There are four elements that are critical to a deal, according to MATH Venture Partners Entrepreneur-in-residence Mert Iseri, who spoke at the Nashville Smart Business Dealmakers Conference during the Dealmakers Roundtable, moderated by UBS Market Executive Ryan Wood. They are fit, alignment, integration and rationale — FAIR.
Fit is the cultural fit between the two companies.
"This is really where the story starts because if you don't have cultural fit, then it doesn't really matter what the deal is about," Iseri says. "Can you sit down next to this person in an airplane for four hours and be buddies with them at the end. Do you make decisions when there are no written down rules in a similar manner? That's cultural fit."
The second component is alignment — internally with your co-founders, board, stakeholders, but also externally with the acquiring company's stakeholders.
"Is the CFO singing the same tune with the head of product in the acquiring company?: he says. "And it's your job as a CEO to find this alignment and maintain it throughout the deal. You can't abdicate this responsibility to someone else."
The third component is integration — how the companies will come together now.
"Integration is sort of like the ugly duckling in the M&A business," he says. "People always say, Let's do it once the deal is closed; we'll figure it out on the other side. Founders leave real money on the table by not figuring out integration during the deal process."
Many M&A deals have earn-out periods, which sets a revenue milestone that must hit to release additional payments. Without an integration plan that is rubber-stamped as part of this deal, he says that objective will not be met.
The final component is rationale. He says the best rationale is described with the acquiring company in mind and it's articulated with what the two companies can do together.
"And it's almost like a little trick," Iseri says. "You work backwards from that and come up with the best price for your business because it's ultimately about that future objective that you're going to achieve together."
UBS Managing Director, Head of the Business Owners and Multigenerational Wealth Client Segments James Jack says the letter of intent is really where a seller can begin to lose the ability to control things, so it's critical from a planning perspective. The planning ahead of the LOI stage is when a seller can take advantage of qualified small business stock or the gift and estate tax exemption that can save the seller millions of dollars.
"You want to be doing this planning now because once that letter of intent is signed the IRS has a very different view on discounts and things," Jack says. "But also when you're in the muck of it, when you're in the trenches, you want to be focused on keeping your numbers and growing; planning and other things are a bit of a distraction. Do it early when you don't have the proverbial gun your head."
MATH Venture Partners Managing Director Mark Achler says there is a stigma associated with talking about exits, especially if the venture has investors and a board of directors. But he says it's fundamental that once a year at a regularly scheduled time there is a strategic conversation with the board to talk about where the business is at.
"Is business great — 100 percent year-over-year growth, we're grabbing market share. Or maybe things are starting to slow down a little bit. Maybe your technology, if its a technology company, your products getting a little bit old, maybe you're losing market share, competition is coming," Achler says. "Whatever it is, having the conversation, it also helps to build alignment."
That important because the venture capital world, he says, is on a clock.
"So, if it's year one of a fund, it's great. Let's go build it," Achler says. "If it's year 10, it's like, our LPS want their money back. We've got to get an exit here. So, having that conversation also buys you the luxury of time because if you have two or three or four years to start planning, you could talk about who's the most likely acquirer. Is it an IPO? Very few companies IPO. Is it going to be a strategic buyer? Is it going to be a financial buyer? Is it going to be an ESOP selling it to your employees? What type of transaction and what are they looking for? If it's a strategic buyer, maybe they care about top-line revenue, and you have a couple years to juice it up, invest a little bit more in sales and marketing. Maybe it's a financial buyer and they care about EBITDA? Maybe you can pull back a little bit and focus on EBITDA. But it also gives you a chance to build relationships. We're big believers in the value of long-term relationships. The more you understand who those potential acquirers could be, you can reach out, start to build relationships, start to build trust. When we talk to the heads of business, Biz Dev, at all the big tech companies we said, What's important to you? And they said, We like to buy companies that we already have a relationship with the CEO, the executive team, that we trust — trust is everything. So having an annual exit talk helps you to prepare."
