When deciding whether a company is viable to be bought, CareMonkey president Peter Bencivenga says the magic number is 90 percent.
That number refers to customer retention rate, and Bencivenga said he's called off potential acquisitions when a company's performance in this department isn't up to snuff. Retention, he says, is "the one thing that could always go haywire in an acquisition." For him, companies need to clear the bar of 90 percent customer retention in order to be suitable acquisition candidates.
When it comes to getting acquisition advice, whether purchasing or selling, look no further than Bencivenga. He's been involved in six edtech acquisitions over the past seven years, on both sides of the table.
Bencivenga, who will be coaching entrepreneurs on acquisitions at EdSurge Immersion NYC in September, founded DataCation (later named CaseNEX DataCation) in 2007, and made his first acquisition in 2011, buying the assessment business DataDriven Classroom.
"You don't have to be doing $20 million, $30 million in revenue to start doing acquisitions," he tells EdSurge. "We were doing $3.5 million when we made our first acquisition. From an edtech standpoint, start your M&A pipeline early on."
His second acquisition was already in the works when he completed the first. CaseNEX DataCation bought Pals, a reading assessment platform, in 2012. In September 2015, the private equity firm LLR Partners acquired Bencivenga's company and merged it with another, Longleaf Solutions, to form IO Education, where Bencivenga served as the chief academic officer.
There, Bencivenga helped orchestrate IO's purchases of assessment platform Eadms in August 2016, and of eSchoolData, a student data management system, in September 2017. Then, in July 2018, Illuminate Education bought IO Education as part of a five-way merger.
Bencivenga left the company months later, opting to lead a seed round in an early stage startup, CareMonkey, and become its president.
You don't need to be a large company like Illuminate to buy others, though. Bencivenga advises entrepreneurs to think outside the box on how to finance acquisitions.
"Don't wait. There are creative ways you can do M&A as a small company that don't require a lot of cash up front," he says. The terms "could be a mix of equity, earn-outs over the years, things which might make more sense even though you might be a small company."
Before founding DataCation, Bencivenga worked for 16 years as an educator, and he doesn't believe companies should make acquisitions solely to chase additional revenue.
"A lot of companies make acquisitions just to bolt on revenue. We really looked at product fit with our own portfolio, customer fit and customer gap," he says. "The first I like to look at is product fit/product gap. If I'm a SaaS-based teacher management system company, I'm not going to go out and buy a company that does HR for schools. There's no product fit there."
(A note on terms: Bencivenga defined customer fit as a buyer's existing customers adopting the product of an acquired company. Customer gap refers to the segment of customers a buyer might add via an acquired product. Both determine whether a possible acquisition will complement an existing portfolio of products and services, or only exist alongside them without synergy.)
"We ask, 'What are our customers asking for? What are they missing?' We then evaluate whether it would be more costly to build that and scale, or buy a best-of-breed product in that space that could give us additional customers," he says.
In addition to product fit, customer fit and finances, Bencivenga considers acquisitions with several other angles in mind-whether the product or service has found a welcoming market, and how well the teams fit together (or if they duplicate one another), for instance. He advises entrepreneurs and private equity investors to do the same.
The financial considerations of an acquisition, he noted, should be geared more toward the long-term than the present. He evaluates a company's customer retention first and foremost.
"If we're buying revenue, we want to make sure that revenue will be there for the next year and the following year," he says. "The valuation is going to be different if your retention rate is at 80 percent versus 95 percent."
"At CareMonkey, we're considering a small acquisition right now that we can't name yet. One of the things we're going to do in diligence is call that company's customers. Not the ones they still have-the ones they lost," he points out.
If you are wondering whether your company is ready to be acquired, here's Bencivenga's test: a combination of inbound interest in your company and movement in a particular sector.
First, "if people are already calling us-not one call, but multiple calls-then we start to consider doing the full diligence process," he said. "Number two, have there been recent acquisitions in your area of edtech? For example, if Illuminate made an assessment acquisition, then Pearson made one, and Measured Progress made one, all of a sudden it might be time to put ourselves out there if that's our area."