Startups often approach us with some hand-wringing. They’ve built solid products and are now attractive acquisition targets. Interested acquirers are ready to begin due diligence, yet company founders are nervous. And it's because they have no visibility of their SaaS exposure - and an IPO or M&A are imminent.
It’s understandable: the frenzied pace of early-stage company life meant that financial processes and expense management practices took a backseat to sales and engineering. But now, an acquirer is sniffing around. Their engagement process requires that they explore spend, assess internal system organization and weigh the complexities of integrating a target company that owns a variety of systems and software.
Having poor (or no) tools for expense and software management is simply bad optics. Acquirers have distinct requirements when it comes to deal execution and initial data requests. They want to close transactions successfully and, if given a choice, will prioritize better-prepared targets that require lower scope due diligence.
For companies with a vision to exit, it is never a bad time to wrangle SaaS spend and establish software management disciplines. But SaaS visibility is crucial when an IPO or M&A is imminent. From our discussions with numerous startups, here are three ways better SaaS management improves M&A outcomes -
- Eases financial due diligence. Once the commercial rationale for a deal is set, acquirers immediately turn to risk-reducing due diligence activities. Here, the primary focus is financial health. Of course, startups will be asked for balance sheets, P&Ls and cash flow statements. But particular attention will also be paid to projections, trends and reporting quality. Sloppy forecasting or incomplete historical data is a concern to an acquirer. The average U.S. employee accounts for nearly $14,000 annually in software and IT infrastructure expense. These figures are growing each year and certainly matter to acquirers. Targets need to be able to guide this fact-finding.
- Improves the HR experience. Human resource diligence is a regular part of the discovery experience. In general, the acquirer's HR team will be tasked with understanding requirements to integrate a new team. Target companies can improve this by detailing the specific costs of employees and offering clarity around what tools are available and required for prospective new staff.
- Supports IT integration. Active acquirers know that the integration phase is the biggest determiner of deal value or failure. Within this phase, technology related issues present the most complexity. Technology teams are accountable to unearth key issues, potential deal breakers and then project manage the integration of new teams, systems and tools. The better and faster they do this, the more deal value is extracted. When two companies come together, there will naturally be software duplication, multiple contracts with the same vendors and competing tool sets. Technology leaders are responsible to make sure these issues don’t affect productivity, drive waste or introduce security and compliance issues. When targets can offer the technology leads a clear view of spend, license distribution, contract detail and software usage, technology integration accelerates.
The common thread through each of these outcomes is speed.
When a deal opportunity presents itself, target companies need to be prepared to move quickly. Every day that passes is a new chance for a deal to collapse. Markets change, competitors announce new initiatives, key hires depart and acquirers’ priorities shift. Having full control over technology vendors and capable forecasting and reporting can shave a week or more off due diligence – especially as security and privacy compliance are top of mind.
But, perhaps your company has its eyes on another strategy like an IPO...great! The same principles apply.
Investors want proof of sensible financials and companies that exhibit internal control and management. These types of companies reflect leadership thoroughness and bring investor confidence. These are not just “ housekeeping” activities, but demonstrate a company’s ability to handle the administrative complexities that can derail even great product companies in the public markets.
Meeting reporting demands as a public company is hard. Finance teams have to produce timely, audited financial results and need to articulate tight forecasting. Skilled people aren’t enough – companies need policies, procedures and systems in place to deliver on time.
Companies that deploy Cleanshelf show the world that “they have their stuff together.” Establishing SaaS controls and managing license spend, usage and deployment is an important step toward becoming an attractive target or going public. Preparing financials and readying for an exit event will be stressful, but with the right tools, companies can do it.
Fortune magazine reminds that Predictability & Visibility are one of the three top factors for IPO success. Precision matters. Do you have the tools in place to make these a reality? If not, contact the Cleanshelf team today, manage your SaaS exposure, and begin your IPO/M&A with confidence.
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