Our Best Tips for Ensuring a Smooth and Efficient M&A Process
As an active acquirer, Volaris Group holds a wealth of M&A experience and we strive to guide companies through the sale process. Below, we highlight some of the common mistakes observed by M&A professionals who have seen their fair share of successful and unsuccessful deals. We also compile advice from the M&A advisors at Corum Group, who recently named the parent company of Volaris the top acquirer of software companies in 2021.
Be Prepared for The Sale Process
“The biggest mistake I see from first-time sellers is to underestimate the time, emotional effort, and mental focus involved in selling a software business,” says Nathan Godfrey, a Portfolio Manager at Volaris Group. “It is not like selling a piece of real property.”
The M&A process at Volaris is designed to be thorough, thoughtful, and detailed. Since we never sell the businesses we acquire, we tend to devote a significant amount of time during the M&A process to long-term business planning. This crucial step ensures we can continue to support the health of businesses after we acquire them.
“Volaris saw potential in our business in a way we and others never saw it,” says Craig McAlister, a Group Leader who joined Volaris through the acquisition of TASS. “To build that long-term plan took a lot of data and time to deeply understand the business.”
McAlister advises that sellers need to be ready to see the entire process through, even toward the end of the process when it can be fatiguing. However, he says the other side of this is that the seller can be confident that the business will be in good hands after knowing that the buyer understands the business intimately.
A common challenge can arise when a business has more than one owner. In these cases, all co-owners can benefit from having open conversations and understanding each other’s goals and requirements before entering a sale process. If anyone is hesitant to sell the business, it is ideal to resolve the concern at the very beginning of the process, advises McAlister, whose business was co-owned by four people before the sale.
Finally, business owners need to make arrangements so that managing the sale process doesn’t detract from successfully running their ongoing operations. The sale process can take the business owner and managers away from running the business for a period of time. In a November 2021 webinar, Corum Group President Rob Griggs shared an example about a worst-case scenario where a client lost focus on running the business during the M&A process, leading them to critically miss a quarterly revenue target.
Fortunately, preparation can minimize the impact of the M&A process on company operations. If the business owner is planning to retire or move out of the business, the sale process can be a perfect time to bring in successors more actively.
Understand Market Conditions and the Competition
M&A experts say that it is important to ground valuations in current market and economic data, along with an understanding of the competitive landscape. Some sellers are unfortunately surprised to find that buyers may not necessarily anchor valuations based on past R&D investment.
Buyers are systematic in how they define, count, and categorize potential customers. They will ask for current information about how the solution is competitive and can adapt to evolving market conditions. Therefore, businesses that don’t maintain current marketing data, or businesses that rely only on a “gut feeling” about their competition may have a hard time communicating their value to potential buyers.
Ultimately, sellers help themselves by providing current market intelligence because they can then prepare more informed revenue forecasts, and help buyers negotiate better earnout conditions.
Hire the Right Advisors
Godfrey shares that hiring experienced advisors can be well worth the cost, which can be offset by their quality of advice and efficiency in finding the right path forward.
“When choosing your advisers, consider asking about their experience with sales side transactions, business exits, experience selling software businesses, and experience dealing with your size of business,” he shares. “It can also be worth asking about the people who will be working on your matter, not just the firm you engage.”
McAlister says sellers shouldn’t undervalue the importance of professional accountancy advice and representation during the sale. When looking back on his own experience, he says he would have engaged a certified accountant earlier in the sale process so that the company’s financials were prepared to the accounting standards that the buyer required. He recalls that initially TASS did not recognize unearned revenue accurately, and thus gave an inaccurate initial interpretation of the business valuation.
Some business owners also find that they regret not hiring a lawyer early enough in the process, or not hiring a lawyer who is sufficiently knowledgeable about software M&A transactions.
“When choosing your advisors, consider asking about their experience with sales side transactions, business exits, experience selling software businesses, and experience dealing with your size of business.”
-Nathan Godfrey, Portfolio Manager, Volaris Group
Check Off All the Boxes During Due Diligence
When sellers are taking inventory of the business, it is important to be detailed and not unintentionally leave out information that could mislead the potential buyer. For example, many software companies contract out their coding and may not be aware that they don’t have complete ownership over their intellectual property.
Sellers who are thorough in how they represent their business build trust with the buyer, as opposed to situations where a buyer or seller is surprised by a new revelation. If previously undisclosed information comes out during due diligence, the best-case scenario is that the buyer may delay and re-trade the deal while they process the new information, said Joel Espelien, Executive Director of Corum Group in a webinar.
Buyers at Volaris understand that an acquisition process can be emotional for owners, management, and employees. McAlister encourages sellers to reach out to their counterparts who have successfully joined Volaris and who have been through the process themselves. Many M&A leads at Volaris are happy to make introductions that can provide an additional level of comfort. This advice is also offered by Volaris CEO Mark Miller. (Read his Q&A
While a sale process can be long and complicated, Nathan Godfrey advises sellers to keep their eye on the big picture.
“Through the sale process, your advisers will help you to see the various challenges and risks—that is their job. You should always take good advice, but give and take will be necessary at some point in any negotiation," Godfrey advises.
"However, ultimately it is your business that is being sold. Your advisers cannot make these pragmatic decisions about your business for you, so you will need to do that. Sometimes this is easier said than done, but you need to consider what matters to you and which issues are material.”
How to Learn More
If you’re thinking about selling your business, the Volaris M&A experts who share advice in this article are happy to speak with you. Connect with them via LinkedIn:
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