EP #303 - Jonathan Roberts: A Comprehensive Guide To M&A

About Jonathan Roberts:

Jonathan Roberts is the director and co-founder of Menalto Advisors, an IT-focused M&A advisory firm headquartered in Silicon Valley and with a strong presence in Europe. He holds a BSc in Accountancy & Management from Miami University and worked as a consultant for Deloitte before starting his own firm, Menalto Advisors, in 2016.

Menalto decided to open up an office in Zurich partially because of its great startup ecosystem (high number of startups funded, large amounts of capital, high number of uni spin offs, but not that many exits) and partially because the city seemed like the ideal place for Jonathan and his wife to raise their first child. Jonathan has been working in M&A for over a decade, and during his episode with us he shared some valuable insights for companies looking for a trade sale exit.

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How should you prepare for an M&A?

• Build a valuable business with key differentiators. What are you the world’s first, only or best at?
• Make some noise! Revenue and team are important, but you need to understand your buyer landscape. Potential buyers can’t buy you if they don’t know you exist. But there is such a thing as reaching out too early, so make sure you have something to show first.

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Startups are by definition resource-constrained operations — they don’t have a lot of time, people or capital — so they should focus their energy on the right opportunities. When engaging with other companies or individuals, make sure the person/company you’re engaging with falls into at least two of the following categories, if not all three: buyers, customers and partner/investors.

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When is it the right time to sell? // What type of trade sales are there?

• Promise Value Sale: this is what happens when a company sells quite early, on account of the strategic value it provides to the buyer. They’ve built and validated tech, the buyer sees how they could plug this tech into their product/ecosystem, and opts to pay a strategic premium. 
• Valley of Death: this middle stage consists of having unique tech but choosing to raise money instead of selling. Raising money naturally raises expectations regarding the company: sales teams, marketing teams, HR, finance, and regulatory teams are all expected to grow. At this stage you’re deploying a lot of capital to build up infrastructure, but it takes time for this infrastructure to support the revenue generation that will get you to that Financial Value Sale stage, so you’re not really sellable yet.
• Financial Value Sale: this type of sale comes usually at a later stage, and is based on financial multiples like ARR, revenue, etc. 

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Which KPIs are important to convince buyers? It depends!

• The bare minimum will probably be something like product-market fit, a couple million in revenue, and some operating history.
• Some buyers may demand at least CHF 10M ARR and a growth rate of 50%;
• Others may demand that your business be profitable.

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You need to know what the buyers in your ecosystem are interested in. If you don’t know, go to tradeshows, conferences, networking events, etc… 

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What if you disagree on the purchase price? 

• If the proposals are too far apart, it makes no sense to continue the discussion. Example: 1M vs 1B. 
• How much leverage do you have? Are there other buyers interested? Do you have other funding options? If so, you’re free to say no, and this might allow you to raise the purchase price.
• There’s a lot more to a company than a buyer initially realizes: they don’t necessarily understand the bigger story, or the other assets that that company has that can benefit the buyer in the long term. You have to make sure the buyer knows all of this.

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If you’re looking to undergo an M&A process, make sure to prepare for 6 to 9 months. Within the first 4 to 6 weeks, however, you should already have an idea of where things are headed.

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Memorable Quotes:

"Buyers today are a lot more diligent about due diligence than they were a decade ago."

If you would like to listen to more conversations on M&A, check out our episode with Heiner Grüter.

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