In the latest Nauta Collective session we welcomed Oscar Macia, Co-founder and CEO at ForceManager, into the Nauta Barcelona office for a workshop with founders from our community focused on partnering with potential acquirers. Oscar has first-hand experience of this through ForceManager’s recent exit to Sage.

Although many of the learnings are repeatable, it’s important to note that Oscar and ForceManager’s journey, like every startup, is unique and the process is likely to vary from sector to sector and from acquirer to acquirer. However, at Nauta, we believe firmly in sharing lessons learned with the next generation of founders.

Background on ForceManager

Founded in 2011, with Nauta leading ForceManager’s Series A, the company grew to over 1,200 customers and 15,000 active users before being acquired by Sage. As a lightweight CRM for B2B companies in traditional (non-software) industries such as manufacturing, construction and automative, ForceManager is a great fit into Sage’s product suite to offer its new and existing client base.

The relationship first started as an ISV partnership, with Sage’s sales reps selling ForceManager to customers as part of a revenue share agreement. This went very successfully for 12 months before turning into an acquisition process (a further six months) and ForceManager is now part of Sage, albeit still available as a standalone solution.  

Key success factors:

• There is a clear shared customer base with the partner and the two organisations have a clear market-fit alignment
• ForceManager was actively engaged with Sage’s sales channels and was active in 33 countries, supporting six languages which made it easier to acquire
• Strong demand was generated through the partner network and revenue share model, showcasing the potential upside of the acquisition
• Hired an ex-Sage employee which helped activate the partner’s channel

The acquisition process

Oscar was highly aware of two factors once the process started:  

1. Most acquisition processes do not reach completion
2. The vast majority (70-80%) of acquisitions still fail or fall behind expectations after they’re completed (often due to product integration or cultural challenges)

Neither of which was in the interest of anyone involved.

So, he walked us through what he did to mitigate both outcomes.

Negotiation strategy

It’s important for both parties that they reach a mutually beneficial agreement on the value of the company and a revenue multiple. Oscar separated this as a pre- and post-term sheet, emphasising the importance of disclosing all potential issues and utilising all potential leverage before signing a term sheet.

Pre-term sheet:

• Disclose all potential issues (tech, legal, financial)
• This is the maximum leverage point for sellers
• Set clear calculation methods for valuation

Post-term sheet:

• Expect a 4-5 month process
• Limited negotiation leverage once you’ve signed
• Focus on minimising holdbacks as much as possible (holdbacks are where some of the purchase price is withheld until certain conditions are met – i.e. commercial performance)

Due diligence preparation

Fundamental to the success of the post-term sheet part of the negotiation process is due diligence, during which the buyer is looking for all potential issues for them further down the line. Each of the issues found can result in a drop in valuation, additional holdbacks or worse, the buyer pulling out.

Technical preparation:

• Scan codebase for security issues well ahead of time (conduct a wide search for the best pen testing, it doesn’t have to cost a fortune)
• Review third-party licenses (a component with a viral license in the codebase can be an issue)
• Clean up technical documentation and code (messy code stored in multiple locations and mismanagement can raise questions about the organisation of the people and product being acquired)

Legal preparation:

• Organise all contracts well, especially early customer agreements as these are most of the times the ones that include mote no-standard terms and potential liabilities
• Review data privacy compliance
• Have the 27001 ISO certification well in advance, if possible

Financial preparation:

• Clean up revenue categorisation
• Minimise debt during the previous years of the acquisition where possible (impacts final valuation directly)
• Carefully review working capital calculations, they will impact final valuation

Risk management

If, during the process, the company’s performance starts to drop, it can have a negative impact on final valuation and terms. Oscar stressed the importance of making sure the wider team remains laser-focused on their day job and continuing the company’s growth story. So, it’s important to carefully segment the level of knowledge sharing for employees.

Here's how he recommended to segment the information:

Information compartmentalisation:

• Top level (CEO + COO): Full acquisition knowledge and involvement
• Management team: Knowledge of a funding round taking place in case they need to provide details or be involved in calls  
• Rest of company: Only aware that a partnership process is taking place to avoid distraction unless something is required of them

Communication strategy:

• Provide quick, accurate responses during due diligence. If communication slows down on either side, it isn’t a good signal
• Use calls instead of emails for sensitive topics to avoid misinterpretation  
• Leverage investors to play the ‘bad cop' role where necessary in negotiations (works well but use carefully)

Holdback Structure

It depends on the specific deal and each case is different, but this can be a common structure:

Short-term adjustments:

• ~1-2% of total amount
• 60-120-day review period
• Working capital and closing adjustments

Long-term holdbacks:

• Can range from 5-20% of the total amount depending on the findings during the due diligence
• 2-3 year typical duration
• Based on identified risks

Government Considerations

It is very important to factor in government approval to the acquisition timeline. With so much concentration being put on the commercials, this can be neglected and subsequently slow the process.

• Special approval is required for AI companies
• This added three months to the ForceManager process but thankfully they ran it in parallel with the Sage due diligence
• Always required for foreign acquisitions in strategic sectors
• Start the process early to avoid delays, and tell the acquirer to start the process as soon as possible, sometimes they are not aware and find it at a late stage delaying the whole operation

‍

Key takeaways

Oscar’s key takeaways for the M&A process:

1. Protect your company and team from this major distraction
2. Create clear information compartmentalisation
3. Respond quickly, but accurately to queries
4. Request a call to explain anything that requires context
5. Put your team in the spotlight (a big part of the acquisition is the people)
6. Let your investors play ‘bad cop’ when required