Fall 2018: M&A Considerations for FM & Technology Founder’s—
The fall is literally awash in back-to-back industry conferences—so many that you need to own your own private jet to make each appearance. As I embark on several the next few weeks and meet with companies in the technology and FM space, the question/topic de jour, considering the frothy state of valuations in venture and private equity investing is “do I sell or raise more capital?”
2018 will mark the busiest year for transactions and capital raised for the FM and related technology space. Valuations have reached 10-year peaks and buyers and sellers alike are taking notice. With the Fed raising rates continuously all year, the impact to Cap Rates, the driving financial liquidity metric for commercial real estate, are bound to have a tempering influence on valuations in the CRE sector as a whole in 2019.
The biggest question is when to sell or raise more capital for founders, owners and investors of FM companies (frankly any company). Understanding how this impacts your exit planning is critical to your strategic roadmap. A few thoughts for those founders considering an exit in the coming months, take stock of market conditions and a few of these might help you frame your decision;
1. Start the discussion
Founders should begin thinking and talking about these decisions sooner than later. Once you do engage the right bankers and advisors 12-24 months before a process. Don’t take your buddies word for it who just sold his company, get expert advice on how the process works so you better understand the fundamentals that can lead to a 10X type outcome.
2. Growth & Market Timing
Contrary to conventional wisdom, the best time to sell may not be when the company is at the top of its game or when revenues have surged. Many times it can be when the buyers desire your company the most – when the market is hot (NOW). This is when investors and strategic buyers pay the highest valuation.
3. The Best time to Exit
The best time to sell is yes typically when the company is doing well (duh) and enjoying excellent growth and profitability. This is when the firm can sell for the highest valuations. But being in the business of helping founders make this decision, excellent financial performance and growth is also the biggest barrier to selling for emotional reasons. This is when founders are enjoying the ride and making a lot of money and in my experience, companies usually wait too long before deciding to sell.
Too many CEO’s think more about the value in financial terms, instead of the strategic terms. The mindset that if we wait, we will be worth more does not always apply. This is especially true at the tail end of a growth cycle.
And for technology companies, the strategic value is typically greater than the financial value so waiting does not necessarily increase the value.
4. Timing the Market
Today, mid sized companies in the FM services space are seeing valuations top 10X in some cased with a healthy mean deal valuation of roughly 7X. Market timing is the primary driver for receiving optimum valuations (duh #2).
The ideal time to sell is when the larger companies and private equity firms have the greatest need to acquire your company or your technology. Trying to pick the top usually results in missing the window and not selling for the optimal price. Private equity funds "dry powder" dilemma will continue to put upward pressure on pricing for the foreseeable future.
BE READY FOR THE BOUT--hire the best banker, advisors and M&A counsel and perform a financial audit, aka Quality of Earnings (QoE) before you start.
5. Too Many Reasons Not to Sell
The simple rationale that most growing FM companies should use is to continue building the company while the value being created outweighs the risks of staying independent. Numerous factors like age of the owners, client retention and revenue concentration come into play.
6. Strategic Buyers Abound
Strategic transactions are unique in that they can unlock the most value creation due to the buyers scale and potential synergies. 2018 will mark the year that strategic commercial real estate, global FM players and even large national players will acquire more than 50% of the companies that transact.
7. Matching Interests & Strategy
A small acquisition will rarely make an impact on a multi billion company unless it is entering a new market and needs “headline” success. But larger strategic buyers can be an ideal buyer if the strategy and needs of the company are satisfied with a smaller acquisition.
Acquisitions for mid-sized companies (revenues from $100 million to $500 million) to add capabilities and expand into new markets are common. These buyers can act a lot like a big buyer; however, the mid-sized buyer will consider a small acquisition of $10 million or $20 million if it achieves a strategic objective.
8. Competitors Are Not Ideal Buyers
Take note: Competitors are rarely the best buyers. Even if the seller’s services, clients and technology is superior, it is not recommended to let a direct competitor be part of your sale process. The risk of providing them with an arsenal of valuable information will put you and the company at risk if the deal doesn’t close.
9. Adjacent Market Buyers
Many times the best buyers are not in the selling company’s primary market; they are in adjacent markets. We have seen this time and time again in the FM technology space this past year and many times the valuations are considerably higher than market.
10. Customers & Talent
No matter what you do during this process, protect your biggest long-term assets, your customers and your people. It is critical to stay close to your customers and to involve your key talent in the process. My advice is to be up front with your most important customers and inform them of your decision to sell, but only once you have a negotiated LOI with your chosen buyer. The buyer will definitely want to speak with key customers before the deal closes. The earlier the customer is advised of the situation the better off they will feel.