Seeds of Success: Cultivating Transaction Readiness

In corporate transactions, we often assess potential risk factors, undesirable tax implications, or questionable protection of the company's intellectual property rights (IPR). In certain instances, making appropriate adjustments becomes difficult, and sellers may find themselves compelled to provide extensive indemnities, accept a diminished valuation, or, in some cases, risk jeopardizing the entire transaction. Drawing from these experiences, We have some insights on the importance of early preparations.

Consolidate the “Economic Moat” of the Company

The term "economic moat" refers to the strength of a company's competitive advantages. Intellectual property is a crucial factor in establishing and maintaining this advantage. However, in the face of rapid technological development, the economic expiration date of technological intellectual property can be accelerated if not properly managed.

In an era dominated by the digitization of products and services, future industry leaders are likely to be those who strategically leverage data for competitive advantages. Businesses often possess unique access to valuable data, which, over time, accumulates to reveal patterns and insights. This significance is heightened with the emergence of artificial intelligence and machine learning. Consequently, I believe that we are currently undergoing a paradigm shift in intellectual property, where the strategic utilization of data may surpass the importance of "static" rights in the form of patents and copyright to source code.

However, realizing such advancements necessitates a comprehensive strategy that aligns with legal requirements. Once these strategic opportunities are identified and implemented, they become integral to the company's valuation foundation.

Consider the Company Structure

At times, we encounter company ownership structures or affiliations that are less than optimal for the transaction process. Similarly, non-operational assets within the company or activities that could be more efficiently outsourced may come to light. Addressing these considerations early on is crucial as part of the transaction strategy. Modifying company structures may necessitate proactive measures, often well before the conclusion of the financial year preceding the transaction.

Proactive Approach

Upon identifying the need for capital or making the decision to divest, shareholders often express a sense of urgency to kickstart the process. Presentations are typically crafted when the company is poised to commence a roadshow or engage in a structured sales process, often within a relatively short timeframe. However, it is during the preparation for these presentations that weaknesses in the messaging may surface. Consequently, it is advisable to initiate the thought process well in advance and consider utilizing an early draft presentation as a tool. This proactive approach allows for a more thorough exploration of the message, ensuring that it is robust and effectively communicates the intended information.

These are some of the most critical factors to address before preparing an investor presentation:

Transaction Readiness

• Business concept

  • Initiate the presentation with a comprehensive description of the company's product, solution, or service.

  • For early stage and growth companies, it's essential to explain what problem is solved and how the company will achieve this in a more cost-efficient way than the competitors.

• Revenue model

  • Give special attention to the revenue model, especially in cases like transitioning from a software license model to a cloud service. Such transition involves not only technological changes but also necessitates adjustments in pricing models and contract structures.

  • Ensure the revenue model complies with legal requirements and potentially requires special permits, particularly for payment solutions and the use of personal data. Emphasize the company's adherence to legal standards and its implementation of quality assurance routines.

• Markets

  • Provide insights into the current market scenario and the new markets the company is targeting, crucial for assessing growth prospects.

  • Investors seek evidence of growing demand for the product or service, requiring thorough market research, identification of target customers, assessment of market size, and validation of assumptions.

  • Share success stories from existing customers to bolster market credibility.

• Competitive advantages

  • Valuation is tied to future earnings, and future earnings rely on sustained competitive advantages.

  • Explain strategies for enhancing the economic moat, emphasizing differentiation from competitors.

  • If relying on intellectual property rights, illustrate how these rights are secured.

  • Early stage companies should highlight strategies for building competitive advantages, such as being a "first mover" in a market, and elaborate on customer-centric service development and personalization.

Strategic Vision

• Business plan

  • A well-defined business plan is crucial, either as a separate document or summarized in the investor presentation.

  • Showcase a viable plan leading to upcoming milestones and the resources required for execution.

  • Early stage companies should emphasize the route to market, including agreements with distribution platforms, marketing strategies, and associated costs.

  • Identify capital needs.

• Projections

  • Justify growth forecasts based on market assessments and demonstrate scalability and economic potential.

  • Recognize the shift in investor focus from just growth to profitability and articulate a strategy for a fast track to positive cash flow.

Team and Ownership Structure

• Key personnel

  • Highlight the significance of key personnel, providing a detailed description of their background and qualifications.

  • Early stage companies should seeking capital should address the distribution of ownership, ensuring that founders are not overly diluted in subsequent capital rounds.

• Ownership Structure

  • Detail and discuss the current ownership structure and address the potential impact of active owners selling down or diluting.

  • Detail any contingent rights to the equity of the company, such as share options and convertible notes.

By thoroughly addressing these aspects at an early stage, an investor presentation can offer a comprehensive and compelling overview of the company's potential and strategy.

Seek Advice Early

A company that successfully crafts a credible narrative about its competitive advantages stands to be rewarded in the transaction market. Conversely, without a compelling story, the risk factors might cast a shadow over the promising revenues highlighted in the latest quarterly report. To mitigate this, sellers could significantly benefit from seeking independent advice at an earlier stage in the process. Doing so not only helps in identifying potential weaknesses but also ensures a more robust and convincing presentation of the company's strengths in the competitive landscape.

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This article represents the author's general views and is written for editorial purposes. Professional opinions may differ. Advice on specific matters must be sought on an individual basis.