CEO’s Must Be Set Up for Success When Eyeing up M&A Exits

By Victor Basta, CEO of investment bank DAI Magister

Companies’ sale memorandums are often compendiums that fail to tell a compelling story, and while compiling key information has value, it does not sell a business for the maximum price, says Victor Basta, CEO and Founder of DAI Magister.

Investment bank DAI Magister states throughout its Stage 2 exit process that before embarking on an intensive, competitive M&A sale process, businesses should have a thoughtful, sustained preparation over several months or even 1-2 years before being formally put up for sale increases both the price and certainty of an eventual deal. 

Elaborating on the critical steps for successful deals, Victor states, “Exit preparation should become a business process over a defined period. At its core, every company comprises a set of processes that operate efficiently to support growth. Exit preparation needs to become a process with a small group assigned for clear oversight and responsibility allocated, goals set, and outcomes evaluated.”

A core part of any CEO’s job is achieving a successful exit, and in the months or years before that exit, every CEO should invest this level of time towards a better outcome.

Victor continued: “The time discussed is often uninvested as CEOs are unsure where to invest it, with most successful growth CEOs delivering perhaps one, or at most a handful of successful exits in their careers. Adding someone to the CEO’s circle with this context, well before an exit, can help a CEO navigate the process with confidence.

“Strategic buyers have no interest in a growth company’s current numbers and care more about what they can do with the acquired company post-close,” Victor adds. “One of the biggest mistakes CEOs make in exit planning is to focus on refining forecasts in the way they have learnt when planning a funding round. It is more important that a company exceeds its near-term forecast by even a small margin. For instance, a company achieving $45m in revenue having forecast $50m likely receives a lower valuation than it would forecasting $42m then achieving $43m.”

CEOs regularly under-appreciate the importance of risk reduction to even the best buyers, and strategics think at least as much about risk as about upside and potential. High value exists when a buyer is confident a company is exciting and safe to buy. Exceeding a near-term forecast can mean a buyer grows confident enough to discount future performance less, which leads to a higher exit price.

In continuation, Victor states: “Sale memorandums must also tell a compelling story by anchoring things a company has done, which even much larger companies find challenging. This includes redeveloping a complete fintech stack, breaking into an important but challenging market, signing one or more game-changing commercial deals, onboarding a difficult but high-value customer, or maintaining high customer satisfaction.

“An equity story should demonstrate how a growth company can multiply in size and expand its offerings. Large buyers are more interested in how an acquisition can drive revenue/value post-deal, how it helps the buyer ‘fix’ a gap or problem in a business unit or enables them to compete and win large contracts or customers”, Victor elaborates. “Furthermore, a compelling equity story should anchor and highlight a company’s core DNA. It is critical to be clear and emphatic on which attributes drive a company’s success and use that to distinguish the best buyers from those merely curious.

“KPIs and unit economics are VCs’ should be used carefully, as calculations are complicated as large companies often calculate the same metrics differently. Also, growth companies track far more detailed KPIs than a potential buyer, and over-sharing can sometimes trigger questions a buyer might otherwise not ask.”

Victor adds: “Another key element of exit prep is investigating key competitors and defining positive differences. CEOs should clearly define the 2-3 most powerful differences that make their company outstanding and weave each into the equity story. Many growth CEOs are also deterred by the idea of being safe to buy, focusing on raising excitement levels around their businesses. Yet for large buyers, safety is equally valuable, sometimes more so.” Victor concludes, “It is clear first-hand how markedly better exits result from preparation before a sale effort. The reason half of sales processes fail a company is immediately an asset for sale, offering buyers a compressed time frame to make a strategic decision. Groups must be assigned for exit preparation to ensure the correct strategy is in place. CEOs must invest time into achieving a successful exit by conducting regular reviews with clear deliverables, ensuring management and the board see how exit prep has developed every two to four weeks. Lastly, sale memorandums must grip buyers and tell a compelling story defining how they stand out from the pack, communicating opportunities, exposing companies DNA and differentiating from competitors.”