An M&A Q&A With A Founder Who Sold Two Software Companies
A conversation with Steve Jones, SVP at Corum Group.
Steve Jones has been on the forefront of selling multiple high-tech companies and spinning off software divisions. His 25 plus years of executive experience spans both public and private venture-backed startups. In addition to being a board member of several software companies, Jones is also an SVP with Corum Group, an M&A advisory firm that works exclusively with software and tech companies. Jones is speaking about M&A trends at the World Financial Symposium San Francisco event: Growth & Exit Strategies For Software & IT Companies. Jones caught up with ISVinsights and Software Executive Magazine before his presentation to share his expertise with other software companies who are thinking about selling.
You’ll be presenting on the top M&A trends at the WFS in San Francisco on February 22. Can you give our readers a glimpse of one or two of the trends they should be paying the most attention to?
There are several key trends emerging as both disrupting and mission critical to investment priorities for 2018. In past years, a strong emphasis on Big Data and systems integration has unleashed an unprecedented level of information, which now enables the next level of technology. Two key trends now are Artificial Intelligence and Data Science Monetization, which leverage that underlying data to create entirely new markets.
What are some of the most common misconceptions software companies have about M&A?
A misconception comes from the tried saying: “Good companies are bought, not sold” – which essentially says you wait for it just to happen. Every successful entrepreneur that I know would never just wait for something to happen. You don’t have a “buy force” to move your product or solution. You have a sales force. They proactively initiate a compelling discussion with your customers. Whether that outreach is a formal sales team or a digital campaign, it is proactive in nature. The same applies in an M&A situation. When the market conditions are right for an M&A transaction, a software company should be proactive in pursuing an outcome. The choice is to act---or be acted upon. Don’t let the market pass you by.
What do you wish every executive at every software company would know before starting the M&A process?
First, know what you’re good at. Most likely the answer is creating successful companies. You do that by surrounding yourself with the best people you can find, by get the right people on the bus. Selling a company is an expertise. Don’t start a process without finding a partner who knows how to execute a successful M&A process.
Second, understand your boundaries. Go through a personal exercise to identify what is important to you. Price and valuation are just one of the issues to consider. Other areas of concern would include your personal tax liability, the warranties and guarantees required, the post-deal commitments and potential earnouts, and future integration plans for your employees and customers. What is the tolerance level for each?
Third, you still have a business to run. When the decision is made to initiate an M&A process (usually prompted by a soft overture from an interested party) the most important thing you can do to preserve wealth and improve valuation is to keep your eye on the ball. Execution to plan during a process is hard, but critical. You don’t want to show a downfall in the same conversation you’re trying to showcase the potential of your company.
Fourth, and probably the most important – start with the end in mind. From the beginning days of a company’s history, you should plan for an eventual exit. That means you organize all of your files and documents, track client and partner agreements, protect your IP with employee agreements and NDAs, avoid debilitating clauses and terms in third party agreements (most favored nation, right of first refusal, source code agreements, etc.). And finally, track your performance and hold yourself accountable. One of the key assets in your company is you and your management team. The best way to show that you understand your business and market is to create a track record of performance. Come up with a budget and a plan. Then record your performance against plan, celebrate your success, plan to counter the shortcomings, and recalibrate with a new plan for the next term. Many times, a prospective buyer will ask for a forecast of future activity. Your credibility in standing behind a forecast is easily sustained by looking at your history of performance. If you successfully hit your forecasts in years past, then your current forecast becomes much more meaningful.
You’ve founded and sold two tech companies (Auction Trust Network and SpeechFX). When it came time to sell, what did you wish you had known when you founded these companies?
From an operations perspective, I wish I had known not all revenue is created equal. I wish I had a better grasp of revenue models to understand the difference between license/maintenance, managed services, and recurring revenue. Also, know the importance of customer retention.
From a strategic perspective, I would strongly encourage CEOs and executives to build and maintain personal relationships with their partners and customers. This goes beyond signing a partnership deal. Take the time to connect with the executives of these companies, at least on a quarterly basis. Follow up on partner issues, but also share market trends and insights. Create an opportunity with your customers to know your partners. You never know when you need to pick up the phone to have a more serious M&A related conversation with a company. If seeds are planted, that conversation turns from a cold-call into a meaningful, relevant dialog that could lead to a very serious M&A contender (even when they weren’t planning to be involved in the first place)
What would you advise software companies today to do differently?
- Plan for the end in mind. I’d create a vigilant oversight of corporate governance, reporting, and tracking.
- Find a trusted source to calibrate the strategic winds of the market. Make time every month to lift your head out of the operational workload to take a breath and look at the trends and market movements that affect your ecosystem. Who is partnering with who? Who is acquiring who? Why? What are your customers telling you? I know it sounds like a commercial, but Corum Group’s free monthly tech webinar is jam packed with objective market info. There are other sources as well. Whatever the source, keep tabs with the market.
For software companies who are not thinking about selling in the short-term, what advice do you have? What steps can they still take today that will make their business more successful/profitable even if they are not looking to exit any time soon?
See my point above about starting with the end in mind. The other exercise that is helpful is to calibrate your business model with your industry. If you run a SaaS business in a market that values content subscription versus technology subscription, then find a way to monetize your content. Don’t let your business model become outdated. Yet always ensure you are customer-driven in doing so.
Don’t get ahead of your own funding and growth. There is always a big temptation to take down another round of financing to get to the “next level.” However, a new round of investment comes with more restrictions on a potential exit. The floor – or minimum amount—is raised. The pool of prospective buyers is decreased. Exponential growth becomes the minimum expectation. It is not uncommon for companies to become stagnant after taking too much investment before they’re truly able to scale.