPI’s: Buyers will give a company a lot more credit for strong operating performance if the management team has a firm handle on KPI’s. Why? A management team that can rattle off their KPI's will look like they have much better control over their performance than one that can't. That will generate a buyer premium. Examples: MRR, LCV, and CAC for SaaS/recurring revenue companies; gross margin by traffic channel for lead generation companies; MAU’s, DAU’s, and DAU’s/MAU’s (sticky factor) for mobile and social gaming companies; there are many more for all kinds of companies, and buyers love it when targets go deep in tracking and reporting KPI's.
2. Know Your Competition: A management team that doesn’t know its competition will look vulnerable. Every buyer wants a target to know who the competitors are, what they are doing, and why the target is doing it better.
3. Have a Management Bench: An acquisition target always looks much better when there are more strong leaders and operators than one founder/CEO. When buyers are writing big checks to a CEO/founder, they strongly prefer that there are others that they can depend on if the CEO/founder leaves post-deal. Moreover, a CEO/founder will look both more confident and more invested in the future if they have surrounded themselves with talent.
4. Have a Vision Beyond the Short-Term: Buyers want to think their target is positioned to survive across innovation cycles. While no buyer expects a target to have a crystal ball, a target will look much better if they have a strong view of how the market will change over the next 2-3 years (because it almost always will change a lot) and how they are positioned to succeed as those changes unfold. For example, just about every Internet/tech company should have a story to tell on how they are positioned to benefit from the rapid growth of social and mobile.
5. Sell From a Position of Strength: Many companies are reluctant to sell when their growth is strong and their future seems full of “low hanging fruit.” But that is the exact time when management will appear most prescient, a business will look least vulnerable, buyers will have the most interest, and a target will command the highest valuation multiples. Potential sellers that wait until growth has slowed will find a lot less buyer interest and a compressed valuation multiple.
Horizon Partners is a boutique financial advisory firm serving companies in digital media, software, and related growth sectors. Horizon provides advisory services to help companies raise capital and execute mergers and acquisitions.