Increased Use of Nontraditional M&A Expected in 2021

Increased Use of Nontraditional M&A Expected in 2021

With the uncertainty in adoption, capitalization, and valuations following the social and economic adjustments brought to the world through the influence of the pandemic, companies need to expand their options beyond traditional M&A (Buying or selling a company).

Leaders will use joint ventures, partnerships (with or without equity, with or without financial sponsor partners), and corporate reserves to deliver new solutions, products, and services in ways that are easier on the balance sheet and significantly less invasive on the implementation and timelines. 

At Revenue Rocket we see these nontraditional combinations of offerings more when a company is testing a market or expanding services to existing clients that are potentially early stage and unproven. It’s hard to identify the true adoption forecast for emerging categories as the playing field is usually littered with trials and partial deployments vs enterprise tested and true reliability. Regardless of why an offering is seeing traction, it is important for companies in the mix to remain relevant and aware of what products and services are driving disruption.  These disruptors are hard to buy typically as they are riding the growth curve and drinking the proverbial kool-aid on valuations.  Most emerging categories and disruptors rely on multiples of revenue when crafting their valuations and for a pragmatic well-established operator, the risks associated with overpaying for something not fully baked is too great.   

Nontraditional M&A can allow companies to take an ecosystem approach by partnering with other companies to explore new opportunities, reserving the option to buy with a “first right of refusal” clause. This approach can also deter other buyers circling the target as deals with an incumbent or competitor sewn into the mix are almost always going to run up the price and complexity in displacing that relationship and buying the company.  

This increases the likelihood of selecting the right deals, structures and ensuring that the return on such an investment will be realized not just from your shareholders but from the customers you service.  Think about it as a long engagement before the wedding.  You get to evaluate the future with your partner, spend some money setting up the ideal combination, and at the same time show the world your commitment to the cause (whether it be a product gap, geographic expansion, or hopping target audiences). 

These deals while incredibly valuable to both parties are traditionally harder to structure, especially when it comes to drafting terms associated with a potential combination.  These deals often come with complex valuation calculators that bridge the gap between the sought-after multiple of revenue to the method preferred by buyers of EBITDA multiples. 

We love these deals when they are part of a larger strategic plan and fuel decisions based on real-life data vs trends and forecasts seen in a broader industry. It’s an option we sometimes present to clients engaged in our SPV program, as it helps fuel growth while installing intimate knowledge about how a new offering could impact their business without betting the farm. 

To learn more about nontraditional M&A deal structures or to evaluate the opportunities we are representing, visit us at revenuerocket.com or reach out at info@revenuerocket.com