After experiencing two consecutive years of flat revenue, the founders/owners of a subscription software company were at a crossroads: maintain the status quo, raise growth capital for the first time, or call it a good day and transition to retirement after selling the company. There wasn’t a clear choice, and the owners recognized that outside guidance could help them identify the best path forward. The owners embraced the need to address the issues and brought on an outside advisor to help develop and implement solutions.
In our interview with Jeb Connor, we discussed the value of engaging an outside advisor when developing a succession plan and how the process can support a successful exit.
Could you share a bit about CPFD Software and specifically, its core technology?
JC: CPFD Software is a pioneering technology company in the field of computational fluid dynamics (CFD). Building upon a unique heritage from Los Alamos National Laboratory, CPFD Software expanded fluid-flow modeling to the simulation of industrial-scale fluid-particle systems. Its primary product is the Barracuda Virtual Reactor, a sophisticated software product that models and simulates the complex physics and chemistries that occur within fluid bed reactors to produce the full spectrum of hydrocarbon-based fuels, chemicals, and biopharmaceutical products globally.
Refiners have used Barracuda to solve issues that cost tens of millions of dollars per operational cycle; technology companies have accelerated commercialization timeframes and even bypassed construction of a pilot plant milestones; and research institutions and academia are augmenting R&D programs through simulation.
What strengths and weaknesses stood out to you?
JC: For starters, the technology was interesting and high quality, plus with the company operating in the B2B industrial market, there was strong growth potential. The CEO was regarded as a top subject matter expert in the industry and the company had brilliant engineering talent. Culturally, the company DNA was solid; the development team maintained thorough documentation and executed on its plans. It had a great customer base and recurring revenue backed by renewable contracts and had reached profitability without investment capital.
CPFD had an extremely bright and capable team, but the company didn’t have the sales and marketing DNA to transform the novel technology into a rapid uptake business model without significant investment, or without finding a buyer that had that expertise. While there was a stable source of recurring revenue with existing customers, there was little progress on adding new customers or expanding within large accounts…the sales model wasn’t functioning at its fullest potential. Additionally, the financials were managed via cash accounting and handled by a local accountant. The company didn’t have a board of directors or a formalized advisory board, which isn’t uncommon for early-stage companies, but as CPFD matured, it lacked senior professionals who could provide growth expertise. Finally, the owners struggled with the decision between staying with the company and continuing as is versus selling the business. And, the founders were aging, but they hadn’t developed a succession plan.
What strategic options did you consider in collaboration with the owners?
JC: It really came down to getting the owners to agree on one of three paths:
- Continue the lifestyle business at the pace revenue growth, profitability and annual cash accumulation would allow;
- Raise capital to affect needed change; or
- Find a buyer for the business and fix the financials, clarify and commit to a succession plan, and incentivize the company on revenue growth.
The owners decided on option 3. They recognized that it was in everyone’s best interest to sell and that key areas needed to be “cleaned up” to both improve the likelihood of a successful sale and a larger payday.
What factors did you consider when guiding them on a succession plan, particularly one that wouldn’t deter buyer interest?
JC: Both owners genuinely wanted the employees and products to end up in a well-funded growth situation and they were willing to stay on for as long as needed to ensure a smooth transition. I worked closely with the owners as they deliberated and agreed upon their decision; we then worked together to craft and communicate the plan to employees, which helped keep them motivated instead of spooked. From a positioning perspective, we focused on how the business was primed for growth – high-profile customers that were regularly renewing despite weak sales due to robust product development and customer care that could plug and play into a buyer’s sales/marketing channel. We also emphasized the expertise of the CEO/founder, who wanted to stay visible in the market and help the buyer evangelize the growth potential of the product.
After going through the sale preparation process, what was the outcome for the owners?
JC: Within 12 months of starting the pre-sale preparation, the company retained FOCUS to enter the M&A market. The result was a sale of the company and a suitable outcome for the two owners, who retained partial ownership in their company; a board seat in the acquiring company; and a consulting contract to support the transition to the new owner.
How has working with companies like CPFD informed your advisory practice?
JC: Owners face complex, interpersonal decisions when weighing a potential sale, especially 50/50 owners. In my role, establishing a deep understanding of each owner’s personal, business, and financial goals is essential. Objectively assessing the business strengths and weaknesses and candidly discussing them with the owners is a must…this forms the basis for agreeing on and executing needed adjustments. In the case of CPFD Software, my role was to help the company prepare for the sale, from implementing operational improvements to navigating the banker selection process. In the case of CPFD Software, it reinforces the value of taking a process-driven approach when preparing for and pursuing an exit. A perspective from CPFD’s CEO and Co-Founder
Ken Williams, formerly CEO and Co-Founder of CPFD, commented: “After our first meeting with FOCUS Investment Bankers, we and they concluded that before we proceeded with either a sale or equity raise transaction, we needed experienced advisory assistance to get us ready. FOCUS introduced us to Jeb who had been in our shoes numerous times. He quickly and accurately assessed our current operational state, identified the gaps that needed to be fixed, and guided us through a process to a successful outcome for the owners, employees, customers and the eventual buyer.”
Ken presently serves as a member of the Reactor Eye, LLC Board of Directors, the company that acquired CPFD, while pursuing select consulting engagements and enjoying a busy retirement with his wife between their homes in Southern California and Colorado
Jeb Connor leads FOCUS’ Sale Preparation Advisory Service. To learn more about his work, be sure to read “Preparing for a Sale: How a Two-Generation Family-Owned Business Achieved a Successful Exit” and “Reinvent and Rebrand: Strategies followed by a SaaS Company to Become M&A Ready”. To learn more about these services, contact Jeb Connor at [email protected]