The Exit Journey with Cardin
What is it really like to experience a fully-advised exit process? From your perspective, as the founder, co-founder, director, shareholder, or CEO? How does it all go down, and what are the rules of the game? Our aim is to demystify all of the above.
Here are some of the top questions we will answer:
- How long does it take, from the moment we are hired, to money in the bank?
- What are the major milestones, along the way?
- Who does Cardin know, how do we know them, how many of these prospective buyers will we talk to, and what are typical response rates?
- When should you hire us: now, when the first buyer comes knocking, 6 months before we expect to exit, or 24 months prior?
- How much do we charge, how do we get paid, and how might you think about the raw ROI on an advisory fee?
WHY IS CARDIN DIFFERENT?
Cardin – SaaS Experts
||Valuation and value defense driven by traditional multiples of EBITDA, or pegged to similar publicly- traded SaaS multiples of revenue. Buyers approached with traditionally-presented financials and broad rationale.|
|Compensation for achieving valuations beyond SaaS fair market financial value; a bet on our capability to surface and position strategic value, and our high level of confidence in the underlying metrics-driven financial valuation.||Straight flat % of sale price (Enterprise Value).|
|Full SaaS-metrics driven, with segment-based and cohort based analysis fully factored.||EBITDA or revenue multiple based.|
Target List Generation
|From curated SaaS-interested database of PE and corporate strategic buyers that have seen multiple deals from Cardin.||Pitchbook, CapitalIQ, or other data sources, on a deal-by-deal basis.|
Teaser & CIM Authoring
|Full articulation of tech stack from engineering perspective, product roadmap from product management perspective; full compliment of SaaS metrics and funnel performance detail from SaaS-experienced CFO perspective.||High level TAM summary and high level product overview, focused primarily on company generated marketing materials.|
|Fully-instrumented, multi-stage, customized CRM with unique targets per prospective buyer, auto-tracked follow up and weekly client deal status reporting.||Ad-hoc Excel spreadsheets or Google Sheets.|
Technical Due Diligence Defence
|Tech stack and architecture analysis with CTO, including defense of devops and QA methodologies.||Typically limited understanding.|
Product Due Diligence Defence
|Full thematic product roadmap review with tie-ins to customer acquisition, churn reduction, and existing account revenue expansion.||Typically limited understanding.|
SaaS Ops Deep Dive
|KPIs, metrics, monthly billing systems, sales funnel conversion instrumentation, sales to CS handoff and retention, customer service and support, currency hedging, etc.||Typically limited understanding.|
HOW LONG DOES IT TAKE?
From the moment that we’re hired, and we've combed through the initial information packet, a typical deal is closed 6 months later. It’s exceptionally important that you’ve already had multiple unsolicited inbound inquiries, ideally at least 2 of them from strategic buyers (with the remainder typically private equity), before we (or any traditional generalist transaction advisor, for that matter), is engaged to run a formal exit process. If not, a Market Check process to spur some interest and take the market’s temperature, is likely much more appropriate. The reason this is important is simple: the financial buyers typically know the kinds of assets that they believe will help accelerate the growth of their existing platform investments; they have legions of associate level folks reaching out to prospective targets continuously; if you’re checking the boxes on size, growth, and strategic fit, you will have heard from these guys. If not, we’d be surprised.
There are deals that close in greater or less than 6 months, of course; we’ve been through transactions where the buyer themselves is bought in the middle of a deal, or when timelines stretch out beyond a year. And the opposite, when the buyer is a very finely oiled acquisition machine, legal counsel on both sides are razor sharp, and the deal closes in 3 months. We hold to 6 months as general guidance, as it’s consistent with our project management view and a typical exit Gantt chart (see below for a version that represents a compressed 16 week timeline).
What are the Major Milestones, Along the Way?
- We have prepared:
- a fulsome Confidential Information Memorandum (CIM, like an expanded investor deck on steroids, typically 30 – 50 pages in length);
- a bottom-up (fundamental growth drivers building up to revenue with costs scaled appropriately to unit economics) financial model looking forward 3 years with all germane SaaS metrics explicitly included (as they are the markers of financial value in a SaaS business);
- a one-page no-names teaser summary of the opportunity;
- a full ‘target list’, enumerating all prospective buyers, delineated by financial and strategic entities (typically multiple buckets for the strategics, as each hold to unique and differing rationale), that will be approached with the teaser.
- Distribute Teaser to all Target buyers;
- For each interested party, sign an NDA, and distribute a watermarked CIM and Excel financial model (we watermark with their email address to encourage discretion);
- Solicit buyers for management meetings and oversee 45 – 60 minute calls with company executive leadership;
- Issue the IOI (Indications of Interest, or IO, Indicative Offers) Process Letter, analyze and summarize the results to normalize to present value for any earnouts, or other contingent consideration;
- Prepare detailed pre-LOI analyses to shore up the buyers’ understanding of the business, arming them with the information and analysis they need to hone in on an exact dollar figure in their forthcoming LOI;
- Facilitate in-person management meetings, including technical and platform due diligence;
- Issue the LOI process letter, take receipt of LOIs that contemplate exclusivity from all remaining interested and engaged parties (typically 2 – 4);
- Negotiate LOIs to in multi-round competitive process to maximize terms;
- Sign a single LOI and enter exclusivity;
- Work ‘shoulder to shoulder’ with the legal teams on both sides of the transaction to march through confirmatory due diligence, and negotiate the Share Purchase Agreement (SPA), or Asset Purchase Agreement (APA), and supporting binding legal documents (and particularly to ensure that the terms agreed to in the LOI are reflected therein, and that any remaining economic issue like the Working Capital adjustment, are as favorable to the vendor as possible);
- Prepare a Flow of Funds document, directing payment to shareholders in exact dollars;
- Host a fantastic Closing Dinner and hard-earned celebration.
Who Do You Really Know?
Cardin’s data backbone is a database of over 25,000 SaaS strategic and financial buyers, globally, together with a customized CRM and Deal Automation Platform. One of the groups in our database is likely your future owner. Because a no-names teaser is low impact to the prospective buyer’s inbox, and because they cannot discern your identity based on the summary level of disclosure we employ with a teaser, the risk that the world believes there is a big ‘For Sale’ sign on your company is minimized. This allows us to ‘check the market’ anonymously, when your sole intent is to discover what the market will bear, with the intention of then deciding whether or not to proceed with full sale.
Between full sale mandates and market check activities as just described, together with our SaaS Quick 25 List outreach and other related marketing campaigns, Cardin is in continuous and meaningful dialogue with the market.
Another element of target list development we pay careful attention to is the thinking through the strategic rationale motivating your competitors, near-competitors, or (and this is better!) your existing or prospective channel or integration partners. We typically divide these groups of potential strategic buyers into discrete buckets, delineated by their likely rationale and associated synergies, as we tag the companies from our database to form the target list. Then we ensure that the CIM fully articulates the strategic value resonant with each.
To give you a better sense of how many groups we might reach out to on any given transaction or market check, please see the table below:
When Should You Hire Us?
The simple answer is: the moment that you’re ready to plan for exit. By plan, we mean that rather than continuing to grow and run the business, you are clear in your own mind (and your board, if you answer to one, agrees), that it is time to plot the path to exit. There are typically alternatives: raise capital and accelerate growth (typically whilst realizing some liquidity as part of a secondary share sale), continue with slower organic growth to the extent free cash flow is sufficient and you’re not horribly capital constrained, or consider alternate sources of growth capital like revenue based financing or venture debt. However, typically the stars have aligned: the continuous unsolicited inquiries validate your relevance to myriad prospective buyers, you have been hard at work for a decade or longer, and it is time to liquidate and diversify your risk.
This moment could very well arise 18 – 24 months prior to exit; often, there is a clear ‘final leg’ of growth realizable, perhaps as much as another doubling of enterprise value if you focus on the most effective strategic and operational efficiency initiatives. If that is the case, we engage to help establish these initiatives and associated target SaaS metrics, to maximize the enterprise value of your business once it’s time for us to transition into a more traditional, formal exit process. These growth consulting engagements are a very natural prelude to full exit, afford us a much more intimate understanding of both your leadership and business ahead of time, and ensure we benefit from a running start.
How much do you charge, and when are you paid?
Setting aside the growth consulting prospect and assuming it’s time to proceed with a full exit mandate, here is a representative proposal:
PREAMBLE AND ASSUMPTIONS:
- Without yet having separated out start date customer cohorts, and on an FX-adjusted basis, the revenue line has been growing steadily at 20%+ for the past 3 fiscal years;
- The profitability of your smallest (< 10 seats) customer segment has been below sustainable (based on our segmentation analysis, using normalized LTV and CAC, on a contribution margin / DCF-adjusted basis);
- There exists a cohort of customers at or above $10k ACV, which appear to sport a normalized 3:1+ LTV:CAC ratio, and increasingly dominate your total SaaS revenue;
- A significant opportunity exists with integration and co-marketing partnerships as enabled by your open API, together with ‘right sizing’ the target customer as identified above;
- Comparable public companies trade at 5 – 10X revenue (median of 6.8 with 22% CAGR median revenue growth)
- Relative to the standard publicly-traded SaaS comparable companies, 4 discounts apply to the business in our view:
- A traditional liquidity discount (Discount for Lack of Marketability) of 30% (based on multiple studies, and on Price / Sales ratios);
- An additional small company size discount of 20%;
- A discount of ‘unprofitable revenue’, which is about 15% of total revenue, historically (and which you are purposefully shedding rapidly, which is good);
- A discount (not accounted for in our math) for the SaaS metrics in the ‘healthy’ cohort: CAC:ACV appears to be on the high end, and LTV:CAC of 3:1 is also on the lower end of what is considered healthy.
- Applying these discounts suggests that the straight revenue multiple of recurring revenue should be somewhere between 5 - 7X * (1-30)% * (1-20%) * (1-15%) = 2.4X – 3.4X
- Somewhere in a range between 2.4 – 3.4X $5.2M 2016 recognized recurring revenue;
- + 1X (this is on the high end) 2016 consulting revenue of $1.5M
- = $14.0M to $19.2M
- This represents the cash-free, debt-free Enterprise Value of the business to a financially-oriented buyer; the equity value would be lesser by at least the current ~$1.7M debt on the balance sheet, plus any Working Capital adjustments (to the good, or bad)
- Deferred revenue is a separate question, although we argue for minimal adjustment (as we have with similar companies in the past)
- The strategic buyers will attribute additional value to both revenue and cost synergies; we are not explicitly accommodating those here, but we would include such parties at the top of the target buyer list
- Deal structure:
- The above contemplates a standard 10 - 15% holdback with no contingent consideration (earnout provisions).
- Depending on our process letter guidance, offers will come with significant performance-based earn-out provisions, which may increase the headline (total) consideration significantly
- We always aim to minimize earn-out provisions / deferred consideration, as we believe they generally create mis-aligned incentives, post acquisition;
- To the extent they are included or we allow for them in our process letter guidance, they should be ‘upside’ based, not ‘downside’ punitive; we will DCF the earn-out figures at appropriate rates to make the various offers comparable, then negotiate away the deferred payments, depending on the shareholders’ preferences and our calculations of risk-adjusted value
Value-creation Alignment Compensation:
- Our on-target fees for a process of this nature are $X base for a full process in equivalent circumstances, from a standing start to full collaboration and management of the legal team, to money in the bank (typically with some existing formal written Indication of Interest, often with an existing a full Letter of Intent, in 90%+ of circumstances that we see);
- These fees are competitive for a full-process advisor, particularly those with technology and software domain expertise and with both partners holding engineering degrees and enterprise software experience (Andrew Jones and Brent Bolleman), and having stewarded multiple software exists successfully to close;
- Even most boutiques shy away from advisory mandates where the sale price is less than $10M or even $20M USD implied Enterprise Value, in search for larger deals; full service investment banks generally won’t touch deals of this size (partially because they may not have the deep domain expertise, but mostly because their firm economics make any fee < $500k opportunity-cost prohibitive); we don’t suffer from these limitations, and thrive in this value range.
- In the interest of aligning valuation expectations and awarding Cardin for achieving in excess of fair market value, we propose a Success Fee of: X% of the first $M of Implied Enterprise Value; Y% of the next $M of Implied Enterprise Value, and W% of any Implied Enterprise Value in excess of $M
- At $15M, the Success Fee is X% of $15M = $K
- At $19M, the Success Fee is Y% of $19M = $K
- At $23M, the fee is W% of $23M = $K.
- The Implied Enterprise Value is defined as:
- 100% of cash or publicly-traded company stock offered to all capital providers (equity and debt holders) plus;
- Any debt assumed by the buyer; less;
- Any cash in excess of what is implied by the normal level of Working Capital
- Work Fees
- $10k / month, capped at 6 months (on the quicker end of total time to close from this point; if we could close mid-September, all-in, we would be well ahead of the typical 6 month target.
Next steps beyond ratification of the compensation economics and signing of the engagement letter:
- Model generation and full value defense, through all relevant points of view:
- Full analysis of existing cohorts, relative to the underlying SaaS metrics;
- Size incremental sales opportunity under a strategic buyer’s control
- Full assessment of TAM for relevant sales segment adjacencies;
- Including relevant at-scale cost synergies, equivalent SaaS CAC / LTV metrics for buying company
- Generate management presentation + CIM / Prospectus articulating full company value to engage spectrum of financially oriented and strategic buyers;
- Develop full buyer list beyond obvious competitive vendors, to include all relevant adjacencies, together with companion rationale for each;
- Introduce Cardin as bankers of record to all existing interested parties; we assume full lead role in process management:
- Teaser distribution to target buyer list;
- Engage all interested parties; sign NDAs; build preliminary DD dataroom; arrange, participate in, and oversee management meetings with all parties;
- Issue IOI process letter with firm deadline, once all interested parties are sufficiently up the curve;
- Issue detailed LOI process letter which must include exclusivity provision and further details, confirming select legal terms to avoid confusion and retrade risk in long-form docs
- Negotiate LOIs in a multi-party process; optimize terms and consideration;
- Go exclusive with a single party; engage your corporate counsel;
- Negotiate any remaining economic terms; oversee and project manage legal team to close.
Between emerging business development initiatives and the pipeline of healthy customers on the horizon, all metrics should continue to improve through the sale process – this helps get deals closed.
Please let us know once you’ve reviewed, conferred with your board, and would like to discuss.
Per the detail above in ‘Value-creation Alignment Compensation’, we are typically paid a monthly consulting fee over the course of the preparatory and deal marketing phase, and a success fee once the deal is 100% complete. As an incentive to achieve superior results, and as an important mechanism to get aligned around expected valuation, we typically propose success fees that are incrementally graduated above thresholds of value. This means we’re compensated relatively less if our process does not achieve figures above the mid point of expectations, and significantly more if we do.
We trust this overview helps you to understand the nature of a fully-advised SaaS exit process. We are often asked to dive deeper on each of the areas above, and encourage you to contact us (below) if you'd like to learn more.