Thursday, February 11, 2021

Representations and Warranties in a Business Sale





One of the biggest surprises that business sellers experience is when they first review the definitive purchase agreement presented by the buyer and encounter the Reps and Warranties section. The reactions range from shock, to fear, to disbelief to, "no way am I signing this".  As the Eagles song says, "Well I've got some news for you and you'll soon find out its true……"  Below is a Reps and Warranties Section for a transaction we recently completed. As you can see, it is extensive and far-reaching.

Warranties and Representations of Seller 

Except as set forth in the correspondingly numbered Section of the Disclosure Schedules, Seller represents and warrants to Purchaser that the statements contained in this Article 4 are true and correct as of the date hereof.

Organization and Good Standing of SellerSeller is an individual residing in the state of XXXXX, and has full power and authority to own, operate or lease the properties and assets now owned, operated or leased by him and to carry on the Business as currently conducted. Section 4.01 of the Disclosure Schedules sets forth each jurisdiction in which Seller is licensed or qualified to do business, and Seller is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the ownership of the Purchased Assets or the operation of the Business as currently conducted makes such licensing or qualification necessary.

AuthorizationSeller has full power and authority to enter into this Agreement and the Ancillary Documents to which Seller is a party, to carry out his obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Seller of this Agreement and any Ancillary Document to which Seller is a party, the performance by Seller of his obligations hereunder and thereunder and the consummation by Seller of the transactions contemplated hereby and thereby have been duly authorized by Seller. This Agreement has been duly executed and delivered by Seller, and (assuming due authorization, execution and delivery by Purchaser) this Agreement constitutes a legal, valid and binding obligation of Seller enforceable against Seller in accordance with its terms. When each Ancillary Document to which Seller is or will be a party has been duly executed and delivered by Seller (assuming due authorization, execution and delivery by each other party thereto), such Ancillary Document will constitute a legal and binding obligation of Seller enforceable against it in accordance with its terms.

Ownership and Sufficiency of Purchased Assets.  Seller has good title to the Purchased Assets being transferred to Purchaser, free and clear of all encumbrances, security interests, liens, charges, conditional sales agreements or claims by any person of any kind, whether known or unknown, except the Assumed Liabilities.  None of the Purchased Assets are subject to any commitment or other arrangement for their sale or use by Seller or third parties.  The Purchased Assets constitute all of the Purchased Assets of the Seller used in the Business and are in good condition and are sufficient to permit the conduct of the Business as it has and will be conducted up to the Closing and constitute all of the rights, property and assets necessary to conduct the Business as currently conducted.

Litigation and Adverse ClaimsThere are no actions, suits, arbitrations, regulatory proceedings or other litigation, pending or, to the knowledge of Seller, threatened against Seller or any of its employees or agents in their capacity as such, or any of its properties or businesses. Seller is not subject to any order, judgment, decree, injunction, or consent order of or with any court or other governmental agency.

Restrictions on TransferSeller is not subject to any agreement, judgment or decree, restriction or instrument of any kind which would prevent the consummation of any of the transactions provided in this Agreement, terminate or modify any agreement to which Seller is a party, or prevent the execution of this Agreement.

 

 Financial StatementsComplete copies of the unaudited financial statements consisting of the income statements of the Business for the periods ending December 31 in each of the years 2019, 2018 and 2017 (the “Unaudited Financial Statements”), and unaudited financial statements consisting of the income statement of the Business for the period ending December 8, 2020 (the “Interim Financial Statements” and together with the Unaudited Financial Statements, the “Financial Statements”), as well as sole proprietorship tax information for the years 2017, 2018, and 2019, have been delivered to Purchaser. The Financial Statements have been prepared in accordance with Seller’s customary accounting practices applied on a consistent basis throughout the periods involved, subject, in the case of the Interim Financial Statements, to normal and recurring year-end adjustments (the effect of which will not be materially adverse). The Financial Statements are based on and are consistent with the books and records of the Seller’s customary non-GAAP accounting practices with respect to the Financial Statements detailed herein shall be detailed in Exhibit J and fairly reflect the financial condition of the Business.

Undisclosed Liabilities

. Seller has no Liabilities with respect to the Business, except those which have been incurred in the ordinary course of business consistent with past practice and which are not, individually or in the aggregate, material in amount.

Taxes

All Tax Returns required to be filed by Seller for any Tax period prior to Closing have been, or will be, timely filed. Such Tax Returns are, or will be, true, complete and correct in all respects. All Taxes due and owing by Seller (whether or not shown on any Tax Return) have been, or will be, timely paid.

Seller has withheld and paid each Tax required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, customer, or other party, and complied with all information reporting and backup withholding provisions of applicable Law.

No extensions or waivers of statutes of limitations have been given or requested with respect to any Taxes of Seller.

All deficiencies asserted, or assessments made, against Seller as a result of any examinations by any taxing authority have been fully paid.

Seller is not a party to any Action by any taxing authority. There are no pending or threatened Actions by any taxing authority.

There are no Encumbrances for Taxes upon any of the Purchased Assets nor, to Seller’s Knowledge, is any taxing authority in the process of imposing any Encumbrances for Taxes on any of the Purchased Assets (other than for current Taxes not yet due and payable).

Seller is not a “foreign person” as that term is used in Treasury Regulations Section 1.1445-2.

Environmental Matters

 The operations of Seller with respect to the Business and the Purchased Assets are currently and have been in compliance with all Environmental Laws. Seller has not received from any Person, with respect to the Business or the Purchased Assets, any: (i) Environmental Notice or Environmental Claim; or (ii) written request for information pursuant to Environmental Law, which, in each case, either remains pending or unresolved, or is the source of ongoing obligations or requirements as of the Closing Date.


Intellectual Property Section 4.10(a) of the Disclosure Schedules contains a correct, current and complete list of: (i) all Intellectual Property Registrations used in, arising out of, or relating to the Business as currently and formerly conducted, specifying as to each, as applicable: the title, mark, or design; the jurisdiction by or in which it has been issued, registered or filed; the patent, registration or application serial number; the issue, registration or filing date; and the current status; (ii) all unregistered Trademarks included in the Intellectual Property Assets; (iii) all proprietary Software included in the Intellectual Property Assets; and (iv) all other Intellectual Property Assets that are used or held for use in the conduct of the Business as currently conducted. All required filings and fees related to the Intellectual Property Registrations have been timely filed with and paid to the relevant Governmental Authorities and authorized registrars, and all Intellectual Property Registrations are otherwise in good standing. Seller has provided Purchaser with true and complete copies of file histories, documents, certificates, office actions, correspondence and other materials related to all Intellectual Property Registrations.

Section 4.10(b) of the Disclosure Schedules contains a correct, current and complete list of all Intellectual Property Agreements, specifying for each the date, title and parties thereto. Seller has provided Purchaser with true and complete copies (or in the case of any oral agreements, a complete and correct written description) of all such Intellectual Property Agreements, including all modifications, amendments and supplements thereto and waivers thereunder. Each Intellectual Property Agreement is valid and binding on Seller in accordance with its terms and is in full force and effect. Neither Seller nor any other party thereto is, or is alleged to be, in breach of or default under, or has provided or received any notice of breach of, default under, or intention to terminate (including by non-renewal), any Intellectual Property Agreement.

Seller is the sole and exclusive legal and beneficial, and with respect to the Intellectual Property Registrations, record, owner of all right, title and interest in and to the Intellectual Property Assets, and has the valid and enforceable right to use all other Intellectual Property used or held for use in the Business as currently conducted, in each case, free and clear of Encumbrances. Seller has entered into binding, valid and enforceable written Contracts with each current and former employee and independent contractor who is or was involved in or has contributed to the invention, creation, or development of any Intellectual Property during the course of employment or engagement with Seller whereby such employee or independent contractor: (i) acknowledges Seller’s exclusive ownership of all Intellectual Property Assets invented, created or developed by such employee or independent contractor within the scope of his or her employment or engagement with Seller; (ii) grants to Seller a present, irrevocable assignment of any ownership interest such employee or independent contractor may have in or to such Intellectual Property; and (iii) irrevocably waives any right or interest, including any moral rights, regarding such Intellectual Property, to the extent permitted by applicable Law. Seller has provided Purchaser with true and complete copies of all such Contracts.

Neither the execution, delivery or performance of this Agreement, nor the consummation of the transactions contemplated hereunder, will result in the loss or impairment of or payment of any additional amounts with respect to, nor require the consent of any other Person in respect of, the Purchaser’s right to own or use any Intellectual Property Assets or any Intellectual Property subject to any Intellectual Property Agreement.

All of the Intellectual Property Assets are valid and enforceable, and all Intellectual Property


Registrations are subsisting and in full force and effect. Seller has taken all reasonable and necessary steps to maintain and enforce the Intellectual Property Assets and to preserve the confidentiality of all Trade Secrets included in the Intellectual Property Assets, including by requiring all Persons having access thereto to execute binding, written non-disclosure agreements.

To Seller’s Knowledge, the conduct of the Business as currently and formerly conducted, including the use of the Intellectual Property Assets and the Intellectual Property licensed under the Intellectual Property Agreements in connection therewith, and the products, processes, and services of the Business have not infringed, misappropriated, or otherwise violated. To Seller’s Knowledge, no Person has infringed, misappropriated, or otherwise violated any Intellectual Property Assets or the Intellectual Property licensed under the Intellectual Property Agreement.

There are no Actions (including any opposition, cancellation, revocation, review, or other proceeding) settled, pending or threatened (including in the form of offers to obtain a license): (i) alleging any infringement, misappropriation, or other violation of the Intellectual Property of any Person by Seller in the conduct of the Business; (ii) challenging the validity, enforceability, registrability, patentability, or ownership of any Intellectual Property Assets; or (iii) by Seller or any other Person alleging any infringement, misappropriation, or violation by any Person of any Intellectual Property Assets. Seller is not aware of any facts or circumstances that could reasonably be expected to give rise to any such Action. Seller is not subject to any outstanding or prospective Governmental Order (including any motion or petition therefor) that does or could reasonably be expected to restrict or impair the use of any Intellectual Property Assets

 Material Contracts

Section 4.11 of the Disclosure Schedules lists each of the following Contracts (x) by which any of the Purchased Assets are bound or affected or (y) to which Seller is a party or by which it is bound in connection with the Business or the Purchased Assets (such Contracts and all Intellectual Property Agreements set forth in Section 4.11 of the Disclosure Schedules, being “Material Contracts”):

all Contracts involving aggregate consideration in excess of $25,000 and which, in each case, cannot be cancelled without penalty or without more than 90 days’ notice;

all Contracts that require Seller to purchase or sell a stated portion of the requirements or outputs of the Business or that contain “take or pay” provisions;

all Contracts that provide for the indemnification of any Person or the assumption of any Tax, environmental or other Liability of any Person;

all Contracts that relate to the acquisition or disposition of any business, a material amount of stock or assets of any other Person or any real property (whether by merger, sale of stock, sale of assets or otherwise);


all broker, distributor, dealer, manufacturer’s representative, franchise, agency, sales promotion, market research, marketing consulting and advertising Contracts;

all employment agreements and Contracts with independent contractors or consultants (or similar arrangements) and which are not cancellable without material penalty or without more than 90 days’ notice;

except for Contracts relating to trade receivables, all Contracts relating to indebtedness (including, without limitation, guarantees);

all Contracts with any Governmental Authority (“Government Contracts”);

all Contracts that limit or purport to limit the ability of Seller to compete in any line of business or with any Person or in any geographic area or during any period of time;

all joint venture, partnership or similar Contracts;

all Contracts for the sale of any of the Purchased Assets or for the grant to any Person of any option, right of first refusal or preferential or similar right to purchase any of the Purchased Assets;

all powers of attorney with respect to the Business or any Purchased Asset;

all collective bargaining agreements or Contracts with any Union; and

all other Contracts that are material to the Purchased Assets or the operation of the Business and not previously disclosed pursuant to this Section 4.11.

Each Material Contract is valid and binding on Seller in accordance with its terms and is in full force and effect. None of Seller or, to Seller’s knowledge, any other party thereto is in breach of or default under (or is alleged to be in breach of or default under) in any material respect, or has provided or received any notice of any intention to terminate, any Material Contract. Except as set forth in Section 4.11 of the Disclosure Schedules, no event or circumstance has occurred that, with notice or lapse of time or both, would constitute an event of default under any Material Contract or result in a termination thereof or would cause or permit the acceleration or other changes of any right or obligation or the loss of any benefit thereunder. Complete and correct copies of each Material Contract (including all modifications, amendments and supplements thereto and waivers thereunder) have been made available to Purchaser. There are no material disputes pending or threatened under any Contract included in the Purchased Assets.

Customers and Suppliers

Section 4.12(a) of the Disclosure Schedules sets forth with respect to the Business (i) each customer who has paid aggregate consideration to Seller for goods or services rendered in an amount greater than or equal to $50,000 for each of the two most recent fiscal years (collectively, the “Material Customers”); and (ii) the amount of consideration paid by each Material Customer during such periods. Except as set forth in Section 4.12(a) of the Disclosure Schedules, Seller has not received any notice, and has no reason to believe, that any of the Material Customers has ceased, or intends to cease after the Closing, to use the goods or services of the Business or to otherwise terminate or materially reduce its relationship with the Business.


Section 4.12(b) of the Disclosure Schedules
sets forth with respect to the Business (i) each supplier to whom Seller has paid consideration for goods or services rendered in an amount greater than or equal to $50,000 for each of the two most recent fiscal years (collectively, the “Material Suppliers”); and (ii) the amount of purchases from each Material Supplier during such periods. Except as set forth in Section 4.12(b) of the Disclosure Schedules, Seller has not received any notice, and has no reason to believe, that any of the Material Suppliers has ceased, or intends to cease, to supply goods or services to the Business or to otherwise terminate or materially reduce its relationship with the Business.

Compliance With Laws

Seller has complied, and is now complying, with all Laws applicable to the conduct of the Business as currently conducted or the ownership and use of the Purchased Assets.

Brokers

Except as set forth on Schedule 4.14, no broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement or any Ancillary Document based upon arrangements made by or on behalf of Seller.

Full Disclosure

No representation or warranty by Seller in this Agreement and no statement contained in the Disclosure Schedules to this Agreement and the Seller’s Closing Certificate contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they are made, not misleading. End or Reps and Warranties Section

This is one of the areas of the contract where there is very little wiggle room for negotiations on the part of the seller. The instructions of the larger company's transaction team are to protect the mother ship. They do not want to acquire unknown liabilities that could put the buying company in financial or legal difficulty. They will ask for the Reps and Warranties to last for long periods, often including language such as, "will last for the statute of limitations or six years, whichever is longer". We generally are able to negotiate the period down to the 3-4 year range. It does not matter what your agreement's rep and warranty period is on taxes, because the government is not bound by your agreement and will come after you to the full extent of the statute of limitations period.

This language was extracted from a Software Company deal. Please note the extensive attention paid to the full and complete ownership of the intellectual property. I warn our software clients that the buyers will spend the most time in due diligence on this very issue, because this is the value they are buying.

As a Business Seller, you may think this is overkill, but the buyers will stand fast on this issue. A business acquisition is, by its very nature, a risky transaction based on integration with the buying company, synergies, customer churn, employee defections, etc. They will do whatever possible to limit their risk from inherited hidden liabilities and/or misinformation. So as a Seller, focus your energies to negotiating the best price and terms for your sale and to being totally transparent in the due diligence process.


Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology, software, and other technology based companies. Dave is also the editor of the Exit Strategist Newsletter and author of the Book Selling your Software Company - An Insider's Guide to Achieving Strategic Value

Saturday, February 6, 2021

M&A Deal Announcement - Software Driven Audit Recovery Firm


#Software mergers and acquisitions, #Software Investment Banker, Software Deal Announcement, #Software Business Broker, Software Business Sale 

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology, software, and other technology based companies. Dave is also the editor of the Exit Strategist Newsletter and author of the Book Selling your Software Company - An Insider's Guide to Achieving Strategic Value

Monday, September 30, 2019

Transportation Information, Monetization, and Access Control Solutions




2018 Revenue: $1.93M            2018 EBITDA: $223K


Company was founded in 1999 and has extended its system to a SAAS model for easier rollout and support. The Primary Company offers a number of patent protected transportation informatics and access control solutions within the Intelligent Transportation Systems space to State DOT (75% of Company 2018 revenue), City or County Public Works (15%), and other agencies (10%).
Its Sister Company provides software products and consulting services that are used by public agency and private sector clients to manage infrastructure systems including county roads, city streets, sidewalks, curb and gutter, signs and signals, bridges, parking lots, wastewater and storm drainage systems, water pipelines, park features, and other miscellaneous assets.

§  Strong Client Relationships: The Company is proud of its strong ties to clients. Evidence of these relationships is shown in the 85% rate of repeat business. The Company verified client success stories help to easily acquire new business.
§  Outstanding Growth Opportunities: There exist several opportunities for the Company to significantly increase revenue and profit, including leveraging the Company’s proven reputation, patent protection, and increased infrastructure spending to pursue and penetrate new and existing markets.
§  Hold Patents in the First Position: On critical and pervasive transportation informatics reporting systems currently in use by other companies. 



Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology, software, and other technology based companies. Dave is also the editor of the Exit Strategist Newsletter and author of the Book Selling your Software Company - An Insider's Guide to Achieving Strategic Value

Sunday, September 29, 2019

Marketing & Presentation Software for Insurance Agents and Financial Advisors - Company for Sale



2018 Revenue: $1.1 M      22% Growth Rate   42.5% EBITDA Margin



Headquartered in Kentucky, Company offers marketing and sales presentation software for insurance agents and other financial advisor professionals. The software and associated materials support tax-advantaged savings programs using the Indexed Universal Life Insurance product.

The product package was effectively established for one larger client in approximately 2012, and officially introduced to other clients in late 2015. Market feedback has been very positive, with revenues growing from $160,000 in 2014 to over $1,095,000 in 2018.

The suite of products is offered on a recurring subscription basis, and is website-accessed by its customers .The site enables financial advisors to create and manage a variety of customized, compliance-approved client reports that streamline the complex IUL product.  Client reports are accompanied by complete marketing programs that support member advisors from the prospecting phase through the close of the sale.  IUL is one of the fastest growing products in the life insurance industry, where it is used as a tax-advantaged cash value accumulation tool. A rapidly-growing number of advisors use IUL for retirement planning with their clients.

·        Growing Market for the Company’s Services: Main product is an illustration software for Indexed Universal Life. IUL’s emerging popularity with insurance agents and financial advisors, along with retirement savings wealth trends in general, support strong momentum for Company's market opportunity.
·        Proprietary Financial Product Development:  Company occupies a very unique segment in the retirement savings industry, has hundreds of agent and carrier contacts, and understands the underlying actuarial and marketing aspects of insurance-oriented savings products. All materials and product names are copyrighted.
·        Track Record/Proven Product Acceptance: Company has increased its year-over-year sales to one of the largest IMOs in the industry since inception, and now has other IMOs participating, as well as other market participants interested. Great growth potential with expanded marketing resources.

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology, software, and other technology based companies. Dave is also the editor of the Exit Strategist Newsletter and author of the Book Selling your Software Company - An Insider's Guide to Achieving Strategic Value

ORGANIC SEARCH ENGINE TRAFFIC GENERATION SOFTWARE COMPANY -Company for Sale




2019 Revenue: $900 K proj                  Gross Margins > 90%

With over 10 years of combined research and development, the software and technology have been fine-tuned and extensively tested. The software has many built-in SEO features that can be customized at will.  These features, along with other strategies incorporated in their website production process, have allowed the company to create a portfolio of websites that generate 100% organic search traffic.

Currently, the company’s websites receive approximately 6.5 million unique visitors/year, all of which is organic search engine traffic from the major search engines. As such, the company does not have the need to pay for marketing or SEO of any kind, giving it a large competitive advantage over its competition.

The owners have created a cutting-edge software program and website production technology  hat has almost unlimited potential in the right hands. We lack the management team, staff, and resources to gain broad implementation and distribution. We seek to be acquired by a company that can help our product reach its full potential.

·        Proven Methodology: The company’s websites receive approximately 6.5 million unique visitors/year, all of which is organic search engine traffic from the major search engines.
·        Proven Technology The company uses its proprietary software and website production technology to create robust websites (in a semi-automated fashion) that target large numbers of geographically-based keywords in a variety of verticals. 
·        Great Growth Potential: Owners operate this as a very profitable life-style business and have limited growth. Their sites routinely outrank billion-dollar companies for very expensive keywords in high-competition verticals like drug addiction rehab. The Company is just scratching the surface for growth and income.
·        Powerful Geo-Targeting Technology: The ability to go after geo-targeted longtail keywords on a large scale is another key feature. Company can target thousands of combinations of longtail keywords on each site it produces. This allows for flexibility, uniqueness among multiple sites, and the ability to attack a niche from several different angles.
·        Scalability: The software and semi-automated website production process allows for quick turnaround time. An organization with the proper staff in place could easily produce 100+ websites/month, and there are dozens upon dozens of niches that can be targeted, most of which the company has yet to explore in detail.
·        Superior Cost Performance to Paid Search and SEO Services: Their business model that targets Pay Per Call lead buying companies and uses highly effective organic traffic generation far outperforms the paid search models especially on the very expensive and competitive keywords.
·        Secure and Protected: The software code is fully encrypted and cannot be copied to any other site without a license. The software is highly secure and hacker-proof and their websites have ever been hacked.
·        Scales Rapidly: Company sites generate organic traffic with virtually no time delay. Websites that depend on SEO for traffic are highly dependent on budget and time allowances for web traffic to materialize. Not only do we get purely organic traffic, our traffic converts.      
·        Superior ROI: The total cost for Company to produce a website from start to finish is usually $500 or less, and full production can be accomplished in less than a day.  This allows for a fast return on investment.

·        Flexible Integration:  The software can be installed on any existing website, including Wordpress blogs. Installing the software would allow business owners and blog owners to expand their geographical search potential.

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology, software, and other technology based companies. Dave is also the editor of the Exit Strategist Newsletter and author of the Book Selling your Software Company - An Insider's Guide to Achieving Strategic Value

All-in-one SIP Enabled Contact Center as a Service Provider - Company for Sale



2018 Revenue: $1.7M                 Gross Margins > 90%


 Their offering is a robust Multichannel Contact Center and Workforce Management solution for mid-market and Enterprise customers. It is a multichannel skills based routing contact center and scales from 5 to 1250 agents per location. The base “Select” software includes skills based routing, flexible announcements, agent and supervisor software with presence, call control, queue monitoring, scrolling marquee, IM text messaging, supervisory advanced monitoring and agent control and historical call reporting.

Advanced add-on options can complement the “Select” base package. These options include: Call back number queuing, Customer post-call surveys, VoIP voice and screen recording,  Blended E-mail, Webchat and SMS queuing, CRM and customer database integration with data dip for smart routing and call coordinated screen pop, Blended automatic outdial campaigns with power/preview/progressive and predictive auto dialer.

The founders have been running the company for more than 23 years.  They are skilled software engineers and that is the strength of the company. They feel that they could greatly benefit from an acquisition by a larger company with the resources and sales and marketing expertise to capitalize on the explosive growth in this unified communications space.

·        Robust Product Set: Contact Center suite includes multichannel inbound, outbound, IVR, virtual queue, surveys, screen pops, recording and Workforce Management (WFM) and Workforce Optimization (WFO).
·        Attractive SaaS Business Model: Company has been delivering call center software solutions since 1996 and has captured that intellectual property and expertise in their proven SaaS offering - Call Center as a Service.
·        Great Growth Potential: Globally, the cloud-based contact center market is expected to grow from $6.47 billion in 2017 to $24.11 billion by 2023, at a CAGR of 25% during the forecast period according to Market Research Future. 
·        Strong Product Adjacencies: With UCaaS (Unified Communications as a Service) which is accelerating at an annual rate of 29%, according to a Synergy Research Group.
·        Relationship With a Major UCaaS Provider: Company has established a relationship with a major UCaaS provider with their Channel Partners including Company's Contact Center module where appropriate.
·        Expanding Interest in the UCCaaS Space: Several Major UCaaS providers are either developing or acquiring Contact Center Capabilities. Ring Central acquired Connect First, Nextiva released their own Cloud Contact Center solution, and  Talkdesk, the fastest growing Contact Center as a Service provider, completed a $100 million in Series B funding in 2018. Vonage acquired New Voice Media.
·        Software integrates with SIP Enabled hardware and software systems
·        Very Competitive on Price and Features 


Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology, software, and other technology based companies. Dave is also the editor of the Exit Strategist Newsletter and author of the Book Selling your Software Company - An Insider's Guide to Achieving Strategic Value

Friday, March 8, 2019

SaaS Mergers and Acquisitions Deal Announcement

#M&A #MergersandAcquisitions #SaaS #InvestmentBanker #softwareM&A #sellsoftwarecompany

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology, software, and other technology based companies. Dave is also the editor of the Exit Strategist Newsletter and author of the Book Selling your Software Company - An Insider's Guide to Achieving Strategic Value

Thursday, February 28, 2019

When an EBITDA Multiple Doesn’t Work for a Valuation


Takeaway: In our technology focused mergers and acquisitions practice we are often approached by an entrepreneur saying, “I want to sell my company for strategic value.” This article explores what strategic value means and why a buyer would pay more than an EBITDA multiple for a seller’s company.

Rule of Thumb Valuations

In the world of mergers and acquisitions, sophisticated buyers, private equity firms, and business valuation firms establish some “rules of thumb” valuation multiples. The International Glossary of Business Valuation Terms defines “rule of thumb” as “a mathematical formula developed from the relationship between price and certain variables based on experience, observation, hearsay, or a combination of these; usually industry specific.” For one industry it might be a multiple of revenue, for another it is based on assets and capacity like the hotel industry at $25,000 per available room, or Revenue Per Available Seat Mile (RASM) for airlines or for other industries, monthly active users or subscribers, an EBITDA multiple, or a value based on discounted cash flow.
The Pros and Cons of Rules of Thumb Multiples
Rules of thumb multiples are very convenient and a great starting point for a valuation discussion or analysis, but we view them as just that, a starting point. Valuing a business is far more complex than valuing a piece of commercial real estate (discounted cash flow) or a single family home. For a home there are very accurate comparables based on the number of bedrooms, the number of bathrooms, school district, distance to public transportation, square footage, and a few others. The value of a business, however, is subject to the interpretation of the buyers that evaluate it. A strategic buyer will evaluate a potential acquisition based on the value that can be created after the assets of the target are combined with buyer’s assets. This points to two critical elements of your business sale; 1. Capture and articulate your company’s strategic value drivers in your business sale marketing documents and, 2. Get as many opinions from the market as possible.
Capture and Articulate Your Company’s Strategic Value
Below are some of the most powerful drivers of strategic value:
1. Contractually recurring revenue – This is exactly why most major software companies are moving away from a one-time licensing fee to a software as a service (SaaS) offering. Microsoft and Adobe recently changed their business model to this approach and their market values are soaring. Salesforce.com launched their business using the subscription model, and they have been a huge success. The time and materials IT service model is disappearing and being replaced with a managed services offering. Contractually recurring revenue tremendously reduces the risk for a business buyer and they will pay up for it both in purchase price and the percentage of cash at closing versus earnouts and deferred contingent payments.

  1. Time to Market and First Mover Advantage – Most business buyers could develop the sought-after technology themselves, but we suggest they analyze the cost of their time to market delay. Believe me, with first mover advantage from a competitor or, worse, customer defections, there is a very real cost of not having your new strategic product today. We were able to convince one buyer that they would be able to justify our seller’s entire purchase price based on the number of client defections their acquisition would prevent. Think of the difference today between first mover Gatorade and the distant number 2, PowerAde.
  2. Companion Products and Similar Customer Base – There is an old salesman saying, “It is ten times easier to sell an additional product to an installed account than it is to open a new account.” If you product or service is viewed as a logical add-on to the buying company’s product suite it can produce some stunning post acquisition sales growth. Similarly, if the buyer’s and seller’s customer base is similar, great value can be achieved by cross-selling to one another’s customer base. The market may provide you with value expansion because you have an installed base of difficult to penetrate blue-chip accounts.
  3. Removing Barriers to Entry – If your company has already broken the code to federal government business or even more importantly security clearance, this can be quite valuable to a buying company that is anxious to penetrate that client.
  4. A Superior Business Model – For the selling company, of course, their main product, service, and intellectual property are valuable. Often what is overlooked, however, is the value of a better sales system, or social media approach, or the use of outside contractors. The buying company might be thinking that if we implemented the seller’s sales system across our entire sales force, could improve our productivity by 10% across the board. If you have developed a particular strength, make sure your potential buyers know about it and value it.
  5. Improve the Core Product Offering of the Buyer – We represented a seller who had developed a database and algorithm to help hospitals establish the proper level of nurse staffing for the various hospital units. The two final bidders were both major providers of human resources and staffing software for hospitals. Often these software systems would sell for a half million dollars and up. Our client’s product was viewed as an important module that would improve the competitiveness of the buyers’ main system. The selling price ended up being way higher than even an aggressive multiple of EBITDA.
  6. Restate Financials to Reflect the Buyer’s Pricing Power – For small technology companies selling into the enterprise, there is often a substantial required pricing discount when competing with the big legacy provider. In one M&A deal we restated our seller’s historical financials using the pricing power of the brand name acquirer. This client was a small IT company that had developed a fine piece of software that compared favorably with a large, publicly traded company’s solution. Our product had the same functionality, ease of use, and open systems platform, but there was one very important difference. The end-user customer’s perception of risk was far greater with the little IT company that could be “out of business tomorrow.”
  7. By applying the pricing model of the buying company to our client’s income statement, we were able to double the financial performance of our client on paper and present a compelling argument to the big company buyer that those economics would be immediately available to him post acquisition. It certainly was not GAP Accounting, but it was effective as a tool to drive transaction value.
    1. Defensive Response to M&A Activity in the Market – This dynamic can drive company selling price beyond traditional valuation models. We have a number of potential sellers in our pipeline that have contacted us well in advance of taking their company to market. They just wanted to make a connection and to get advice on how to prepare their company for their eventual optimal exit. When we hear about a completed acquisition of one of our prospective client’s competitors, we pick up the phone. This deal announcement will normally elicit a competitive response from the marketplace in the form of several other acquisitions from the buyer’s competitors. You see it all the time. If Merck buys a biotech company with a promising cancer drug pipeline, you can be pretty sure that Novartis, Pfizer and others will soon follow suit. The same goes for the tech industry if Google buys an Artificial Intelligence company. Microsoft and Adobe will be close behind. This produces an arbitrage opportunity and company selling prices shoot up until the competitive demand is satisfied.
    Sell to Your Strengths
    This list is by no means exhaustive. You are in the best position to recognize your company’s strategic value components. As you engage with the various potential buyers, try to envision how your two companies would combine and how they could leverage your assets to produce performance well beyond 1 + 1 = 2. You can even take this one step further. Try to quantify this synergy and use that in your selling approach. Your value proposition is unique to each individual buying company so it is important that you maximize your exposure to the market and invite as many opinions as possible.
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology, software, and other technology based companies. Dave is also the editor of the Exit Strategist Newsletter and author of the Book Selling your Software Company - An Insider's Guide to Achieving Strategic Value