POST-ACQUISITION INTEGRATION: MONO-CULTURES, INCLUSIVE-CULTURES, ACCOUNTABLE-CULTURES
In post-acquisition integration, the culture of both the acquiring and the acquired company can impact the success of the integration process. Three types of particularly relevant cultures are mono cultures, inclusive cultures, and accountable cultures.
A mono culture is a culture where a group of individuals share similar backgrounds and values. This can lead to a focus on "we versus them," potentially limiting diversity and creativity, and hindering the success of post-acquisition integration. In contrast, an inclusive culture values diversity and encourages the contribution of diverse perspectives and ideas, promoting a feeling of "us." This approach can lead to greater creativity, innovation, and more effective strategies and solutions. An accountable culture, builds on top of an inclusive culture, where individuals are held responsible for meeting the goals and expectations of the integration process, promotes a feeling of "us with a joint vision." This can help ensure that everyone is working in joint collaboration and diversity towards the same goal, with clear accountability for their actions.
Leadership involvement and bottom-up involvement are important for creating a successful post-acquisition integration. Leaders must set the tone for inclusivity and accountability, modeling inclusive and accountable behaviors and providing support and training to employees. They must actively seek out and value diverse perspectives and encourage the development of relationships between employees from different backgrounds. Leaders must also be aware of their biases and ensure that they are not perpetuating a mono culture.
The people of the acquired company can also play an important role in the integration process. They can provide insight into the existing culture and help identify areas where cultural integration may be challenging. They can help identify potential areas of conflict that may arise during the integration process. They can also contribute their unique perspectives and skills, helping to foster a more diverse and innovative organization.
In summary, creating an inclusive and accountable culture is important for successful post-acquisition integration, while a mono culture can lead to a focus on "we versus them," potentially limiting diversity and creativity. Leadership involvement and bottom-up involvement are important for creating a successful integration, with leaders modeling inclusive and accountable behaviors and employees contributing their unique perspectives and skills.
It's important to set clear strategic and financial goals and expectations, establish a clear governance structure, foster communication and collaboration, provide support, monitor progress, and create a culture of accountability.
PRE-EXIT CONSIDERATIONS: LIQUIDITY, CONTROL, AND DILUTION
You're the founder of a mature tech company, digital platform company or tech-enabled service company that's been experiencing steady growth and success. You're excited about the future potential of your company, but you know that to continue with extended ambition, you'll need some extra cash. You've considered taking on private equity investors, but you're hesitant to give up control of your company.
That's where pre-exit strategies with private equity can be a game-changer. With pre-exits, private equity can provide liquidity to your company's early investors, founders, and employees without fully diluting your ownership and control of the company. You can sell some of your shares and still keep your stake in the company rolling over to a Newco, giving you the cash you need without sacrificing your vision.
But it's not just about the money and control. Private equity firms specialise in a "buy and build" strategy, which involves acquiring other companies in your industry or adjacent tech domains, geographies, or industries to create value by scaling and entering higher multiple categories. By teaming up with a private equity firm, you could take advantage of their expertise and resources to scale your company faster than you ever thought possible.
And here's the best part: pre-exits with private equity safeguard against the risks of a single liquidity event for you as a founder or executive team. Instead of relying on a single exit or acquisition of the company, pre-exits enable founders to benefit from multiple liquidity events as private equity firms seek to sell their stake in the company to other investors in the not to far future. That means you can repeatedly cash out over time and continue to focus on growing your company.
Of course, it's crucial to carefully consider the terms of any pre-exit deal to ensure that it aligns with your long-term goals and objectives. That's where working with a multi-disciplinary tech M&A advisor and dealmaker comes in. By balancing the needs of shareholders and stakeholders, they can help you create a pre-exit strategy that benefits everyone involved.
So, if you're a tech founder looking for a way to take your company to the next level without sacrificing control, consider a pre-exit strategy with private equity. It could be just what you need to turn your vision into a reality and unlock your company's full potential.
THE DIFFERENCE BETWEEN PRIVATE EQUITY, GROWTH CAPITAL, EVERGREEN FUNDS AND FAMILY OFFICES
Frequently, at Shurman, we receive inquiries about various investors and whether they are suitable to partner with. Our response is always tailored to your specific personal objectives, company strategies, and financial aspirations. Although there are notable variances within each classification, here is a broad overview. Private equity, growth capital, evergreen, and family offices are distinct investment funds, each with its own distinctive features and investment tactics.
Private equity: Private equity firms typically invest in companies that are not publicly traded and are looking to grow or improve their operations. They usually take a controlling stake in the company and work to improve its performance with the aim of selling the company for a profit in the future. Private equity firms often target mature companies with stable cash flows that can benefit from operational improvements and strategic initiatives
Growth capital: Growth capital is a type of investment that is focused on helping companies expand and grow. Unlike private equity, growth capital investors typically take a minority stake in the company and provide capital to help it grow but do not typically take a controlling stake. Growth capital investors typically target companies that are in the expansion phase and need capital to invest in new products, services, or markets.
Evergreen (growth) funds: Evergreen growth funds are investment funds that do not have a fixed term, unlike traditional private equity or venture capital funds. Instead, they are structured as permanent capital vehicles and have a long-term investment horizon. These funds often focus on investing in established, profitable companies with a track record of growth and stability.
Family offices: Family offices are private wealth management firms that typically invest on behalf of a wealthy family or a high-net-worth individual. They may invest in various asset classes, including private equity, growth capital, and evergreen growth funds. Family offices can play a key role in the private equity and growth capital ecosystems, providing capital for investment and serving as a source of potential deal flow for private equity and growth capital firms.
In summary, private equity, growth capital, evergreen growth funds, and family offices are all types of investment funds that focus on different stages and sorts of a company's growth and development. What fits best and how to work with the different options depends mainly on personal, strategic and strategic preferences.
PITFALLS WORKING WITHOUT A MULTI-DISCIPLINARY TECH M&A ADVISOR
There are several potential pitfalls for founders and executive teams who do not work with a multi-disciplinary tech M&A advisor and dealmaker when engaging in pre-exit transactions with private equity firms. These include:
Limited Perspective: Without a multi-disciplinary tech M&A advisor, founders and executive teams may have a limited perspective on the market and potential deal structures, which can result in missed opportunities or undervaluing their company. Private equity firms may focus only on financial metrics and spreadsheets rather than intrinsic value, which could lead to a less favorable outcome for the company's employees and clients.
Reduced Negotiation Power: If founders and executive teams are not well-versed in the deal-making process, they may lack the negotiation power to secure the best deal for their company. Private equity firms are skilled negotiators and may use their expertise to take advantage of companies that are not well-prepared.
Lack of Strategic Alignment: A multi-disciplinary tech M&A advisor can help founders and executive teams ensure that the private equity firm they are engaging with has strategic alignment with their company. Without this alignment, there may be conflicts in priorities and goals, which could result in a less successful post-transaction outcome.
Unforeseen Challenges: The tech industry is constantly changing, and a multi-disciplinary tech M&A advisor can help companies anticipate and address potential challenges that may arise in the future. Private equity firms may not have the same level of industry expertise, which could result in missed opportunities or unforeseen challenges after the transaction has taken place.
Unfavorable Exit Terms: Private equity firms may prioritize their own financial gain over the long-term success of the company, which could result in unfavorable exit terms for founders, executive teams, and employees. A multi-disciplinary tech M&A advisor can help ensure that the terms of the transaction are fair and reasonable for all parties involved.
In summary, working with a multi-disciplinary tech M&A advisor and dealmaker can help founders and executive teams navigate the complex process of pre-exit transactions with private equity firms, ensuring a more successful outcome for all parties involved. Without this support, companies may face a number of challenges and risks that could have a negative impact on their future success.
BALANCING RHINELAND VERSUS ANGLO-SAXON INVESTMENT APPROACHES
Shurman has positive experiences collaborating with Private Equity firms. Nevertheless, we frequently observe that founders hold biases towards PE, mainly due to a lack of differentiation between the Anglo-Saxon and Rhineland private equity and growth capital ecosystems.
In numerous instances, the differentiation between the two is somewhat subjective as Anglo-Saxon practices can also be present in the Rhineland area. At Shurman, our primary consideration is the management team's personal, strategic, and financial goals, and only after evaluating those, we can determine the best-suited sponsor. Balancing the demands for a financial or strategic partner is always crucial.
Nonetheless, as a generalisation, the following categorisation can be made:
The Rhineland and Anglo-Saxon environments represent two different approaches to private equity and growth capital. The Rhineland model is associated with continental Europe, particularly Germany and the Netherlands, while the Anglo-Saxon model is primarily associated with the United States and the UK.
The Rhineland model:
In the Rhineland environment, the role of private equity and growth capital is more limited. Companies are often owned by founders or family, and there is a greater focus on long-term relationships and continuity between companies and their stakeholders, including employees, customers, and suppliers. Private equity firms in this model tend to take a more collaborative approach to work with companies, with a greater emphasis on building relationships and long-term strategic planning.
Greater emphasis on collaboration and long-term relationships can lead to more stable and sustainable growth.
Focusing on stakeholder relationships can help companies build strong reputations and foster greater trust with customers and employees.
Founder- and family-owned businesses may have a greater sense of responsibility to the communities in which they operate.
A more limited role for private equity and growth capital may make it more difficult for companies to access the capital they need to expand.
A greater emphasis on long-term relationships and strategic planning may make it more difficult for companies to respond quickly to changes in the market.
Founder and family-owned businesses may be more resistant to change and less willing to take risks.
The Anglo-Saxon model:
In the Anglo-Saxon environment, private equity and growth capital play a much more significant role. Companies have a greater focus on short-term financial performance. Private equity firms in this model tend to take a more aggressive approach to working with companies, with a greater emphasis on achieving quick (3 -7 years) returns on investment.
A more aggressive approach to private equity and growth capital can lead to faster growth and higher returns for investors.
Shareholder-driven companies may be more responsive to changes in the market as they face more significant pressure to meet short-term financial targets.
Private equity firms may bring valuable expertise and experience to the companies they work with.
A greater focus on short-term financial performance may lead to a lack of investment in long-term growth.
An aggressive approach to private equity and growth capital may lead companies to take on too much debt or engage in risky practices.
Shareholder-centric companies may face more pressure to prioritise investors' interests over other stakeholders, such as employees and customers.
CREATING MULTIPLE LIQUIDITY EVENTS WITH PRE-EXIT
There are several advantages for tech company founders and executive teams to create multiple cash liquidity events with a smart pre-exit transaction with a private equity firm. Here are some potential benefits:
Diversification of Risk: Creating multiple cash liquidity events allows founders and executive teams to diversify their risk and reduce their exposure to any single asset. This can be particularly important for those who have a large percentage of their personal wealth tied up in the company.
Opportunity for Growth: By partnering with a private equity firm, founders and executive teams can gain access to additional capital and resources that can help fuel the company's growth. This can help them to expand more quickly and take advantage of new opportunities that may arise.
Operational Support: Private equity firms often have a wealth of experience and expertise in operating businesses, and can provide valuable support and guidance to founders and executive teams. This can help them to make better decisions and optimize their operations, leading to improved performance and ultimately higher valuations.
Increased Valuation: By executing smart pre-exit transactions with private equity firms, founders and executive teams can potentially increase the valuation of the company. This can be achieved by optimizing the company's operations, improving its financial performance, and enhancing its overall strategic positioning.
Partial Exit: By creating multiple cash liquidity events, founders and executive teams can take a partial exit, allowing them to realize some of the value they have created in the company while still retaining an ownership stake. This can provide them with additional financial flexibility and a greater sense of security.
Overall, creating multiple cash liquidity events with a smart pre-exit transaction with a private equity firm can provide tech company founders and executive teams with a range of benefits, including diversification of risk, access to additional capital and resources, operational support, increased valuation, and the ability to take a partial exit.
COMBINING PRE-EXIT WITH BUY-BUILD STRATEGY
A pre-exit transaction (PET) strategy is a business growth approach that involves preparing a company for a future acquisition or initial public offering (IPO). A PET strategy typically involves optimising a company's financials, operations, and market position to make it more attractive to potential buyers or investors. On the other hand, a buy-build transaction (BBT) strategy focuses on acquiring other companies or building new business lines to expand a company's product offerings and customer base.
Combining a PET strategy with a BBT strategy can be an attractive approach for founders and executive teams of tech-companies and tech-enabled service companies for several reasons:
Enhancing growth potential: By combining a PET strategy with a BBT strategy, companies can accelerate their growth trajectory and increase their potential valuation. Acquiring other companies or building new business lines can help to diversify a company's revenue streams and expand its market reach, making it more attractive to potential buyers or investors.
Achieving operational efficiencies: Through acquisitions or new business lines, companies can realize operational synergies that lead to cost savings and improved efficiency. This can increase a company's profitability and make it more attractive to potential buyers or investors.
Mitigating risk: By diversifying their product offerings and customer base, companies can reduce their risk exposure and become more resilient to market changes. This can help to increase the likelihood of a successful exit, whether through acquisition or IPO.
Attracting top talent: Building a carrier for growth through PET and BBT strategies can create a dynamic and attractive company culture that attracts top talent. This can help to further drive innovation and growth within the company.
Overall, combining a PET strategy with a BBT strategy can be an effective approach for tech-companies and tech-enabled service companies looking to build a carrier for growth. By diversifying their revenue streams, optimizing operations, and mitigating risk, these companies can increase their potential valuation and become more attractive to potential buyers or investors.
NEWCO: THE STARTING POINT FOR ACCELERATED BUSINESS GROWTH
As a founder or executive team, selling your business to a private equity firm can feel like the end of a long and challenging journey. But what if we told you that it could be the start of a brand new adventure? Creating a NewCo provides an incredible opportunity for you to reinvest and play a pivotal role in the next phase of your business's vision, growth and success.
By reinvesting in a NewCo, you can maintain your position as a key stakeholder and reap the rewards of its accelerated organic and buy-build growth strategy backed by the financial resources of your private equity partner. You'll have the power to continue to steer the company's direction and continue to be the major player in the decision-making processes. And most importantly, you'll have the chance to build on the legacy and lineage of success you've already created.
Of course, it's essential to evaluate any reinvestment agreement carefully and ensure that it aligns with your long-term personal, strategic, and financial ambitions. But with the support of a qualified multi-disciplinary advisor, you can prepare well, make informed decisions, and seize this exciting new opportunity.
So don't let the sale of your business be the end of your hero’s journey - let it be the beginning of an even greater one. Take advantage of the chance to reinvest in a NewCo and keep steering the business towards greater success!
THE NEXT SOFTWARE DISRUPTION: HOW VENDORS MUST ADAPT TO A NEW ERA
by McKinsey, Jun 2020
Over the turbulent past decade, many legacy software players proved to be remarkably resilient. Now they must adopt a new strategic playbook to weather the different challenges ahead.
For the past ten years, the rise of software as a service (SaaS) has reshaped the enterprise-software industry. Yet that growth came with a cost: industry profitability tumbled, falling by half over the decade.
STATE OF THE TECH M&A MARKET IN THE NETHERLANDS AND BELGIUM
by PWC, June 2020
An analysis of the tech M&A trends in the Netherlands and Belgium: 2015-2019 review and 2020+ outlook.
The Netherlands and Belgium tech M&A markets provide various attractive investment opportunities. Over the past five years, we have witnessed a sharp increase in the number of technology deals in the Netherlands and Belgium.
PRACTICE MAKES PERFECT: WHAT SETS PROGRAMMATIC ACQUIRERS APART
by McKinsey, Nov 2019
A new survey finds that expert acquirers take a different approach to strategy, deal execution, and integration.
Past McKinsey research has found that companies completing many small deals regularly over time create more value than those completing the occasional large transaction. But what do these companies actually do that differentiates them from the rest of the pack?
DEMYSTIFYING DEAL MAKING: LESSONS FROM M&A VETERANS AND PROGRAMMATIC DEAL MAKING
by McKinsey, Aug 2019
In mergers and acquisitions (M&A), nothing quite beats experience.
This is particularly true of so-called programmatic M&A, a systematic approach to finding and transacting a steady stream of deals over time along a common theme. To help demystify the deal-making process—including what works and what doesn’t—we asked two seasoned M&A veterans.