With a three-to-five-year investment cycle, driving value in your sale process is a key part of the private equity journey. Georg Ell shares the tactics he used to increase offers for Smoothwall by 35%.
In PE circles, there’s a high-level measure of software company success called the ‘rule of 40’. This rule states that the most valuable businesses have profit margins and growth rates that add up to 40. This could be achieved with a 40% profit margin and a very low growth rate, a high growth rate and a low or negative profit margin, or something in between.
Most of the work needed to achieve these numbers – and a high sale value – is completed well before you sell. However, there’s still plenty of opportunity to influence the value of your sale during the process.
Of the buyers who got to the end of the sale process with Smoothwall, we managed to increase their offers by 35%. All by leveraging a range of value drivers in our business. In this article, I reveal these drivers ranked in order of impact on the sale value.
Driver 1 – cash cows and high growth products
Buyers like stability and buyers like growth. But what they like even more is a combination of the two.
Smoothwall had historically grown on the back of one product. It was profitable, cash-generative, had a high market share and strong renewals, albeit only modest growth rates. To secure our continued expansion, we needed new products to sell. So, in the three years before the sale, we developed two additional product lines.
With a mixture of trade and private equity-backed trade in our final round of bidders, it was important for both audiences that we had a high-growth product they could cross-sell to their customer base. Our new product lines had around 60% growth and the potential to expand to their customer base in the US, which was highly attractive.
Something else that added value was our market share. We had about 40% of the UK school market (the second biggest market for education software behind the US). Building that market share in competition with Smoothwall would be difficult for our buyers. So buying into the leading UK company in this vertical was a very attractive opportunity.
This combination of product stability and growth plus market share was very exciting for people and all made our business more desirable. But, if I had to single out one driver of the three in terms of adding value, I would say that new product growth had the single biggest impact.
Driver 2 – building personal relationships
The saying that ‘people buy from people’ also applies when selling your business.
Throughout the sale process, I connected with prospective buyers’ CEOs via WhatsApp and Zoom. We used these opportunities to build personal connections and trust. This really mattered at the end of the sale process when we needed our bidders to increase their pricing and take certain feedback on board.
Some were able to do that better than others. And I think that was partly down to the level of conviction they had in our business and our people. Those with the strongest connections seemed better able to influence their own boards and investor groups.
Driver 3 – broad strategic fit
The bigger the universe of potential buyers for your business, the greater the competitive tension. Which is often good news for your sale value.
Smoothwall’s broad strategic appeal meant it could be seen as core software, safety software or compliance software. We also provided a platform and customer base with good cross-selling and data integration possibilities. These options meant different buyers could see something of value whatever their perspective.
If you think your business only has narrow appeal, try to change its strategic fit in advance of a sale and consider how you could present it more broadly. Obviously, this thinking needs to start early.
Driver 4 – quality presentations
When Tenzing insisted that some presentation practice would be a good idea, I wasn’t entirely convinced. But it turned out they were absolutely right.
Tenzing’s team provided a range of feedback which helped me prepare for the various opinions and demands of our interested buyers. Practising challenged me to perfect our presentations so they worked for various audiences. By the time we finished the rehearsals, I was pretty solid.
Driver 5 – showcase your talent
Wherever possible, we introduced our buyers to a range of people across our sales, engineering and leadership teams. Their vast industry experience made it clear that there was great strength and depth in our business. And that I, as CEO, had trust in my wider team.
Driver 6 – don’t share your price expectations
When buyers ask you to disclose your price range, it’s very tempting to give a number. But I’d recommend that you don’t.
Valuations depend on a range of factors including your revenue, growth rate, strategic and geographic fit, product overlaps, public market comparables and so on. As we experienced, values can range significantly between bidders. One bidder significantly improved their offer as the process went on. If we had set a price range at the start, this bidder might have exited before they built conviction. Or we might have undervalued ourselves.
Driver 7 – drive value with acquisitions
Before our sale, we’d been working on and off on an acquisition. It made strategic and financial sense as we could buy the business and drive efficiencies. Just as we got serious about our own sale process, the acquisition became serious too. So we bought the other business between the first and second rounds of bidding in our sale process.
While some of our bidders found this activity a little distracting, others could clearly see the strategic rationale. And they increased their offers based on the acquisition.
We were also able to talk about the potential for additional future acquisitions due to prior support from Tenzing’s acquisition specialists. They carried out detailed research into around 200 possible purchases and built a heatmap showing how close each business was to selling.
Building out the acquisition landscape allowed us to talk (anonymously) about potential acquisitions with confidence. Showing that we were on the ball when it came to our future growth strategy.
Get ready to go for gold
Continuing to drive value in your business is similar to an athlete dipping for the line. You’ve done most of the hard work already, but leaning in that little bit more can make a big difference. Adopt these tactics during your sale process and you could find that the extra effort propels you from silver to gold.