The first lesson in getting a company to a point that it is interesting to suitors is not to think about an exit at all. From day one, the entire focus should be on achieving a long-term, sustainable firm that is profitable and cash flow positive, and that has happy customers, a strong management team, and strong financials. If a firm is able to achieve these metrics, then there should be many types of firms that will find value in its assets, achievements and intellectual property.

Although a majority of the members of a firm should be thinking about how it can be a stand-alone success, key strategists (such as the CEO, the VP of Strategy, Board members, etc.) should be thinking about potential suitors. At Catamount, one of our criteria in assessing an investment is to understand whether there are enough potential suitors for the products and services that the company seeks to develop. If there are a small handful of potential acquirers, then the value of the products and services being developed (and thus the value of the firm) could be diminished. Potential acquirers could be customers, competitors, firms with auxiliary products, OEMs and resellers, etc.

It has been our experience that acquirers are almost always looking for one or more of the following things: (1) access to sales channels; (2) new customers and a sales pipeline; (3) revenue and/or cashflow; (4) proprietary technology/intellectual property; (5) management expertise; (6) to make a defensive move and prevent competitors from buying the company; or (7) market share. Therefore, we have to map the relevant market landscape, understand how the market will unfold, and so on – more of the work we do with key operators in our portfolio firms. Understanding who your potential acquirers are and their motivation early in the process should help tweak your product development process, sales and marketing strategy, and key hires.

As firms move from the product development stage to aggressive customer acquisition, they often receive early inquiries from potential mergers and acquisition parties. Set forth below is a basic checklist that we use to help our firms think through and analyze the validity of such opportunities. These steps are sequential, so we abandon the analysis if we aren’t able to pass a step in order not to waste the precious time and energy of our teams. In addition, it’s important to check in throughout the process to ensure that we are on track and that we understand that all decision makers are in line and feel good about the process.

1. Self-Analysis and Company Evaluation: Get key people from the firm together to list the assets (product, people, cash, revenues, etc.), liabilities, personnel and synergies of our company and the potential partner’s company. At the earliest stages in such a situation, try to develop a sense of what our firm offers, what our options are, and what we’re looking for in a partner. Identify problems early!

2. Timeline: Put together a timeline to complete or abort this project.

3. Due Diligence List: We make an internal list of questions that we need to have answered in order to proceed (what is the potential partner’s revenue and cash status; what would a joint set of financials look like; how advanced is their product development; how deep is their team; etc.).

4. Strategic Planning: We put together a strategic outline of our product/customer fit and joint efforts going forward. We quantify how combining the products, teams and/or financials will make the combined firm stronger then keeping them separate. For example, we explore whether and how the new firm would add more vertical markets, channels and/or customer segments, etc.

5. Engage in Active Diligence: Diligence includes, for example, customer calls, management reference checks, financial stability analysis, payables, burn rate, technology stability, legal issues, etc.

6. The High Level Handshake: The two CEOs come to an understanding of combining the entities and individual goals without finalizing price. This is where a frank conversation about synergies, personnel changes, and cultural fit is necessary. Who plays what role? Who goes? Who stays? Get a sense of valuation sensitivities and make sure the two parties are not wildly out of synch.

7. Consensus Building: Key functional team members meet one another to understand issues and roles. Key ‘inside’ members of the management teams and boards of directors should get together and ensure that everything is covered. This will help air any last minute issues and identify potential personnel problems going forward.

8. Valuation: We make sure that all questions are answered and we put together a final financial model that will outline cost reductions, cash flows, and thus funds needed to create a long-term sustainable firm. Only then can we fix a price, employee buy-out figures and equity sharing models. According to a recent Adams, Harkness and Hill survey, they’re currently seeing valuations at 8-13x this year’s earnings. There could be a valuation kicker if clear and sustainable growth are apparent.

9. Final Negotiation: Develop a final proposal and set a closing date.

Our experience in the high-tech business over the past fifteen years has shown that these steps represent a solid set of building blocks for implementing a successful M&A strategy. Time is the biggest opportunity cost. In this process, the worst thing that could happen is that you distract a management team from performing their primary job – building a sustainable company. We seek to help our firms get to the right answers fast and find the win-win scenario that can drive a merger or acquisition to fruition. In these times of uncertainty in the public markets, initial public offerings are rare. At Catamount Ventures, we’re constantly on the hunt for innovative ways to take our long-term sustainable firms and seek liquidity - if opportunities arise where a sale makes sense, we’re prepared to jump on it.

-Jed Smith