Having bootstrapped his way from personal savings to, over the course of 12 years, a company that grew to 176 employees working in six countries, Prosperoware Co-Founder Keith Lipman planned to either do a majority recap or sell in the summer of 2021.
"I hired a banker and went through it and one of the bankers said, 'You should wait, your numbers will look better in January.' Thank God I didn't listen," Lipman told attendees at the 2023 Philadelphia Smart Business Dealmakers Conference.
He went through a process, got an Letter of Intent by the end of November and closed January 2022, right before the M&A market cooled.
"So, we had the best result. But I have to say the only way we got there was the four to five years of crap that we had done beforehand," he says. "We actually maintained a constant dealroom. We had all the data arranged. Our finance team, basically we had every number nailed — we knew where our numbers were, we understood how we recognize revenue, we understood every bit of how the team was going to work and how we're going to go."
His advice to anyone is to bring in help when going to market.
"Advisers, advisers, advisers; but prep. And it's prep internally. It's starting to track all of those documents, literally. Are you going to know where every offer letter is? Signed? Are you going to know every major substantial contract? Where is it signed? Where is it located? Is it stuck in somebody's email? All of this matters. You will be asked for anything you can imagine in the process. And if you don't have your fingers on it, you need to fix those processes now."
He says there is an advantage to making sure, as the CEO, you own the process. That's because people may leave and then it could get difficult to find the data that's needed. All of that preparation, he says, made for an extremely clean deal.
When looking for advisers, he says it's important to understand their skillsets and experience. But there's another factor that might be harder to identify on paper.
"You better jive with them because these are people who you're going to have some rough moments within the process that they need to be on your side and you feel comfortable when you talk it through that you can actually have a good conversation," Lipman says. "Think of it this way: Whatever your deal cycle, your active deal cycle, it will be the most stressful moments in your life because you're running the business and you're doing this deal. It doesn't get worse. It's two full time jobs. And on top of it, likely, depending on your business, I actually had to execute a number to get the deal done. So, I had to hit a revenue target of done deals. So, I literally was calling and closing some myself on top of getting the deal done. So, it's just a way of thinking that through. You need to depend on those advisers to really help you and coach you and also push back on the other side at the right time."
He says something else sellers should know are the buyer's KPIs.
"So, for example, in software, you better know how to calculate the recurring revenue, you need to know net retention. Net retention is how much your existing clients are growing. And if you don't know these numbers, and calculating these numbers, you're not going to understand it."
He says one way for sellers to educate themselves on this is to talk with an PE firms that inquire about the business. He says just a 30-minute conversation could help a seller learn a lot.
"If you don't educate yourself there, you won't really understand," he says. "It's everything to understand it."
Also, as part of his market prep and strategy to have conversations with inquiring buyers, was to get his name out to the buyer community so they knew who he was.
"I actually ended up selling to a strategic I knew, and had a conversation with their private equity firm two years ahead and had pushed them off."
He says he never thought the strategic that bought them would be the buyer.
"I thought we were going to end up in a good majority recap and continue the business," he says. "They gave us an offer I couldn't refuse."