Capital Efficiency and Timing Insights from Successful M&A Exits
By Allie Glans - NextPath Associate, MBA candidate University of Washington Foster School of Business
Capital efficiency will always function as a powerful predictor of a company’s ability to make a successful M&A exit. As a CEO, you should be calculating your Sales to Investor Equity ratio, or SIE, to gauge how efficiently your company is generating revenue from the capital you received from investors. The higher the SIE value, the more attractive your company will be to potential buyers. But - Should you be considering an M&A exit and when should you start planning?
NextPath sought to answer this question by studying 29 successful exits of software companies in the western states in 2021. The results are shown below:
We found a correlation between the number of exits, operating time, and SIE ratio. In general, most companies from the 2021 M&A Cohort were between 3 and 7 years of age with a median age of 6 years. We also saw a decline in SIE ratios for companies that were 7 years or older at time of exit. See graph below.
What do these metrics mean to me and my company?
Assuming that your company is not heading toward an IPO or unicorn status - There may be a sweet spot for M&A transactions. Especially if your revenue growth rate currently hovers above 40% or will in the future (though not required). Maybe you are receiving pressure from your board, or simply want to find a strategic buyer while your technology still has a strategic advantage in this fast changing market. If your company falls within the 3 and 7 years in operation and has SIE values greater than 0.6, you may be well positioned for an exit. The 2021 M&A data also suggests that many companies are exiting within 2 years of receiving their last fundraising round. If you are not yet profitable and fall within that time range, you will want to plan ahead to make sure you do not run out of cash.
Want to talk about your options?
Capital efficiency and timing are important for CEOs to consider as you plan for potential exits and financings. Relative valuations may change with market conditions and your company’s situation, but these metrics remain fundamental to success.
If you would like to discuss how this might apply to your company, click the link below for a free M&A readiness consultation, or to subscribe to our blog.