At some point, you may decide to sell your growing SaaS business and like any entrepreneur, you’ll want to make the best deal. It is possible to do the legwork yourself, but generally speaking, if your company is of a certain size, you’ll want to bring in outside help in the form of a banker. All bankers aren’t created equal, however. That’s why it’s essential to know what to look for when hiring one, so you can walk away with the price you deserve.
Why You Should Hire a Banker
Your company may have great software engineers, talented marketing people, and a driven sales team. Yet unless you have someone skilled in mergers and acquisitions, odds are you should look for a third -party to help you find a buyer.
The alternative—running the process yourself---is risky because you may not be able to generate sufficient interest in your business to get the best price or terms possible. Think of it this way: It can be the difference between asking one person how much they’ll pay for your tickets to the ball game, and asking ten people. As a general rule, the more potential bidders, the better the price.
The evidence in the M&A world bears this out: According to a study of 85 business owners, hiring a banker added value, with 84% of those surveyed saying the final sales price exceeded their initial estimate.
Another advantage to bringing in a third-party advisor is that it allows you to keep your eye on the business’ day-to-day operations. Indeed, one big risk in trying to manage the process in-house is that it detracts from your company’s growth, which ends up making the business less valuable in the end.
Finally, hiring a banker is a way to demonstrate to the market that you’re serious about conducting a professional sales process. When companies and investors see that you’ve dedicated both time and money to retaining an advisor, it reflects well on your business.
What to Look for When Hiring a Banker
Before hiring a banker, it’s important to have a sense of what they should bring to the table. For starters, they should have a well-functioning experienced team, led by a senior dealmaker and supported by junior associates. Beyond that, a good banker has their finger on the pulse of the market for your industry, both in terms of competitors, deals completed and contacts in the investor base of the industry you operate in. This knowledge can help you conduct a sales process that maximizes the value you receive for your shares.
Once you’ve hired them, your banker should be able to:
● Lead the sales process, and formulate the strategy behind the process
● Help you put together investment memorandums (long and/or short)
● Assist you in presenting your financials in the best possible light (while maintaining accuracy, of course)
● Coach you on what to say/what not to sale during negotiations with interested parties
● Tap into a deep network of contacts. This can range from other advisors (bankers, lawyers, accountants, etc.) to potential acquirers, whether upstream or downstream companies in your sector, or investment firms (such as private equity)
● Identify and segment likely buyers, and assess each one based on merits such as financial strength and reputation
● Work to structure the best possible transaction for you
As with any professionals, not every banker is a superstar. Some you encounter could be ineffective at generating a truly competitive bidding process. They might not portray your company in the best light possible, and, as a result, secure a sale price significantly below your potential. In short, you could end up paying millions to a banker for a suboptimal deal. Keep in mind that when signing a banker up to represent you, there is normally a time limit. And if you sell your company (even by yourself) within this timeframe, you have to pay the fees.
Deciding Who to Hire
Businesses don’t usually interview a sole candidate for a job. Likewise, you probably want to speak with a number of potential bankers before giving one the mandate. In deciding who to hire, you should take into account:
● Their experience
● Any references you can speak to (i.e. companies they`ve worked with previously),
● Personal feel (does this seem like a person/team to which you are comfortable entrusting such a big role?)
● Experience, knowledge and contacts
It’s All About Competition + Incentive
Bankers, as we mentioned, can help you run a truly competitive sales process. Even if you have a sense of who the eventual buyer will be, your advisor can drum up substantial interest, thereby driving the price up as well.
They certainly have an incentive to do so. While you may have to pay a small retainer, most of the banker’s compensation comes in the form of a success fee, which is paid as a percentage of the selling price (it can be 3-4% if your firm is small, or as low as 1.5% if you’re a large company). The higher the price they get for you, the more they make.
That said, you may be faced with a situation where their interest diverges somewhat from yours. Suppose one bidder offers $50 million in cash up front, while another offers $30 million today and another $30 million spread over 5 years. You may be inclined to take the first offer, while the banker (who is paid based on the total price), may prefer the latter. Remember, it’s your company, and you should take the deal you think is best.
Selling a Business is All About Relationships
In a world dominated by technology, the process of selling your SaaS business can be as old-school as it gets. Putting together a compelling strategy, and conducting intense face-to-face negotiations can make the difference between a good deal and a great deal.
That’s why you want the best banker you can find on your side.
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