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Ask the Expert: What are the main liquidity exit options and associated strategies for software entrepreneurs?




By: Robert Young, Director, Alantra


Owners of software companies invest significant time and financial resources into their business and often have the vast majority (if not all) of their personal ‘wealth’ tied up in the company. Realising liquidity can however be delivered via many means, including by taking capital out of the business without selling and exiting completely by taking investment from private equity. Transactions (whether a minority, majority or a full sale) typically represent one of the most important financial, professional and personal decisions in a founder’s life. As such, it’s vital that liquidity options and their respective merits are understood at every stage, and that ahead of and during an M&A process, a strategic approach is taken to ensure the best terms possible can be achieved.

Over the years, we have worked with hundreds of business owners. While each process is highly customised, understanding your options, preparing your company for a transaction and developing a liquidity strategy aligned with your goals will increase the likelihood of delivering a deal, enhance your company’s value and simplify the transaction process. 

 

Private equity

Private equity (PE) firms raise money from investors to buy and sell businesses. They partner with owners and management teams to grow the business, typically over a three to five-year period before selling it to generate a return. PE professionals have significant experience growing businesses and will take either a majority or minority stake (but never 100%), thereby allowing owners to stay involved or in control, while taking some money off the table and ‘derisking’.  


Software companies are particularly attractive to PE due to their recurring revenues, large total addressable markets (TAMs), scalability, high margins and potential for international expansion. PE firms provide not only capital and financial support, but also tried and tested strategies, and access to value creation teams and industry contacts amongst other things. All these help companies grow and enhance their value, enabling owners to realise further liquidity from a follow-on PE investor or sale to a strategic buyer in the future. Many companies will pass through multiple cycles of PE ownership as businesses continue to grow and evolve, enabling the shareholders and management to take cash out multiple times whilst still benefiting from the continued success and financial upside.

 

Is PE right for you? How to decide on the right form of transaction (from a minority sale to a majority sale, to a full sale)

Deciding on the right path depends on your goals. You might think your business has reached the point where it needs meaningful financial investment and expertise to take it to the next level, you might want to derisk by realising some of the value you have created while continuing to grow, or you may have made the decision to sell and retire, or to start a new venture. 


Next you need to consider what capital sources (and structures) will be available. This is influenced by your business’s stage of growth and its financial performance, as well as market trends and conditions. 


A high-quality advisor can effectively help you weigh up all these factors and then vitally, help you plan ahead of a transaction to ensure you maximise value, terms and deliverability. We often sit alongside owners for several years, acting as a sounding board and providing advice until they or their business is ready, or a decision on the desired path has been made. This may even follow a ‘dual-track’ process, where more than one option is tested in the market simultaneously. 


Knowing the likely investor in or buyer of your business is just one factor. Accessing them, understanding their acquisition priorities and the market conditions, clearly articulating your company’s unique value proposition and managing the many logistical, legal and financial steps involved in completing a transaction are also vital. A skilled advisor can manage all of this for you. 


Preparing for a transaction 

Whatever the objectives and final strategy, preparation is vital. The work involved ahead of a transaction shouldn’t be underestimated. It takes a lot of time and work to prepare your company for a transaction and to be ‘process ready’ and this work ideally starts years in advance, not during a process. 


Assessment

  • Understanding what drives value: Determining the value drivers for your company is the first step. Here, your adviser’s insights and technical experience are important as they know what the most relevant value drivers are for the various investor and buyer types, given their strategic priorities and the market trends. For strategic and PE-backed trade buyers, this could be assessing certain client types, geographies or gaining the ability to cross-sell. Their appetite to acquire may be cyclical and they will be able to pay premium valuations for the right companies at the right time. 

  • For PE, the focus is on: Aligning themselves to markets with strong tailwinds and businesses with underlying growth dynamics, as well as leading unit economics and KPIs. Finding companies that can act as a platform for consolidation is also a common strategy. PE often doesn't benefit from the same strategic rationale as trade buyers. Nevertheless, they will often pay premium valuations for businesses that are regarded as leaders in their end markets.    

  • Understanding the market: Compare your company’s revenue and EBITDA multiples to those buyers have paid for similar companies (‘precedent transactions’). This evidence is a great foundation for determining an initial valuation and serves as bargaining power when negotiating with prospective buyers. It also feeds into the value driver assessment, as you can better understand why buyers pay more for some assets than others 


Action

  • Developing a strategic roadmap: The above can be used to set out a roadmap to enhance the most important value drivers, focusing on where the largest wins can be made, and to illustrate opportunities and earnings potential under new ownership, or with the assistance of growth capital. 

  • Emphasise financial visibility: as well as focusing on your business’ capabilities, buyers will look at your financials. An adviser can work with you to ensure these are tracking in the right direction, and your reporting is in good order whilst highlighting the value of the company’s performance using various metrics/KPIs. This will help you articulate the value in your chosen business model and its unique characteristics.


Successful preparation should attract a pool of potential buyers, creating competition and often driving up the valuation..

 

Case study: Using private equity to accelerate growth while maintaining independence

Founded in 2013 by Anush Newman and Leo Valan, JMAN delivers a range of solutions combining consulting, data science and data engineering capabilities that address the growing need for investment and value creation initiatives to be driven by data, at pace.

Operating from London and Chennai, JMAN has a primary focus on delivering for clients in the private equity industry.


JMAN has achieved significant growth over the last five years. Anush and Leo wanted to partner with an investor that could help expand its offering to grow internationally.

Having demonstrated our deep sector knowledge and our record of securing minority investors to support businesses like JMAN, we were appointed to prepare the business for an investment and to secure a financial sponsor to back Anush and Leo to deliver the next stage of growth both in the UK and internationally.


The solution

• We spent a significant amount of time pre-process to coach the management team on the options available to them, across debt, structured capital and minority private equity

• JMAN’s track record in a high growth market and reputation with private equity clients meant many potential bidders were already familiar with the business. This, coupled with the company’s impressive financial profile, attracted strong interest across the structured finance and private equity markets

• Our role was to ensure that the equity story presented to investors was ambitious but credible, with alignment between marketing documents, management presentations and vendor diligence

• After a highly competitive process, the JMAN team chose Baird Capital because of their track record with supporting professional services firms, experience in the US market and deep understanding of pharma and pharma services (another growth area for JMAN)

• Baird’s investment supports the continued expansion of JMAN’s range of data-led solutions for clients, as well as international growth. 


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