Top story: Thinking backwards to move forwards

Start with the goal in mind!

1. Increase in the value of the company

One of the main tasks when preparing for an M&A transaction is to increase the value of the company. This can be achieved through various measures:

• Leverage earnings potential: Revenue can be increased through a well thought-out pricing policy and a focus on multiple-driving business models such as subscription services, license fees or professional services. It is equally important to concentrate on the most profitable business areas and to identify and eliminate loss-making areas. Investments should be harmonized and aligned with the exit horizon to avoid erratic fixed costs.
• Making the future tangible: Ongoing budgeting and adherence to planning are essential, as is the precise recording and management of the sales pipeline and relevant key figures. A clearly defined development roadmap and the measurement of referral rates and NPS scores help to make the future of the company tangible and comprehensible.
• Optimize purchase price: Optimizing payment terms, reducing inventories and collateral, and a solid dividend policy improve the equity bridge. Equity bridge? In simple terms, this is the difference between the enterprise value and the purchase price for the shares. Enterprise value minus debt plus free cash.

2. Increase in the probability of a successful completion of the transaction

To maximize the chances of success of an M&A transaction, it is important to eliminate potential transaction risks and increase the transaction probability:

• Eliminate transaction risks: Freedom-to-operate analyses, a cleansed cap table, clean documentation (IP, compliance, KYC) and the renegotiation of change of control clauses are crucial measures. Dependencies on key resources should be reduced and contract deadlines adapted to the exit. A robust corporate governance system supports the long-term stability of the company.
• Increase transaction probability: Commercial deals that grant potential buyers time-limited exclusivity licenses can increase the attractiveness of the company. Establishing contact with operational purchasing decision-makers at an early stage and strategic allocation of IP within the company are further important steps.

And what else is possible just before the exit?

1. Increase in the value of the company

Even short-term measures can have a significant impact on the company’s value:

• Sales-effective measures: Transparent sales pipelines and processes, the realization of contract extensions and the introduction of exit bonuses for sales employees are effective strategies. It is important to focus sales and marketing expenditure more strongly on sales and to explore the sales potential for the next 12-24 months with key accounts.
• Cost-effective measures: Specific booking and reporting of special effects, the avoidance of new long-term obligations and the deferral of postponable extra expenses are key measures. New HR compensation models should be avoided.
• Measures affecting the purchase price: Solid receivables management and the reduction of debt-like items such as trapped cash and down-payments are crucial. It is important to clearly define and enforce negotiation lines.

2. Increase in the probability of a successful completion of the transaction

Short-term measures can also increase the likelihood of a successful transaction:

• Increase transaction probability: A future-oriented equity story and a smart bidder approach, including fireside chats, frontrunners, buyer education and stapled finance, can increase the attractiveness of the company. Thorough due diligence preparation is essential.
• Reduce transaction risks: Shareholder alignment through a seller’s agreement, W&I insurance and well thought-out transaction timing are important measures. Process exclusivities should be avoided to ensure flexibility.

Summary

We have shown how you can think backwards from today with the perspective of a potential sale in order to derive the right measures for the future. In short: “Start with the goal in mind”.

Conclusion: With a well thought-out and well-implemented exit strategy, the company value can be significantly increased, as well as the chances of successfully completing the transaction.

We have also created a separate checklist for software companies.

Checklist for quality and risks in software companies

Code quality:

– Analyze the source code for quality, consistency and documentation.

– Check for technical debt and possible maintenance problems.

Software architecture:

– Evaluation of the software architecture for scalability, flexibility and performance.

– Review of architectural decisions and their justification.

Security aspects:

– Review of security mechanisms within the software.

– Check for known vulnerabilities and security gaps.

Compliance and licenses:

– Ensuring that all components used (including open source software) are correctly licensed.

– Checking for compliance with relevant legal and regulatory requirements.

Development processes:

– Evaluating the development processes and methods used (e.g. Agile, DevOps).

– Review of quality assurance measures, including testing strategies and implementations.

Technology stack:

– Analysis of the technology stack used and its future viability.

– Check for dependencies and potential risks due to outdated technologies.

System and infrastructure:

– Evaluation of the IT infrastructure and its suitability for the existing and future software.

– Review of the cloud strategy and the use of cloud services.

Performance and scalability:

– Testing and analysis of software performance under different load conditions.

– Evaluation of scalability strategies and options.

Documentation:

– Review of technical documentation, user manuals and training materials.

– Evaluation of the documentation of development processes and guidelines.

Team and skills:

– Analyze the skills and experience of the development team.

– Review of organizational structure and team dynamics.

Support and maintenance:

– Evaluation of existing support and maintenance processes.

– Review of customer satisfaction and responsiveness to problems.

Product roadmap:

– Analysis of future development plans and strategic direction of the product.

– Assessment of the feasibility and risks of the planned features and releases.

Franziska Wolfgram
f.wolfgram@atares.team
+4989 – 38888-124