4 Things Startup Founders Should Think About Now, Even If You Are Not Thinking About Selling Your Business
Navidar | September 27, 2021
When you are working hard to grow a young business, selling it someday might seem too far off to even think about. But the reality is that every founder should set the course for an eventual merger or acquisition by taking notice of four key points that will not only make your company a more salable asset later but will also lead to better business practices now.
#1. Know What Makes Your Company Special and Unique
From the outset, we encourage founders to think about what makes their company sustainably different from their competition. Sustainably is the key word here, because the company must fill a long-term market need and be able to maintain its differentiation against competitors over time to be successful and, in turn, to eventually have a favorable M&A exit.
Sources of differentiation vary. Is your company’s differentiation based on specialized expertise? On relationships it has with key partners? On the intellectual property embedded in its software? Whatever the answer, we have often noted that many founders overlook their key sources of differentiation, which is to say that they do not focus sufficiently on what a potential acquirer would value most in their business.
If this is surprising, consider the following example: Navidar was hired to sell an e-commerce company that competed against several other well-funded and better-known competitors. The company had two product offerings, both operating on a common technology platform, but the majority of its revenue came from just one of those products. When Navidar asked about the second product offering, the CEO told us that it was not really very important or essential to their current strategy. But Navidar noticed that if the company were positioned with acquirers as being able to offer both products to the acquirers’ customer base, then the company would be truly unique and attractive because none of our client’s competitors offered both products.
In another example, a founder had started a vertical SaaS software company to provide an ERP system to small businesses in that sector. The founder had previously owned and operated one of these businesses before starting this technology company. While there were already existing software solutions in the marketplace, the founder nevertheless launched a competing product. What really was unique about the business and the product was how much industry knowledge and best practices workflow were built into the SaaS solution because of the founder’s experience in the industry.
#2. It Is Never Too Early to Form Relationships with Key Industry Players That May One Day Buy Your Company
To be certain, strategic relationships with large players in an industry can often take a long time to negotiate. Large companies you may wish to partner with sometimes have byzantine partnership approval processes that may involve long reviews by legal and compliance departments.
Nevertheless, it is also often advisable to form partnerships with several of the top players in an industry rather than putting all of your eggs in the proverbial same basket. We often say to clients that whenever a small company dances with an 800-pound gorilla, they must be careful not to get stepped on, but it is still important to remember that such partnerships hold the potential of not only increasing a company’s revenues but also broadening your pool of potential acquirers when the day comes to sell your business.
#3. Engage a Quality Accounting Firm and Get Your Numbers Audited (Yes, Audited)
Navidar is often asked: “Why should my small company get its financials audited from the beginning?” The answer has several components, all of which are important.
First, it is better to do things correctly in the beginning rather than correct mistakes. We can assure you of one thing: the money spent on getting your numbers right from the beginning will be one of the best investments you ever make in your company.
Second, having accountants audit your financials also helps avoid problematic issues that can derail or delay an acquisition. The most common issue we encounter with unaudited financials is that revenue recognition is not correct. The second most common issue is that liabilities are not properly accrued. Sales tax is typically the largest liability that we find is not accrued for correctly.
One important item that most accounting firms do not address is the proper presentation of the financials. We would recommend talking to a banker as to the appropriate industry standard format for your sector so that investors or acquirers can easily compare your audited financials with other companies in the industry.
One SaaS company we know had to change its entire financial history because it had never been audited and had been recognizing revenue incorrectly for many years. Unfortunately, this issue was brought to the company’s attention in the middle of an M&A process by the potential acquirer, who ultimately decided to acquire a different company in the industry that had no such accounting issues to resolve.
Finally, wouldn’t you rather be talking to the large company interested in buying your business about strategic matters such as deal synergies and your strategic value to them, rather than discussing whether you have recognized SaaS revenue correctly?
We are quite certain that discussing the former is far more advantageous to obtaining an excellent outcome than fighting about the latter and believe that every dollar spent on good auditing more than pays for itself when the time comes to sell the company.
#4. Assemble a Team of Trusted Advisors
It is critical to have long-term relationships with trusted advisors who can be regularly tapped to provide counsel as your company navigates key strategic decisions. Such advisors can have the most impact and value when they have been part of your company’s journey and know where it is headed.
Oftentimes, investment bankers are brought into a relationship much too late, leaving little time to make some of the desired changes ahead of an M&A transaction or capital raise. It is an all-too-common misconception that a company needs to be ready to sell before it starts having a dialogue with investment bankers. In fact, nothing could be farther from the truth.
Navidar prefers to meet companies early in their lifecycle, well before they want to sell the business. Founders and CEOs who work with us in this way get the opportunity to see the value of our insight in advance of any deal, learn how we think about strategic issues, and gauge whether our firm would be a good fit for them when they do decide to sell.
In turn, Navidar gets the opportunity to form relationships with founders and CEOs and help them avoid many of the common mistakes young companies often make as they build their business.
It is not necessary to sign an engagement letter to have these types of discussions with a trusted investment banking partner. Navidar is receptive to establishing an informal relationship that can potentially pay off for both parties.
If you are interested in speaking to us about ways to start preparing your company now for a future M&A, or if you are currently seeking advice on a potential transaction, please contact Stephen Day at [email protected] or (512) 765-6973.