M&A as a strategic exit pathway

There are more than 1,400 private unicorns but fewer than 20% are expected to go public – at least in the near-term. As the IPO market remained muted, it has created a backlog of companies looking to make their public debut. As well, IPOs right now are suited to companies that fit a specific mold for public investors – ones that have, amongst other traits, strong growth prospects and a clear (short-term) path to profitability.

In this age of accelerated innovation, while we anticipate IPO activity to continue opening up to act as a pipeline for funding, we are not expecting it to reach pre-pandemic levels. Instead, a strategic and meaningful exit option for founders and CEOs can be M&A.

To help our portfolio companies, we recently convened a discussion around how founders and CEOs can optimize this path by building optionality early, establishing strategic relationships, and managing a successful sale process.

Here are a few of the key takeaways:

1. Build optionality early

Creating optionality should start as your business nears $25M ARR, not when challenges arise. Building optionality involves making your business adaptable and building trusted industry relationships to avoid a pressured sale down the road. Here’s what to think about:

• Invest in strategic relationships: Founders often hesitate to connect with bankers and private equity firms without immediate plans for a sale. However, establishing these relationships early provides insights into market trends and better positions your business for an eventual exit.
• Broaden your viewpoint: Understand how others view your industry and where they see value in your company’s approach. Engaging bankers can help you understand the valuation landscape, even if you’re not immediately considering a sale. 

2. Allow ample time for the process

A successful sale takes time.  Preparing for this empowers you to manage expectations, ensure needed runway and avoid weakened negotiation positions.  This is critical given the challenging fund-raising market and regulatory environment. Here’s what to think about:

• Conduct scenario planning: Develop potential exit scenarios and assess the impact on your runway and potential shareholder returns. Always consider the opportunity cost of your decisions. Time is incredibly valuable, and cash is no longer free.  Know how the cap table will pay out key shareholders at different valuation points.
• Strategically engage your team: Minimize the number of people who are involved in any process to avoid leaks and distraction.  Help those involved understand the sale phases and guide them in balancing the process with running the business. If you might need to exit at a depressed valuation, consider a management carveout plan to ensure retention of essential executives through deal close.

3. Set the table for success

Remember that a deal is not done until the money is in the bank.  Sales processes can be exhausting and easily tilted by seemingly minor issues, such as cultural fit. Moreover, merger agreements tend to be long and incredibly nuanced.  Work to proactively manage cultural fit and augment your team with experienced outside advisors. Here’s what to think about:  

• The importance of culture alignment: Leaders prioritize cultural fit when buying companies.  Identify and clearly highlight your company’s cultural strengths. Aligned values will strengthen the deal’s viability and support post-close success.
• Surround yourself with experienced advisors: There is a lot to be negotiated in a sale process beyond price.  Potential acquirers likely will have more experience than you on how to tilt terms and definitions to their advantage.  Be sure you have experienced advisors to help you strengthen your negotiations and avoid unexpected surprises. 

Success comes in many forms

Every founder aims to leave a lasting impact on their industry and create meaningful value for their team and investors. Leaders who actively manage the factors within their control achieve the best outcomes. At TVG, we don’t just invest; we partner with our portfolio companies to create opportunities and achieve the best outcome together.

Looking for a long-term partner? Get in touch at tvg@otpp.com.