Acquiring With Insight and Wisdom

An estimated 65% of all acquisitions fail. It’s a sobering statistic. The buyers undoubtedly conducted extensive due diligence. Why, then, were they surprised later by substantial shortfalls in projected revenue, customer base erosion, earnings dilution, product integration nightmares, or the rapid departure of key management? Most often, it’s because the buyers didn’t truly understand critical elements of the seller’s business, or anticipate the post-closing impact of the acquisition. Acquisition success requires an intimate knowledge of private company operations, finances, product strategy, distribution channels and market strategy. That’s our bread and butter. We help buyers choose wisely, assess astutely, value intelligently and structure transactions that can better the odds and the outcome. It’s this unique combination of investment banking skill and unmatched industry expertise that distinguishes Software Equity Group from other firms.

• Our firm is well-known and highly respected worldwide by software and technology entrepreneurs, public software company senior executives, venture capitalists and private equity firms.
• We have profound knowledge and understanding of the software industry and the technology markets we serve.
• Software Equity Group has guided, mentored and represented more than one thousand public and private software and technology companies worldwide, including both buyers and sellers, in North America, Europe, the Middle East and Asia-Pacific.
• Some 10,000 industry decision makers in 26 countries rely upon our research and analysis of the software and technology equity and M&A markets.
• We are strongly committed to success and enjoy an impeccable reputation for integrity and professionalism.

Strategic Acquisitions to Grow Revenue, Expand Markets and Enhance Shareholder Value

Software Equity Groups primary buy-side objective is to facilitate transactions that satisfy the anticipated returns on investment of our clients. By utilizing our extraordinary industry network and employing a proven buy-side methodology, we help our clients acquire strategically, assess insightfully, value intelligently and structure transactions to better assure the desired outcome.

Our buy-side clients include smaller public companies seeking to outsource or supplement their corporate development teams; large public companies requiring special assistance to find and qualify a highly strategic acquisition; and private equity firms desiring in-depth domain expertise to more insightfully analyze a buyout candidate.

Our Comprehensive Buy-Side Process

Our approach to buy-side mergers and acquisitions is comprehensive, hands-on, and results-driven. Though the actual process may vary, here’s a step-by-step overview of our typical approach:

Formulate and Clarify Acquisition Strategy. We begin with extensive fact gathering and a detailed strategy session. Our objective is to define and clarify with client senior management its specific acquisition goals and objectives, including the desired return on investment.

Formulate Acquisition Parameters. While most acquirers are certain they know what they’re looking for, few consider the plethora of collateral issues that cause so many acquisitions to fail. The technologies should be compatible, but do the distribution channels of buyer and seller need to align? How important is recurring revenue in comparison to growth rate or the strength of the management team? What if the acquisition was mildly dilutive or the seller’s target market fundamentally different from the buyer’s?

Create/Assemble Briefing Memorandum. Initial impressions are important, and presenting an acquisition opportunity to a target seller is no exception. We understand, intimately, the mind set of private company software entrepreneurs/principal shareholders. Many are receiving numerous inquiries about their acquisition receptivity. To effectively stimulate target seller interest, we typically prepare a Briefing Memorandum that provides a compelling overview of our client, its finances and relevant valuation measures (if publicly reported), products, target market and market opportunity, as well as the Client’s acquisition objectives and parameters. Our objective is to carefully and strategically position our client as an ideal merger partner with size and synergies that could significantly leverage the target seller and enable it to reach its true potential.

Identify Acquisition Candidates. We begin with our proprietary database of software and technology company buyers and sellers – tens of thousands of companies, painstakingly compiled over the past 15 years and continually updated. That’s our starting point. Next, we access our vast industry network that includes public and private software company executives, industry press publishers and reporters, industry analysts, industry association directors, venture capitalists, private equity firm managing directors, and industry related attorneys, accountants and consultants. We also leverage our client’s market knowledge and industry contacts to leave no viable prospect unidentified. The resulting product is a solid list of qualified acquisition candidates that are summarized and presented to the client for first round review, prioritization and approval.

Contact Acquisition Candidates. Once the initial list is approved, SEG contacts priority candidates by email and telephone. We introduce our firm, present the opportunity, and assess the target’s initial interest. If the candidate is willing to engage at this juncture, we’ll seek to learn more about its product offering and business. If the candidate is amenable, we’ll request relevant financial performance data, suggest an introductory phone call or meeting with our client, and arrange for the exchange of a mutual Confidential Information Agreement.

Evaluate and Qualify Acquisition Candidates. We coordinate the initial meeting or teleconference with each candidate, set the agenda in concert with our client, and actively participate. This first meeting is a vital element of our screening process. Having guided and represented many hundreds of sell-side software and technology companies, we can provide our buy-side clients with unique analysis and profound insight.

Should our client opt to continue discussions beyond the first round, well engage in far more thorough and detailed analysis of the targets business, including its products, technology platform, sales and distribution model, market opportunity, customer base, pricing, historical financial performance, future projections, competitive landscape and management team.

Value Acquisition Target. SEG will often assess the fair market value of the candidate selected by our client for acquisition. While this valuation is not intended for use as a fairness opinion, it can comprise a valuable data point for our client’s internal use when structuring an offer. Our assessment of fair market value, expressed in a range, ordinarily utilizes industry appropriate valuation methodologies, but also reflects a variety of qualitative factors which we subjectively apply. The quantitative component typically considers discounted cash flows, factoring in residual values, as well as EBITDA, free cash flow and/or revenue. The results are then assessed in comparison with relevant public market multiples and comparable M&A transaction multiples. On the qualitative side, we seek to reflect the valuation realities of the marketplace. Our quantitative valuation range for the seller is adjusted upward or downward, based upon the presence or absence of certain factors upon which buyers place great positive or negative value when deciding how much to offer.

Negotiate Purchase Price and Letter of Intent. After consulting closely with our client, we lead negotiations with the target candidate, focusing initially on purchase price, form of transaction, form of consideration, payment terms and deal structure. We believe it‘s in the best interests of our client to address key deal terms and known issues at this juncture, rather than defer discussion until much later in the process. These key elements are then memorialized in a reasonably detailed, non-binding letter of intent we typically help draft in concert with our client’s attorneys. The LOI will ordinarily identify working capital requirements and adjustments, seller liabilities to be extinguished or assumed, indemnity escrows, due diligence timing, employment of key management, and the no-shop/exclusive negotiation period.

Due Diligence Coordination. In the current regulatory environment, today’s buyers – particularly public company acquirers – require a detailed, thorough examination of the seller’s business, finances, assets and records to confirm their perceptions of the seller’s value and identify and quantify any seller-related risks. The process can also aid post-closing integration by illuminating areas that may require special buyer attention. SEG helps facilitate the due diligence process communicating frequently with the client’s attorneys and accountants to help clarify and resolve issues as they arise.

Contract Drafting Facilitation. During the drafting and negotiation of the definitive agreements, communication often breaks down, emotions surge and crises frequently arise. Our extensive sell-side experience enables is to be especially adept at anticipating, addressing and resolving seller related issues that could needlessly imperil a transaction. We pay particular attention to the timing and structure of closing payments, and we’re intimately familiar with structuring earn outs and other contingent payment arrangements so they’re perceived to be incentives, as intended. When opposing lawyers dig in, we’re usually able to shed light, clarify concerns and bridge differences over such issues as the nature and scope of representations and warranties, indemnity escrows and post-closing liabilities, non-compete and employment agreements and state sales tax liabilities.

The Time Line

The period from initial engagement to closing can vary from several weeks to many months, depending upon the specifics of the assignment. The state of the M&A market, the specific product category and target market, the number and type of seller candidates serving the market, the complexity of the acquisition candidate’s products and underlying technology, the buyer’s internal review processes and approval cycles, the style and experience of each party’s lawyers and accountants, and the nature and scope of due diligence issues. It ordinarily takes from three to eight months from the inception of the process until an LOI is signed, and another 60 to 90 days before the signing of definitive agreements and closing.

About Our Fees

Our fees are comparable to those charged by other established and successful investment banking firms. The services we perform for our clients represent a substantial investment of time and resources. Ordinarily our team of highly skilled and experienced investment bankers and financial analysts invest many hundreds of hours in each buy-side engagement. We charge a monthly retainer to defray these costs. If a transaction is consummated, we also receive a commission, or success fee, at closing that is based upon a contractually specified percentage of the total consideration paid.

The Bottom Line

Acquisition is essential today for companies seeking accelerated growth, new markets, greater market share and competitive differentiation. The process is complex, multi-faceted and extraordinarily demanding. Successful acquisitions require a diverse and highly specialized skill set combining strategic thinking, tactical execution, profound industry expertise, investment banking sophistication, interpersonal finesse and negotiation mastery. That’s why buyers come to Software Equity Group.