Selling Your Company
It is Monday so it is time for another MBA Mondays post. We are a few weeks into a series on mergers and acquisitions. The first week we covered the basics of mergers and acquisitions. Last week we talked about asset sales.
This week we are going to start a conversation about selling your company. I will kick off the conversation by laying out the key issues in a company sale. Then we are going to do something new on MBA Mondays; case studies. I will invite a few guest posts from entrepreneurs who have sold their companies. That will hopefully start next week.
I think the key issues for you, your investors, and your Board to consider when you are selling your company are:
Reps, Warranties, and Escrow
Price is the amount the buyer will pay for the business. It is the most important issue and also the simplest.
Consideration is the mechanism the buyer will use to deliver the purchase price. The simplest form of consideration is cash in your local currency. That is also the most common form of consideration. Another common form of consideration is the acquirer's stock. That could be publicly traded liquid stock or it could be illiquid private company stock. Buyers can also pay with debt obligations, earn out plans, and a host of other esoteric and less common forms of consideration.
Reps and Warranties are the legal promises and obligations you will take on as a seller. A portion of the purchase price is usually held back and escrowed for some period of time to backstop the reps and warranties. The escrow is usually a percentage of the purchase price. Ten percent is common but I've seen as little as 5% and as high as 25%.
The integration plan is the way the buyer plans to operate your business post acquisition. Many sellers don't think this matters too much but I think it is critical. If you think about the interests of all the stakeholders in the business, not just the shareholders, then the integration plan becomes a very important part of the overall deal.
Stay packages are compensation plans put together by the buyer for your team. There may even be a stay package for you if the buyer wants you to stick around and most of the time they should. These packages are a combination of cash and stock that vests over a stay period. It is common that some of the consideration may be applied to stay packages, particularly unvested employee stock in your company.
The government, and not just your country's government, may be required to approve the sale. This is not common for small deals. Anything sub $100mm would be very unlikely to require governmental approvals. Really big deals, like billion dollar plus transactions, often run into these issues. Big powerful companies that the government worries may have monopolistic properties will usually face governmental approvals for their acquisitions.
If your business will face negative consequences if the sale is announced and then does not close, you will want to ask the buyer to pay a breakup fee if the transaction does not close. Most buyers will resist agreeing to breakup fees but they do exist in many deals, particularly very large deals.
Timing is another important issue that many sellers don't focus on. Sale transactions are very distracting for the senior team and often for the entire team. A long protracted sale transaction can be very harmful to the business and its stakeholders. You can put time commitments into the letter of intent to sell the company and you can expect the buyer to live up to them.
These are the most important issues in my experience when selling a business. For the next few Mondays we will focus on some real world case studies that will highlight many of these issues.
How would one actually solicit interest for outright sale? would you target interested sellers or try to get people to take a share of company if they know how to shop it around?It is somewhat odd to try to canvas and not canvas buyers by trying to not seem like your selling but pushing the company into being as attractive as possible.
i believe young tech companies are bought not sold. i think shopping them around is largely a worthless effort.the best way to get big companies interested in your company is to start working closely with them, as a customer, business partner, or possibly a minority investor (although that is fraught with risk)
>>”i believe young tech companies are bought not sold. i think shopping them around is largely a worthless effort.”YES. Startups occasionally approach me to rep them to this end. I always tell them it won’t work if they need a pimp.>>”the best way to get big companies interested in your company is to start working closely with them, as a customer, business partner, or possibly a minority investor (although that is fraught with risk)”….or just do what you do best, make a huge, widely-heard splash in the world at large. Then watch both the usual suspects and ones you didn’t think of approach you.
The most important piece of data to be acquired in any prospective acquisition is the motivation of the seller.I have bought more than a few special situations and many of them fall under the 6 DsDeathDiseaseDisabilityDivorceDuress (regulatory or legal troubles)Distraction (cute blondes and deep sea fishing)When you find one of the 6 Ds involved, a good deal can be made. Otherwise, you have to know why the sale is on.
Two questions:1) Why would someone use esoteric ways of paying out the price of buying (and are there negatives to this) (actually slightly better wording is under what circumstances would you use esoteric methods)2) What signals Monopoly power to the government to prevent them from closing deals? Are there any other regulatory risks that stops deals (maybe not in the tech industry, but in general)
esoteric methods come from two places:1 – price obfuscation2 – aligning buyer and seller#1 is bad, but #2 is goodit’s hard to say what triggers the government’s attention to a potential monopoly. most often it is the complaints of competitors
Also, there was a technical glitch and this post was published twice. This one has comments on it, but all of your reactions are going towards the other one…
thanks, i fixed thati wrote this post on my android and published it via email
Any time. It’s my pleasure to help keep things running smoothly
I am looking forward for the price negotiation article! I don’t think there is much information about it on sub $25MM acquisitions? Thanks.
You did not mention if finding the right fit was important or not.So as a investor do you care to see if the company you invested in finds the right buyer who will by acquiring the business will enhance the value of the technology and possibly put more resources to make it better or it does not matter as long as you get top dollar for your investment and you don’t care about what happens to the business after it is sold.If I were to sell a business I started, I would want to make sure that the buyer has the best interests for the acquisition.As an investor what value do you place on finding the best fit for one of your investments in terms of being acquired.Would you care much if say Twitter was bought by Facebook and then shut down within a short period of time after they integrate the end users into their own system.Do entrepreneurs have a right to put a clause in the contracts that state who could be a potential acquirer and what they could do with the acquisition?
i believe the integration plan is key to determining if there is a fit with the buyer
Looking forward to the case studies.
Anything you can add regarding how liquidation preferences are treated when the transaction involves cash + stock where an investor’s preference can’t be fully realized with the cash portion.
you value the stock and treat it like cash and the split should be pro-rata for everyone unless you negotiate something different with your investors
Will there be a post titled, “Dealing with investment bankers”?
Try not to? 🙂
ha, can’t disagree with that. On the other hand, same thing with VCs: try not to need them, but you often will anyway.
probably worth a postthey can be very valuable in the right circumstances
i need to bring back monday night kookonomics (MNK) on certain posts. although, now that we are only a year away from 2012, perhaps MNK should take on a more serious tone: MBA for the governance layer.the simple equation for the governance layer is platform = government.1. asset sales priced in virtual currency used by the platform (fredbucks)2. platform must grant business licenses — i.e. API access, or access to the platform’s social graph. this access can be revoked at any time if the business does not conform to the platform’s laws (or if the platform goes rogue and cuts them off for unethical reasons)3. platform must approve transfer of shares. platform probably has a stock exchange. 4. can platforms themselves be owned and sold? currently, in the bubble i mean application layer, they can be without much of a problem. but as platforms evolve i believe more rules will emerge, out of respect for users (of course users will have to demand this — it remains to be seen how much pain is required before this happens). perhaps boards with citizen-representation will emerge, thus enabling a platform’s user base to block a transfer. alternatively, we may see some platforms emerge that embrace the central banking model of ownership: central banks like the federal reserve are privately owned, but shares cannot be transferred. 5. there will probably be many businesses that operate across multiple platforms. sales of these businesses may be trickier, just as the sale of multinational corporations can be trickier. if the platforms are a part of the same federation, that will make things easier.
So helpful, thanks Fred.I wish I’d known more about this back in 2000 when I got an offer for my first company; the suitor, a tech incubator, tied us up with meetings and emails for a few months and then when we started getting close to an agreement they revealed that the only consideration they had in mind was (illiquid) stock in a competing startup that they owned (the value of which was low at the time; that value turned into zero within a few years). At the time I had no way of knowing whether turning the offer down was the right decision or not; after they failed it became obvious, but knowing more about the various types of considerations would have made me more confident in my decision without requiring the benefit of hindsight.
The AdMob story is a great example of why a breakup fee might be appropriate.Apple offers to buy AdMob for $500 to $600MM with a 45-day no-shop. They inexplicably allow that to expire without consummating the deal or getting an extension.Google swoops in on Day 46 and offers $750MM.Reportedly, AdMob is wise enough to say “hey, you’ve been getting a lot of Justice Dept scrutiny on online advertising, and we’re up a creek without a paddle if we drop Apple and you can’t do the deal.”They insist on a $700MM breakup fee and Google signs it.Fortunately for Google, Justice allows the deal to go through.If not, AdMob would still be an independent company with a $700MM warchest of free money.
How do you justify a breakup fee that is so high? Is it just Google not expecting to lose the deal?
I guess so.I have a feeling that kind of deal might have sparked Google shareholder lawsuits had it fallen through and actually come due.The defense would be “this was the price to play and we needed to play.”Tough judgment call but ultimately AdMob needed to protect their shareholders and certainly appeared to do a great job of that.
When you have escrowed a $700MM break up fee on a $750MM deal, you have already bought the company.
except you may not end up owning the stock or having control! 🙂
unless the government says you haven’t
I would also include fit. I realize it isn’t as concreate as the above key issues, but it should deffinitly be considered when you think of selling your company. A good example of a aquisation that didn’t fit was the purchase of Myspace buy News Corp. In situations where fit is off it usally results in a loss of value.
i think of integration plan as the way you determine fit
I think there is a 9th term (which isn’t actually a term, but rather an assessment of sorts). It’s called, “probability of closing [within the time and other constraints]” aka PoC. This term is very important, particularly when some or all of the VC investors are in the “donut hole” created by liquidation preferences. PoC can have a regulatory dependency (for big deals) but more often it’s dependent upon the politics of the buyer.If you’re an entrepreneur/founder selling your company and you’re in the “dead zone” in which one or more of your VCs are price indifferent, then you need to be keenly aware of PoC and do everything you can to position the deal that delivers the most to Common as having the highest PoC.
i agree that probability of close is really important, but that is something you will have to assess. it will not be laid out by the buyer in the way these other issues can be
Fred, thanks. This educational post is very rewarding for your readers. I’m reading this book “Founders at Work” by Jessica Livingston (@foundersatwork). The book is full of stories of successful startups (or failures) that either got acquired or went on to become multi-billion dollar enterprises. I find it a great book to read.It’s really exciting to hear some of USV portfolio companies will share their own stories in the next few weeks. Can’t wait.
the case studies are not going to be exclusively USV portfolio companies
Case studies takes this into a whole new zone! Can’t wait.I know this doesn’t warrant a post in itself, but when you were mentioning stay packages and also potential perils of a long sale transaction, I couldn’t help but think of times I’ve had to recruit for a company that was in a sale transaction and the challenges and awkward situations this presented. Although I’ve been fortunate — in the two most significant instances the end results were win-win for both parties.Of course, I’d never agree to a situation where the candidate was not informed of a pending sale prior to actual hire — but sometimes this couldn’t be shared with the candidate until fairly far along in the process.
Fred, awesome MBA Monday post – and I’m late to the party but luckily, these are timeless. Having been through acquisitions and sales before (buy and sell side), one of the areas I believe you left out here which would do everyone service by talking about it would be what it’s like inside the board room of the to-be-acquired company.Meaning, when you receive a call from Banker ABC or Company XYZ and they send over a term-sheet, what happens then? You convene the board and the meeting takes the following path…. The meeting can go terribly wrong or absolutely fantastic… being that you’ve been in these meetings, would love to hear your thoughts.
It is unlikely that a prospective purchaser just lobs a Letter of Intent over the transom without warning. There is usually a bit of a courtship ritual. You know it is coming in some form or fashion.If you are the CEO or President, the first thing you have to do is some simple due diligence — research the prospective acquirer like you would your daughter’s prom date. Steer clear of anyone who shows up in an El Camino with a 6 pack and a hard on.Who are these guys? What do they do? Who owns them? Why are they interested in acquiring your company? What is their track record on acquisitions? What legal issues do they have? Do they have enough cash on hand to do the deal? Who are their Board, lawyers, accountants? What public information exists on them?Next sit down w/ the acquirer’s CEO and go through the LOI w/ a fine tooth comb and make damn sure you understand everything that is on that paper. If something is missing, ask to have it included. An example would be a NDA (non disclosure agreement) or confidentiality provision.At this instant, take a deep breath and remember you have a fiduciary obligation to present any and all offers to the Board and a duty to the shareholders first and foremost. That does not mean you do not have a personal opinion or one forming.Transmit the written offer with a “Pre-Decision Memorandum” which outlines all the intel you have acquired and your personal thoughts on the deal. Remember you will never have as much opportunity to influence the Board as at this instant in time when you have more information than they do.Be cautioned it is likely that your Board will know somebody on the acquirer’s Board because of the industry connection. Don’t over play your hand.Then call a special meeting of the Board as quickly as possible to discuss the transaction. It is important to get it called quickly to ensure the Board does not start chattering amongst themselves.In the meantime, if you have a strong opinion work your deal with your most likely allies on the Board and try to dampen your greatest detractors. Go into that Board meeting knowing what the Board is likely to do.Once the Board meeting takes place, call the question. If there is no real consensus or if the Board has definitively decided, then prepare a definitive written Decision Memorandum with a deadline and a Corporate Resolution authorizing you to do the deal.It is at this stage that you should prepare a “proceeds” spreadsheet which shows what everyone is getting. This should go in w/ the Decision Memorandum.I always like to put in a provision in the Decision Memorandum which says — if I do not hear back from you by a date certain, then I will assume you have voted against the deal.Once that Decision Memorandum is agreed to by the appropriate majority of the Board and the Corporate Resolution authorizing you to proceed, you are done w/ the Board until closing.Keep the Board involved and informed every step of the way but don’t let them hijack the deal. If there is a Boardmember who is savvy, seasoned and helpful — use him.Good hunting!
In the business of buying or selling companies, it is important to follow a precise and methodical process. Before the marriage can be consummated, you must get engaged and date.To get engaged, you need a damn good Letter of Intent.To get married, you need a good asset purchase agreement (when buying only assets, the preferred approach in my view) or stock exchange agreement (if you are swapping stock) or purchase/sale contract (if you are buying the whole enchilada, liabilities and all).The LOI is the term of art for a buy/sell while the Term Sheet is typically the term of art for a capital investment. Slight difference. Kind of like the right fork to use w/ shellfish.In the LOI, you cover the obvious things but there are a number of things which should also be added.A good LOI will put a cloak of confidentiality over the entire transaction and add a “no shop” provision as well as spelling out the key terms of the ultimate contract including the exact identity of the buyer, price, payment terms, terms of any non-cash compensation, due diligence period, nature of due diligence, reps and warranties (huge difference), schedule for movement, approval requirements (regulatory, legal, Board, landlords for assignments of leases), general nature of the assets to be acquired, general nature of the liabilities not to be acquired, authority to enter into the agreement, confidentiality and “no shop”.The LOI is formulaic but perfectly logical. You want the scope of the LOI to make the Asset Purchase Agreement a walk in the park for the lawyers to draft.Remember, typically two folks make a deal directly. The LOI is the document which results from that negotiation and is then the guidance for the lawyers to prepare the Asset Purchase Agreement. More deals have gotten screwed up when the lawyers get involved than any other consideration. Be aware of this phenomenon and stay in touch w/ the other principal.Once both parties have had a nice first look at the Asset Purchase Agreement, begin assembling the Exhibits immediately. The schedules of assets purchased, assignments, liabilities not assumed and employment status of key employees are all potential deal killers.
I may run this comment as is for one of the posts in this series. I assumethat’s ok with you jlm?
Psyched to read first hand sale experiences. Hope to see details of their and senior managements stay packages if it’s not too personal.
I would also add the change of control clauses in supplier and customer contracts.
Hi Fred,Can I suggest company formation and structure for future MBA Mondays topic?I mean type of company (llc, c-corp, s-corp), registration state, board members, key roles in a company, etc.Wishes and Thanks,
been there, done thathttp://www.avc.com/a_vc/201…read the comments, they are great
That’s great!Google Reader was showing only last 30 posts of MBA Mondays, it’s good news that there is more posts to read!Thanks again! 🙂
Thanks again for telling that I should read comments too, I found all what I was looking for (taxes, liquidity preferences, voting classes, Delaware, etc).