Why Hire an Advisor?
Software founders are often faced with a conundrum when either raising capital or selling their business. Do I hire an advisor or run the process myself? When chatting through this question below are the most common comments we hear:
· “I have so much inbound interest – why would I need a banker to find investors / buyers?”
· “I already received an offer / term sheet that meets or exceeds my valuation target, what’s the point – I’m almost to the finish line”
· “I know my business better than anyone, how would an advisor know how to market it better than me?”
· “I know who the best fit investors / buyers are, I can just go direct”
So then let’s address each of these…
Inbound Interest
This is becoming a much more common comment as time passes because (a) private equity / growth equity firms have realized one of the best ways to increase IRR is to source “proprietary deals” and (b) tech tools have democratized founder accessibility (e.g. SourceScrub, LinkedIn etc.). What are proprietary deals and how do they boost IRR? Deals that they source without an advisor involved. For obvious reasons these deals tend to price lower than deals that are marketed by an advisor thus boosting IRR. For one, the investment firm knows there’s no advisor involved to play bad cop when necessary. That plays into their valuation. Secondly, the investment firm usually operates under the assumption that they’ll need to spend more on third-party diligence to validate and clean-up data and that the data they’re basing their offer on may need to be “hedged” with a . Thirdly, and perhaps most importantly, the investor believes that there’s likely not a broadly marketed process in place so limited competition. Related to this proprietary deal trend many investment firms have built out large business development teams comprised of junior professionals whose sole focus is to build connectivity with founders. They do this by ingratiating themselves to you (“you’ve built an amazing business, would love to connect and explain our fit!”). Don’t allow yourself to mistake this for an impending term sheet / offer. Even worse, sometimes these teams are reaching out to you to gather intel on your business only to compare it to a competitor that might be in market. Lastly, you are probably not familiar with the different investment firms reaching out to you. A good advisor knows the pros and cons of these firms very well and can quickly filter for fit based upon the transaction type / partner type you’re looking for.
Offer in Hand That You Like
Congrats! It’s no small feat to get to this stage…investors / buyers have done some diligence and felt enough conviction to put something on paper to your liking. So why does an advisor matter at this stage? A few things…first, what level of “offer” are we talking about? An Indication of Interest (“IOI”) with a range for valuation devoid of details? It’s a long road from an IOI to securing a final term sheet / stock purchase agreement. Many opportunities exist for the investor / buyer to re-trade headline valuation if they know an advisor isn’t present. Even assuming they don’t do that there are plenty of other negotiating pitfalls – allowing exclusivity to drag indefinitely because no “stalking horse” has been identified, transaction structure (e.g. participating preferred) that could end up cramming the common equity absent of an upside exit, off-market management employment agreements, shifting cash consideration to an earn-out or private stock in the acquirer (do you know if the value they’re ascribing to the acquiring company is fair?). The point is a good advisor can still be very worth it as a protection against these dynamics even assuming you want to pursue the offer and not use it to market more broadly. Not only that, this investor / buyer could be your partner for the next handful of years – let your advisor play “bad cop” during negotiations vs. doing it yourself and depleting goodwill heading into a long-term partnership.
I Can Market Myself
There are the materials that need to be created but more importantly the “how” the story is told. Any advisor can create slides. A good advisor will have a deep understanding for how to craft the narrative underpinned by identifying which strengths investors / buyers will gravitate towards and which weaknesses will need mitigants backed by data. You don’t raise capital or run M&A transactions for a living and so you likely don’t have an appreciation for how the investor / PE / strategic buyer community thinks about software businesses. Who will you be comp’d against? What are the various KPIs they expect to see in the deck? What sophisticated cohort level analysis can be performed to optimize those KPIs? How should you think about presenting the TAM? How will sales efficiency / pipeline metrics be assessed in determining the credibility of your projections? How should the projections be built? These are just a small sample of the questions that you need to be considering as you think about marketing your business and how investors will, in turn, assess its strengths and weaknesses. It can get complicated quickly.
I Already Know Who the Right Investors / Buyers Are
Lots of founders (especially those being inbounded) believe they know all the right investors and/or buyers to reach out to. The issue here is it can be deceptively complex to determine who the outreach list should be. Part of an advisor’s job is to keep pulse on what areas of software funds are prioritizing, which new funds are launching, what large strategic buyers’ M&A strategies are, which PE-backed companies are looking for add-ons. A good advisor also understands the nuances of each firm / strategic such as understanding how a certain growth equity firm behaves as a Board member or understanding what it might be like to work under the purview of a certain large strategic acquirer. So it makes sense to rely on an advisor for not only having a pulse on which parties make sense to include in the outreach based upon investment / M&A priorities but also what those parties would be like as a partner. The second piece especially is usually beyond the purview of a founder.
Beyond these common questions there are number of other areas a good advisor can add a ton of value: 1) knowing which investors / buyers are the right fit and so properly balancing outreach breadth with ensuring competitive tension by including a sufficient number of parties, 2) managing the due diligence process effectively and efficiently, 3) coaching you on management presentations, 4) connecting you with other third-party service providers to streamline the process.
And so while we are admittedly biased, we strongly believe that in many cases the pros far outweigh the cons. We also understand there are nuances to every transaction type and situation and so as a firm with a flexible mandate we are more than happy to advise you in whatever capacity you think makes the most sense for your transaction – from advising in the background to owning the M&A process ourselves.
