To create and maximize value as they went through various exits, Congruity 360 Co-founder Mark Shirman, who has experience in private as well as venture-backed companies, says one important aspect is the narrative.
“The key is to be able to show a fair amount of customer traction, but also to be able to articulate how that continues to grow both in terms of margins and in terms of top line, having a very defined go-to-market and staying very close to the message,” Shirman says. “One of the big mistakes people make is (they) keep shifting the message, keep looking for additional add-on businesses. Those are things that can confuse potential acquirers or investors going forward and something to be avoided at all costs. So, being very clear to the message, being very clear to the business and strategy, and then executing against it.”
ARK Behavioral Health Executive Chairman and CEO of Boston Property Development Peter McLoughlin says the need for an equity investment became essentially for ARK because the opioid crisis, which had been a phenomenon in the country, was exacerbated by COVID. While they put best practices in place as it relates to the clinical treatment, a big component of being able to provide the service, however, is real estate, which he says, because of the nature of the business, is very difficult to get.
“It's one of the typical NIMBY-type of challenges that you have — no one wants it in the backyard,” McLoughlin says. “So, having a team that had the ability to get through those entitlements and having a team that was focused on a clinical treatment and getting a high quality product out there had been key and is still key.”
As the company evolved, drove toward profitability and took their first equity investment, the message, McLoughlin says, was clear: build the executive leadership team, make sure you have experts on all the phases of the business, a strong CFO, strong legal counsel and solid technology, and making sure the team that was built is scalable.
“Scalability is massive,” McLoughlin says. “Having continuity as it relates to your software that you can then, as you go into different states, make sure you're loading the acquisitions, all the de novos, into that scalable platform, and that continuity of the executive leadership team and scalability of business have been key for us.”
Shirman echoes that the creation of the executive team and its continued evolution is very important. It’s about being able to show a strong collaborative team but also that there are folks behind them that could continue to grow the business.
“If there's an exit, then folks may be retiring, they may not be as focused,” Shirman says. “What happens to the folks behind that keep the business going and keep it growing? So, in terms of value creation in general, it's very important to serve and continue to grow your team. Always look for ways that you can advance people from within and try not to be hiring outside unless there are specific roles or that's just the evolution of the business. To the extent you can do that, that continuity is super important.”
When it comes to value creation, McLoughlin says picking your investor and making sure there is alignment and that the investor can add strategic value is important.
“They would have known a lot of key executives in the space, obviously the strategy of the space,” McLoughlin says. “The communication with them — first picking the correct one but then leaving the doors open, really listening to what they say, as a lot of them have purview not only over your company but they've talked to 20 or 30 other companies in your space. So, I'm always very keen to hear what they have to say at the board meetings, in particular, when you get a good four hours together, where you can really bat ideas around, and making sure that you're open to receiving the messages they're telling you because chances are they've honed them over a longer period of time and across a lot more variety of companies than you have.”
Shirman says narrative is important when you start talking to potential acquirers. Then, it’s important to be upfront and honest about where the business is, what's working and what's not.
“You can sell, sell, sell, you get to LOI, you get to diligence and it all falls apart,” Shirman says. “So, be very clear where you are with the business, be up front and deal with integrity. It gets unwound anyway and you get to the yes or no that much faster.”
McLoughlin says in his space they want to maximize EBITDA and net income, which is how they measure value creation. But ultimately the investment decision comes down to whether the company is “exitable.”
“It's not, are you at the highest EBITDA possible? It's, are you solving the problems for all the stakeholders in your company?”
McLoughlin and Shirman, along with Twelve Points Wealth Management’s David Clayman, spoke at the Boston Smart Business Dealmakers Conference about value creation in the M&A lifecycle. Hit play to catch the full discussion.