By the time a founder and management team decide to explore a majority transaction for their SaaS company, they have likely been inundated with inbound inquiries from both buyers and advisors regarding their business. The decision to explore a transaction and enter an M&A process is overwhelming in a vacuum; adding in the decision to use an advisor or pursue a transaction independently adds a layer to an already complex process.
At SEG, we are constantly hearing from companies that the decision to hire a banker for their M&A process was a no-brainer in hindsight, but that it isn’t always clear at the outset. Before engaging an advisor for an M&A process, founders and management teams are typically told why they should hire a particular firm for a process, but rarely why they should hire an advisor in general. This skips an integral step, as for many, the reasons to hire an advisor in the first place are not crystal clear.
Right off the bat, there are three clear incentives to hire an advisor: access to a broad list of potential buyers, value maximization, and deal de-risking. An advisor has deep buyer relationships and insight into buyer preferences & behaviors. Whether running a broad process or a targeted buyer search is preferred, an advisor’s existing relationships bring added value to a transaction. Advisors undertake an immense amount of work in preparing marketing materials to strategically position the business, utilizing industry knowledge and creativity to craft a clear picture. To drive a competitive process, advisors structure the stages and timeline so that potential buyers have ample time to understand the opportunity and all get up to speed on a similar timeline. Finally, advisors ensure that buyers are doing the appropriate level of diligence to understand business dynamics. Advisors are experts at pushing buyer diligence upfront as much as possible, enabling sellers to differentiate bids on items other than value (term specificity, certainty to close), which massively de-risks the transaction.
There are more reasons, beyond those stated above, that make hiring an M&A advisor a massive value-add for a transaction. Below we have provided a summary of the key reasons to engage an advisor for an M&A process.
In working with entrepreneurs and leaders throughout the years, we have gained a deep understanding of how scarce and valuable a management team’s time is. There is a never-ending laundry list of items just to operate a business- layering in an M&A process adds another massive undertaking to the list (more on that below in #2).
Hiring an advisor allows founders to focus on what they do best: solving problems, ensuring efficient operations, and growing their business. A large part of the M&A process is contingent on the continued performance of the business; underperformance compared to expectations makes it increasingly hard to complete a transaction, especially in a competitive market. By adding the responsibility of running and executing an M&A process to an already packed schedule, founders and management teams run the risk of taking their eye off the ball for too long, with performance suffering as a result. There is a clear comparative advantage that founders have in allocating as much time as possible running their business and utilizing a trusted advisor to oversee an M&A process.
The textbook role of the financial services industry is to ensure efficient flow of capital and liquidity in the marketplace. As an advisor, our role is exactly this: to ensure that our clients are most efficiently spending their time and effort while also guiding them to a smooth, fair, and value-maximizing outcome.
The M&A process is a notoriously complex one that requires an immense amount of time and effort. From the creation of materials through the final negotiations of transaction documents, bankers are laser-focused on each stage of the process to ensure that the proper steps are being taken to drive the transaction forward. Drawing from a wealth of experience, pattern recognition, industry relationships, and a devoted team, advisors have the sole responsibility of completing transactions, and thus, can allocate all their focus and energy into the M&A process. Bankers have a constant pulse on market trends, buyer appetites, the most important metrics and deal considerations, and a host of other information by virtue of their role. As the boxing saying goes, there is no substitute for time in the ring, and advisors live in the ring.
A typical M&A process consists of 50 to 200+ targeted buyers, multiple lawyers, accountants, management teams, and several other third parties. Managing communications and relationships, the information and analysis presented and shared, and the timing and steps of a transaction are where advisors add their value. As a founder or management team, this is an immense task to manage. Bringing in an advisor who is an expert at executing transactions to minimize risk and maximize value yields the best results in an M&A process. Experts know what levers to pull and when to reduce the risk of a transaction, increasing the likelihood to close, as well as how best to drive competitive dynamics.
For SaaS companies specifically, bringing in an advisor with a wealth of experience in software and SaaS is integral to success. An advisor with industry-specific expertise means a deeper understanding of the nuances of software markets, trends, and the evolution of software M&A. This enables the advisor to effectively understand and position complex businesses, creating a value prop with data that resonates with the buyer and investor community. By focusing solely on the software vertical, the advisor will have developed deep and intricate buyer relationships, ensuring a curated buyers list that leverages their expertise to maximize opportunity.
The ultimate barometer of success in an M&A process is the ability to accomplish the goal of closing a transaction and driving a successful outcome. The prospect of achieving this goal is greatly enhanced by bringing in an advisor.
Running a process without an advisor poses several risks. Advisors execute transactions for a living, and thus, have the unique ability to:
- Act as a sounding board for how best to internally approach an M&A process with employees, clients, and other stakeholders of the business
- Analyze and present information and data to buyers clearly
- Best structure a process to build competitive tension with buyers and maximize value
- Leverage the right resources at the right stages to de-risk the transaction before going into due diligence, thus avoiding surprises due to red flags, re-trading, or the deal falling apart
- Negotiate key deal terms to ensure that the transaction is fair, transparent, and acceptable to the client
By running a process independently, a company is more likely to close a transaction that leaves money on the table, includes unfavorable terms, or doesn’t fully maximize the company’s potential. Even worse, by not bringing in a banker to properly present information, build a process, and de-risk deal dynamics, founders and management teams run the risk of jeopardizing the transaction altogether.
Entrepreneurs are perseverant risk-takers who are fully capable of executing an M&A transaction independently. However, doing so reduces efficiency and time spent on the core competencies of the business. An independent process drains the time of founders and management teams who typically don’t have expertise in running an M&A transaction and ultimately leads to a lower probability of closing or a generally less seller favorable outcome. By bringing in an advisor, a company can ensure it remains focused on its business performance while trusting a team of dedicated experts to optimize the process for a high probability, successful outcome for all.
Hiring an advisor, and the right one at that, can make or break a transaction. If you would like to discuss how SEG adds value for our SaaS clients or have questions about the M&A process, don’t hesitate to reach out.