Thursday, May 10, 2007

Selling a Startup: the Impact of your SLAs on Purchase Price

These days, the number one factor that impacts the purchase price offered for a high tech company is the target's support environment/go-to-market operations. Here's why:

Deficiencies in a technology or product can be fixed, many acquirors say, but problems with a target's going to market structure take time. If an acquiror is a public company, time is a problem, as public markets demand that acquisitions be immediately accretive to the bottom line.

The sales organization is usually a break- even operation, acquirors say; the profit margin for a tech business lies in support and renewals. If a technology needs to have upgrades in its maintenance process, or in any other part of the value chain to the customer, then from a potential acquiror's perspective, the product will be out of the market until these are put in place, and the likelihood of return from that acquisition is delayed. As a result, (a) the purchase price offered may be adjusted or re-structured, or(b) the deal may fall away completely.

At our firm, we've developed a model for evaluating the customer chain that we use when acquirors ask us to do due diligence, which helps the acquiror assess the impact that deficiencies here might have on their offer. Here are areas that create the most issues:

- Renewal schedule for maintenance agreements: How many will come due within the next 6 months? 12 months?
- Adequacy of professional services training and geographical allocation of resources: Will the acquiror have to create and train professionals and to support foreign markets?
- Adequacy of marketing collateral: will new materials need to be created?
- Adequacy of sales channel training

This last point is particularly important. As one client told me, "We can acquire really cutting edge technology, but if we can't acquire a properly trained sales force (or train our own force effectively), products won't sell. This means the technology will be out of the market for at least a year while we fix these gaps, and that needs to be priced into the offer we make."

High growth companies, take note: support environment due diligence is a good preventative practice. Don't take money off the table because you failed to identify and fix problems before an acquiror comes calling.

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