When do you sell as an entrepreneur? A few answers:
In every deal there is a seller, a buyer, and a deal champion. The seller is you (if you are lucky). The buyer is frequently a larger company. The Deal Champion is the person inside the larger company who is pushing and pushing and pushing the deal forward. This is the person that you as the seller have to embrace and help.
Deal Champion – The DC is the person in the company that has developed the strategy or insight that makes a worthwhile case for buying your company. They are swimming upstream – this person is banging their head against the bricks of risk adverse company denizens. These denizens are people inside the company that are too afraid of losing their jobs than take any risk associated with the purchase of another company let alone yours. Alas the Deal Champion stands tall, proud, and fights the good fight. Typically these people carry titles like Director of Corporate Development, Director of Corporate Strategy, etc.
As the seller you have to understand who the Deal Champion is and bid for their attention – first you must sell them on your company and then you can help them sell the buyer on your company. The higher up the food chain the Deal Champion the easier it will be to get a deal done. The following are my top four things to try to understand about your deal champion:
If you can decipher the above it should give you a leg up on preparing for the sale. Remember find the Deal Champion and take care of them. Treat them like royalty and get them whatever they need. Help them sell your company inside theirs and reap the rewards of a great transaction.
This is a question that you should pay attention to as you go to sell your company or buy one. During many of the deals I was a part of at CMGI, I was the one that was brought in to assess management and render an opinion as to who would stay and who would not. I looked at many factors from who made the most money on the sale of the company to who actually did the work. I met with the “keepers” and discussed their role in the go forward company selling them on life in the post acquired company. Here are a few types of people I ran across:
The Founder: I usually never counted on a founder staying because what made them great as a founder makes them stink at being in a big or bigger company. Also it is hard and unnatural for them to let someone else run their company. – Your strategy – provide a graceful exit.
The Manager: These were the people that kept the ship running and were sometimes anxious to see the founder and their shoot from the hip style leaving. If you found someone like this it was like striking gold. This person was a real keeper. – Your strategy – beg them to stay and sell them on being the future.
The Engineer: “The” engineer who typically was the recipient of an inflated title was trouble. Thought they were great because they created the code you as the buyer were now paying BILLIONS to acquire. These people had inflated egos and inflated salary demands. They also did not want to change their perfect code. – Your strategy – beg them to stay and immediately start a transition plan to make sure their undocumented code gets documented.
Executive Team: The top level of the company should be interviewed and all of them should be kept for some period of time so that they can help with the post acquisition integration. They also will then have a 90 day working interview where you can figure out who really is necessary or vital to the company and who is not. Your strategy – try to keep them all for a time as I have seen the baby thrown out with the bath water.
Second String: The second player to each member of the Executive Team. This is where you will likely find your future leaders of the business – by future I mean within 90 days as the executive team starts bailing out. It is important to get to know these people after the deal is announced or before during diligence if you can. In many cases they will be younger and less experienced but their domain expertise can really plug some big holes if you lose members of the executive team (which you will both because you want to and because they will want to leave). Your strategy – meet with them a lot during the early stages of the transition.
Whether you are buying or selling a company you must figure out who will stay to help manage it after the founder(s) leave. It is rare that the group of founders will want to stay. Google is starting to have some success enticing the whole group of founders to stay but these are mainly very small companies where there is more upside in working for Google and receiving Google options than leaving for the next start-up.
Everything is the answer I would give you. There have been volumes of words dedicated to negotiating and negotiating strategies so I am not going to expound on that topic. I am going to give you a warning. I have never seen a transaction happen where one side or both wins when Emotion plays any role in the outcome.
If you are buying a company – people call it “Deal Fever”. The emotions run high and “Deal Fever” grips you and all of a sudden you start assuming away issues that make the deal “OK” or the deal terms “passable”. Whenever you say, “We have to buy this…” you will end up paying too much. You will miss something or you simply will not do the things the more disciplined you would do. Commit to no “Deal Fever”. If you start getting emotional stop the deal or bring in your trusty attorney. Usually they will help you think rationally.
If you are selling a company – no buyer can ever “Insult” you. If they make a low bid simply don’t counter. Tell them that you are not willing to sell your company for that low of a price but you would be willing to entertain a better offer. I have seen many sellers get caught up in their own hype and miss out on great opportunities. One potential seller was offered a sum of money for his company (my boss got emotional in this case and had to have the company – I was the messenger so don’t blame me) that would allowed his great grand children to never have to work. The seller was 22 years old but he believed the hype – never sold – never went public and his next raise round was a down round. The company flamed out and it ended up being a $400 million mistake. Remember – no emotion! Think about what you want out of your company and what is needed by you and your investors to gain a good return. Focus on that number – do your best to maximize the number but don’t lose sight of the goal.
Emotion makes people do things for the wrong reasons. The best example of this is in litigation or divorce proceedings. Usually the only one that gets rich or is satisfied in the end is the attorneys. We all have heard at least one divorce horror story.
Bar emotions from your negotiation or have a professional help you.
This sounds like paranoid advice but it is something that should be remembered. Examples abound where underestimating the competition has cost people millions if not billions of dollars, or lost teams championships. When selling your business it is no different. If you underestimate the buyer they will win – if they underestimate your skills then you will be in a favorable position.
How does one side fall in to this trap? The answer is that they do not do the homework on the other side. When I enter a negotiation with someone I strive to find out everything I can about the people across the table. How many kids they have, their names, ages, etc. Where did they go to school? How long have they been on the job? How many deals have they done etc.
I also have learned to be extremely modest in my own dealings. It does no good for the other side to know too much about you. You should script out as much as possible. Let them know what you want them to know. I am not suggesting being dishonest. I just do not make it a habit to discuss my back ground. Does it help that I am now from Kentucky? Sure! Does anyone Google Me? No. Should they? Yes, of course. They would find out I have done over thirty deals. That I write this blog and from this post they would know that I don’t volunteer information and that I have probably heavily researched them.
Guess what most people won’t. Am I guilty of underestimating them?
Maybe.
Reducing Risk will help earn you an Extra X of value for your company, and by having electronic data room ready and waiting potential buyers will signal several things.
1. That you are more sophisticated than they originally thought
2. That you run your business tight – in a controlled manner
3. That you probably have went through this effort because you have more than just them interested in your company (competition is always a good thing)
Why electronic? It will save you time and effort and allow the potential acquirer to save time and effort. In one case I forwarded our formatted operating metrics in an easy to read spreadsheet which the acquirer could easily use to perform financial analysis. Saved them time and allowed me to frame their analysis in the most favorable light for me.
You may also be thinking that if it is electronic won’t that make it easy to expose the secrets of my business to the world. In a word – YES! But unless it is a trade secret formula or the plans for your next big product release I would not worry about it. That is what Non-disclosure Agreements are for and by this time in the process you are pretty sure of the other side’s intentions. Besides they are about to buy your company and they do not want their soon to be secrets out in the public either.
So what should be included in the data room? A simple answer is the information necessary for the deal person on the other side to persuade his boss that your company is worth more than he has already indicated they are willing to pay. There are countless due diligence lists out there. I have attached one example here: Due Diligence List
Another approach to a data room is to include everything that you will ultimately need to represent in a schedule for the definitive agreement. These may include the following:
· All agreements
· Employees and employee records
· List of Real Property
· Lease agreements
· Intellectual Property, including trademarks, etc.
· Tax Returns
· Rate Cards and pricing arrangements
· Detailed Financial statements including sub ledgers for receivables, inventory, and payables
· Web site traffic measurements and logs
· Listing of computer assets and capacity logs
· Shareholders of record, names, addresses, etc.
The goal in taking the above steps is to lower the buyer’s perceived transaction risk. I have been in both situations where the records were a mess and where the records were immaculate. I was willing to pay a little more for the latter as the organization of the company’s records and diligence binders gave me confidence that I was not going to run in to any whammies after the close.
Reducing Risk will help earn you an extra X of value for your company, so how do you reduce the risk associated with the purchase of your company? Here is a list of my top tips for risk reduction:
· Have rock solid set of conservative financial statements
· Assemble a complete electronic data room – all contracts, financials, human resource records, etc.
· Clean up your contracts (can you assign them to the buyer?)
· Understand why the acquirer is interested in your company so you can feature those attributes during the diligence process. An example: The acquirer is interested in your penetration of specific geographic markets. Create the reports necessary to show geographic market penetration and potentially the growth rate of those markets.
· Build a solid team (no one is going to assume that you the founder will stay for any length of time but they will look to your top captains – I call this a leave behind team)
· Foster a can do attitude – paint the picture of how the two companies will fit together – help the acquirer prepare an integration plan
The goal in taking the above steps is to lower the buyer’s perceived transaction risk. I have been in both situations where the records were a mess, there was low level talent, and I have seen the other side where the records were immaculate. I was willing to pay a little more for the latter as the organization of the company’s records and diligence binders gave me confidence that I was not going to run in to any whammies after the close.
One more note on the contracts – the one thing that I have seen blow deals the most is poor contracts. Non assignable contracts or contracts that gave the parties outs or special rights in a change of control situation will damage the value of your company or KILL IT altogether. Manage your contracts carefully.
An extra X means getting another multiple to your company’s valuation. Let’s say that companies in your industry are currently selling for a four multiple of EBITDA. That means if your company makes $1 million in EBITDA per year your company would sell for $4 million. Getting an extra X in this case would mean that your company would sell for $5 million. The goal for anyone selling a company is to get more for the company.
We all know a company that has sold at a “Fire Sale” price – During the Dot.Com bust I helped sell a company in Seattle for less than the cost of the new video streaming center we had just paid millions to build. It was pennies on the dollar and in my opinion a dumb sale (story for another time.)
Let’s say you work hard and increase the EBITDA from $1 million to $1.1 million. That is great and based on your overall net operating percentage that might just have meant an extra million in revenue. That equates to a value of $4.4 million. Great Job! What if instead you worked to get an extra X for your business that would make your company worth $5 million – that would be even better!
So I contend that if you are in the process of selling or planning to sell your business you should spend time learning how to get an extra X. Think risk reduction, key leave behinds, building what others need.
So you want to get more money for your company? You want to retire to some tropical island and thumb your nose at the “Man”…Then build “WHAT OTHERS NEED!”
This idea goes to the heart of unlocking the most value for your business and it does not matter if your business is a start up or going into its 20th year. Identifying how your business can be dramatically different than your competitors will help you increase your current business and the value you can sell your business for in the future. Seth Godin, author of Purple Cow: Transform Your Business by Being Remarkable, “… unless you are dramatically different, your product or service will never be noticed.” So what do you do?
(I know this is abbreviated list but I could write and many have written entire books on this subject – Seth Godin has written several books on being dramatically different)
I was hired to position Rentalhouses.com for sale and within eight months we sold the company and received several “Extra Xs” for the company because we became dramatically different than our competitors and by becoming different we became the missing piece in the competitive puzzle. Our largest competitor was very similar to us and was the industry leader. After studying them and the next four competitors as relative to size we formulated a belief that we should compete where they were not. So we set off to build our listings business in geographies where our competition was weak believing that we could build a case for the market leader to buy our company to help them fill in their missing geographies (and even more important we became a weapon that would let the market leader’s chief competitor strike at the market leader where they were weakest – different story for a future blog post.) Ultimately this geographic strategy paid off as the market leader and ultimate buyer of RentalHouses.com liked that most of our customers did not overlap and allowed them to become truly dominant in areas where their own business was weak.
Geography is only one way to be different – try going for different types of customers, time of day, product adjacencies, – they do frozen you do fresh, they sell gas, you sell oil, they are appoint only you take street traffic, they do dry cleaning you do alterations, etc. – Just be DIFFERENT. – Fill in the GAPS.