Okay, for one of the reasons in my last post Selling Your #startup, you want to move ahead with selling your company. Be sure that you're clear on why you want to sell and what you want to get out of the sale. Keep those reasons and goals in mind as the sale progresses and try not to lose sight of them.
As a first step, you should have discussed this with your board and investors and they should be in agreement that a sale of the company is worth looking at and that your reasoning is sound. Ideally, you should have a board resolution authorizing you to look for a buyer for a designated period of time.
In my experience, finding a buyer and closing a deal can be as short as thirty days or take more than a year. On average, once you have an interested buyer, you're probably looking at three months to close.
Before you look at finding a buyer, you need to ask yourself if you want your search for an acquirer to be public knowledge. My advice is to keep it confidential at this early stage. If your competitors get wind of the potential sale of your company, they'll use that against you in sales situations. Employees may decide to jump ship. And even in non-competitive situations, your customers and prospects will often take a second look at buying your products or services if a change is possible. Plus, ultimately, after looking at the landscape, you may decide not to sell at this time, so why tell the world?
On the other hand, if none of these are a concern, going public with your sale will get you the most exposure and may bring in potential buyers you've never even thought of. I know of a few people who've even had success finding a buyer by offering their businesses on Craig's List.
WHO?
So how do you find the perfect buyer?
You have a Board of Directors, probably have some additional advisors, and may have Angel investors. These people know you; they know your company; they know your industry; and most likely, they know someone who might be interested in acquiring your startup. Use them. Listen to their advice. They may tell you that this is the wrong time. They will likely give you suggestions on positioning. They will make introductions. These types of acquisitions, initiated by a 'third party' are usually the easiest and cleanest.
At the same time, except for specific industry segments, I would avoid brokers. The 'third party' approach works best if the third party is close to your business. Neither I, nor any of the people I've known in the Valley who've sold their businesses benefited from a broker. In general, brokers don't understand your business. They're in it for the commission and rarely look beyond that bottom line. If you expect to see your company's technologies or products thrive, to find a great landing place for your team, brokers are not going to help you.
So, where else should you look?
Business Partners. These are your best candidates. Again, like your Board and advisors, they know you; they know your business; they know your products and technologies. They have partnered with you for a reason: you fulfill a need they can't meet themselves. Whether you've licensed technology to them or they distribute your products as part of a solution sell, they might well be interested in exclusive ownership of your offering. You should also make a list of Potential Business Partners if you don't already have one. Whoever handles your business development should be able to open doors to get you in.
Two of my companies were sold to Business Partners - companies who either licensed our technologies or distributed our products.
Customers. It may sound strange, but just like Business Partners, your customers know you and have confidence in your products/technologies. I sold one of my companies to a customer who found out that their largest competitor was about to sign a major deal with us (I've always wondered how they found out;-)).
They wanted to preserve the uniqueness and competitive advantages of their offerings which used our products.
Competitors. As mentioned above, this one can be a bit risky. Just having your competitor know your business is for sale can hurt you. However, you can often avoid that by involving a third party (advisor or Board member), or by being politic. In one situation, a friend was looking to sell his company. At an industry conference, I just 'happened' to make an observation to his largest competitor that it was too bad they didn't work together. My friend's product was complementary and had features that theirs didn't. They could certainly reach a larger market and compete with one of the Big Guys if they combined forces instead of battling each other. This ended up being one of the quickest sales I've seen. Another friend made a similar comment directly to his counterpart from a competitor's company. Again, this resulted in another successful sale. Note that in both cases, it was never stated that the company was 'For Sale'.
To pitch to your potential buyers, you'll need a basic company presentation that includes your financials and projections, but you need to tailor it for each prospective buyer. Do your homework. Know their business and be clear on how you will fit together and how you will contribute to their market, their customer base, and ultimately, their bottom line.
How?
The logistics of the sale are not terribly complex and are usually similar across industries. It does happen that a large company might just make a offer, but more often your potential buyer will ask you how much you want. As in many negotiations, the first one to name a price usually loses. I could probably do an entire blog on how the acquisition process works and on negotiations, but I'll just summarize here and try to give a few pointers on price in the next section.
Once you've agreed on price and basic terms, your acquirer will prepare a term sheet. These can be very complex, but usually are more of an outline of the core terms. With luck, the term sheet will reflect the agreement from the negotiations with your counterpart.
One thing I will warn you about in advance is that if you're being acquired by a much larger company, there's a good chance that they will restrict your business until the sale is closed. In the best case, they will adversely impact your business inadvertently as you and your staff work through due diligence. You need to plan and account for these impacts in the term sheet and look at 'walk away' penalties that will make you whole. Get advice on this!
Once you have a final term sheet, you'll need to present the offer to the Board and Shareholders. Assuming everyone is happy with the terms, you accept. Then the fun begins.
You will need a good lawyer. I'll tell you some horror stories in my next post about mistakes I've made and some friends have made in the course of acquisitions. Most of these could have been avoided with a GOOD, EXPERIENCED (and often expensive) lawyer. This is not the time to pinch pennies on legal fees.
As the purchase agreement is drawn up and negotiated, due diligence will begin. This is a period where the acquirer will go through your entire business - technologies, products, customers, finances, contracts, lawsuits - everything. If you have skeletons in your closet, bring them out up front. I've seen too many great deals fall through because of 'minor' problems that weren't acknowledged at the outset. Most experienced acquirers expect problems, but they get very unhappy if they think you've tried to hide something from them.
If your acquirer is a publically-held corporation they may need to get SEC or other government approval for the acquisition. This may take some time. But in general, as I mentioned before, if things go smoothly, you can usually close in about 90 days. Note that exposure of negotiations with a publically-held company will immediately terminate any deal. All negotiations and terms have to be kept confidential. This will mean that even among family and friends (and employees), you disclose only on a 'need to know' basis.
How Much?
Ah yes, price. How much is your business worth?
It's worth whatever you can get for it.
While that may seem facetious, it's true. If you have a one person company with zero sales, but incorporation of your technology will increase the bottom line of your acquirer by $100M and their price to earnings ration is 20 to 1, you can see that your value is as much as 2 BILLION dollars! Of course you have to prove that you can add that much to their bottom line...
But as a rule of thumb, if you have a product business, you will need to justify any price that's more than 3 times sales or 10 times earnings. For a service business, you will have to justify any price that's more than 1 times sales or 3 times earnings. And by 'justify' I mean demonstrating why your company is worth more than these numbers. It could be what you add to the bottom line (as above), it could be offering a strategic advantage against a competitor, it could be that there's someone else out there willing to pay more - If you can do it, finding multiple bidders puts you in a very strong negotiating position, so until you have a term sheet, get as many people interested in you as possible. With luck there may be a bidding war.
Of course, even then, mistakes can be made as you'll read in my next post.
Link to Previous Startup Post
As a first step, you should have discussed this with your board and investors and they should be in agreement that a sale of the company is worth looking at and that your reasoning is sound. Ideally, you should have a board resolution authorizing you to look for a buyer for a designated period of time.
In my experience, finding a buyer and closing a deal can be as short as thirty days or take more than a year. On average, once you have an interested buyer, you're probably looking at three months to close.
Before you look at finding a buyer, you need to ask yourself if you want your search for an acquirer to be public knowledge. My advice is to keep it confidential at this early stage. If your competitors get wind of the potential sale of your company, they'll use that against you in sales situations. Employees may decide to jump ship. And even in non-competitive situations, your customers and prospects will often take a second look at buying your products or services if a change is possible. Plus, ultimately, after looking at the landscape, you may decide not to sell at this time, so why tell the world?
On the other hand, if none of these are a concern, going public with your sale will get you the most exposure and may bring in potential buyers you've never even thought of. I know of a few people who've even had success finding a buyer by offering their businesses on Craig's List.
WHO?
So how do you find the perfect buyer?
You have a Board of Directors, probably have some additional advisors, and may have Angel investors. These people know you; they know your company; they know your industry; and most likely, they know someone who might be interested in acquiring your startup. Use them. Listen to their advice. They may tell you that this is the wrong time. They will likely give you suggestions on positioning. They will make introductions. These types of acquisitions, initiated by a 'third party' are usually the easiest and cleanest.
At the same time, except for specific industry segments, I would avoid brokers. The 'third party' approach works best if the third party is close to your business. Neither I, nor any of the people I've known in the Valley who've sold their businesses benefited from a broker. In general, brokers don't understand your business. They're in it for the commission and rarely look beyond that bottom line. If you expect to see your company's technologies or products thrive, to find a great landing place for your team, brokers are not going to help you.
So, where else should you look?
Business Partners. These are your best candidates. Again, like your Board and advisors, they know you; they know your business; they know your products and technologies. They have partnered with you for a reason: you fulfill a need they can't meet themselves. Whether you've licensed technology to them or they distribute your products as part of a solution sell, they might well be interested in exclusive ownership of your offering. You should also make a list of Potential Business Partners if you don't already have one. Whoever handles your business development should be able to open doors to get you in.
Two of my companies were sold to Business Partners - companies who either licensed our technologies or distributed our products.
Customers. It may sound strange, but just like Business Partners, your customers know you and have confidence in your products/technologies. I sold one of my companies to a customer who found out that their largest competitor was about to sign a major deal with us (I've always wondered how they found out;-)).
They wanted to preserve the uniqueness and competitive advantages of their offerings which used our products.
Competitors. As mentioned above, this one can be a bit risky. Just having your competitor know your business is for sale can hurt you. However, you can often avoid that by involving a third party (advisor or Board member), or by being politic. In one situation, a friend was looking to sell his company. At an industry conference, I just 'happened' to make an observation to his largest competitor that it was too bad they didn't work together. My friend's product was complementary and had features that theirs didn't. They could certainly reach a larger market and compete with one of the Big Guys if they combined forces instead of battling each other. This ended up being one of the quickest sales I've seen. Another friend made a similar comment directly to his counterpart from a competitor's company. Again, this resulted in another successful sale. Note that in both cases, it was never stated that the company was 'For Sale'.
To pitch to your potential buyers, you'll need a basic company presentation that includes your financials and projections, but you need to tailor it for each prospective buyer. Do your homework. Know their business and be clear on how you will fit together and how you will contribute to their market, their customer base, and ultimately, their bottom line.
How?
The logistics of the sale are not terribly complex and are usually similar across industries. It does happen that a large company might just make a offer, but more often your potential buyer will ask you how much you want. As in many negotiations, the first one to name a price usually loses. I could probably do an entire blog on how the acquisition process works and on negotiations, but I'll just summarize here and try to give a few pointers on price in the next section.
Once you've agreed on price and basic terms, your acquirer will prepare a term sheet. These can be very complex, but usually are more of an outline of the core terms. With luck, the term sheet will reflect the agreement from the negotiations with your counterpart.
One thing I will warn you about in advance is that if you're being acquired by a much larger company, there's a good chance that they will restrict your business until the sale is closed. In the best case, they will adversely impact your business inadvertently as you and your staff work through due diligence. You need to plan and account for these impacts in the term sheet and look at 'walk away' penalties that will make you whole. Get advice on this!
Once you have a final term sheet, you'll need to present the offer to the Board and Shareholders. Assuming everyone is happy with the terms, you accept. Then the fun begins.
You will need a good lawyer. I'll tell you some horror stories in my next post about mistakes I've made and some friends have made in the course of acquisitions. Most of these could have been avoided with a GOOD, EXPERIENCED (and often expensive) lawyer. This is not the time to pinch pennies on legal fees.
As the purchase agreement is drawn up and negotiated, due diligence will begin. This is a period where the acquirer will go through your entire business - technologies, products, customers, finances, contracts, lawsuits - everything. If you have skeletons in your closet, bring them out up front. I've seen too many great deals fall through because of 'minor' problems that weren't acknowledged at the outset. Most experienced acquirers expect problems, but they get very unhappy if they think you've tried to hide something from them.
If your acquirer is a publically-held corporation they may need to get SEC or other government approval for the acquisition. This may take some time. But in general, as I mentioned before, if things go smoothly, you can usually close in about 90 days. Note that exposure of negotiations with a publically-held company will immediately terminate any deal. All negotiations and terms have to be kept confidential. This will mean that even among family and friends (and employees), you disclose only on a 'need to know' basis.
How Much?
Ah yes, price. How much is your business worth?
It's worth whatever you can get for it.
While that may seem facetious, it's true. If you have a one person company with zero sales, but incorporation of your technology will increase the bottom line of your acquirer by $100M and their price to earnings ration is 20 to 1, you can see that your value is as much as 2 BILLION dollars! Of course you have to prove that you can add that much to their bottom line...
But as a rule of thumb, if you have a product business, you will need to justify any price that's more than 3 times sales or 10 times earnings. For a service business, you will have to justify any price that's more than 1 times sales or 3 times earnings. And by 'justify' I mean demonstrating why your company is worth more than these numbers. It could be what you add to the bottom line (as above), it could be offering a strategic advantage against a competitor, it could be that there's someone else out there willing to pay more - If you can do it, finding multiple bidders puts you in a very strong negotiating position, so until you have a term sheet, get as many people interested in you as possible. With luck there may be a bidding war.
Of course, even then, mistakes can be made as you'll read in my next post.
Link to Previous Startup Post
RSS Feed