Case Study: Higher sales price for software company realised

“The business model of Lampion was fragile. It was a small company that served large, international clients. They did huge projects and charged fixed amounts. The lead time of quotations was also relatively long. This combination had a major effect on profitability. One year they made a profit, the next year they closed with a loss. On balance, the result of the past five years was just above the line,” says Jetten.

And there were two additional risk factors. Lampion was dependent for 50% of its turnover on one company, with a listed company as its parent. Moreover, the director and major shareholder was approaching retirement age and there was no one yet to take over. All in all, not exactly a cocktail in which one can speak of a carefree future.

If the most important client expresses an interest in the company, the necessary discussions are held internally. To do or not to do? What if we say no? And how much is the company worth? One of the investors suggested that Aeternus should be involved. In a previous takeover project, he had seen the positive contribution that such an external party with takeover professionals could make.

“What made this process extra challenging was the position of the various shareholders. There was Richard, the director and major shareholder, an informal investor, a former employee and an investment company. Four parties, each with their own interests. That provided the necessary challenge during the process,” says Jetten. But more about that in a moment.

‘Is the company capable of adapting its business model in the coming years? And will it be able to deliver better results?’

At the start of the process, Aeternus immediately put an important question on the table. Is the company capable of adapting its business model in the coming years? And will it be able to achieve better results by doing so? Based on the discussions and analyses, a clear recommendation was made: sell now.

“In the past, the company had not succeeded in achieving substantial organic growth, outside of this one customer. It was not sufficiently clear why it would succeed in the coming years. Nor were there any new technological breakthroughs in sight. The fact that the company was highly dependent on one customer and that Richard was 63 as managing director also played a role in that advice,” said Jetten.

Of course, in order to get this far, a price still had to be put on the table. “The main thing was to be able to formulate a purchase price that took the strategic importance of the buyer into account. We found a solution for this by calculating the costs of the alternative for this party. In this case, building the software by a third-party developer. It turned out that those costs were much higher than the going concern standalone of the company, the result of the DCF calculation. In the negotiations, we therefore took the price that was based on these alternative costs,” says Jetten.

The price was also part of a hurdle that – in retrospect – proved the most challenging: bringing together the different interests of each shareholder. As mentioned earlier, they were not all in the same league. This is no exception, according to Jetten. While some were concerned about the continuity of the business after the takeover, for others it was primarily an investor’s decision. “It is very important for the further course of a project that you first get all the shareholders on board. We even make it a condition to be able to start a sales process. That was also the case in this instance,” says Jetten.

During the streamlining of these thoughts, emotions sometimes ran high, Richard, one of the four shareholders, also acknowledges. “We found this a difficult phase. The various interests became clear during the discussions and were all put on the table. It was a puzzle that seemed impossible to solve at first.” It is a situation that Aeternus’ M&A strategists encounter more often. “Our job is to listen carefully to all those different opinions and to find the right mode in doing so,” Jetten continues. “We bring years of deal making experience to bear in doing so, of course. That’s how we finally managed to make clear agreements on the desired selling price and all the conditions. We put these in writing so that there would be no ambiguity later in the process.”

When all parties were on the same page, the real negotiations could begin. The question in this phase is invariably whether to put a price on the table yourself or to let the interested party make an offer. “Based on the valuation, we advised to take the initiative in this case and quote a selling price. Based on past results, the buyer might end up with a much lower price. That would make it more difficult to get the price to move towards the strategic price. It turned out to be the right move; we were soon on the right line,” says Jetten.

So was the deal almost done? Not yet. The buyer wanted to do a quick Due Diligence and then negotiate further on the price and key terms. “We found a solution by splitting the Due Diligence into two phases. This allowed the process to continue without losing our negotiating position,” says Jetten. The deal eventually came through, resulting in four satisfied (ex-)shareholders, including Richard.

“The whole process with such a large takeover party was a long one, with the necessary display of power. Aeternus’ role in this part of the process was very powerful. They presented our views in a good way, with the right sense of proportion. We look back on this with a good feeling. Aeternus worked purposefully and led us with a sense of proportion to a successful deal.”