NEW ENGLAND CAPITAL VENTURES

• Impact: area assessment of who and what would be affected if you sold your business is a good start. Do your workers have an option to stay employed if you sell? Do they agree with you that you should sell the company? What is the reason you are going to give them for selling off? The question you will face is: “So what happens to us?” Usually in the case of large businesses and/or complex products, the buying company has no option but to retain product experts. But be careful what you promise as your employees may be used to train the buying company after which, they would serve no purpose and thus be laid off. In case of smaller companies with a fairly well understood product or a service, usually the only person to be retained is the founder. The rest are all toast. Thinking through the people aspect of your business is important as this is what makes you a true entrepreneur. Take care of folks who have helped you succeed and get rich. The financial reward you receive in the end will all but compliment the goodwill you get from your employees. You never know, you may land up being a serial entrepreneur and talking to these guys soon.
  
  The ‘what’ aspect is tricky as there is no ideal time to inform your clients and other stake-holders like product partners who rely on your solution to build their products. But let me focus only on the clients as they are the ones who will be affected most in the end. If things go wary (clients don’t like to be surprised), not only will you land up in a tough situation legally, but also your market credibility will tank sooner than you think and worst-case, the deal may fall-through. According to me, the best time to inform your client(s) is as soon as you have a tangible offer in place, but not the day before you are signing on the dotted line. You need to explain who is buying your company, what will happen to the product (in fact make the buying company talk to your biggest & best clients), how and who is it going to be managing the account and how, how will the price point be negotiated with this new company and finally – what is it that your clients would want you to do to make them comfortable with your decision. Depending on the scale of your clients business scheduled to be affected, give them at least a 90 day notice (this may allow them to hunt for competitive products if they don’t agree with you selling to a company that they are not comfortable dealing with)
  
  The buying company must absolutely know about these 2 strategies before hand.
  
• Build Your Case: with the investor buying you out as a company or a competitor / potential larger corporation you are trying to sell to. First, explain them why you want to sell. Whether its personal or market driven or financial, whatever the case, the cards should be on the table in the very beginning. This is marketing 101; you are essentially creating a need for something that the market currently does not have or is being under-served to the extent that your solution will up the buying company’s valuation, competitiveness & capitalization significantly (notice I don’t use words like ‘strategic’ or ‘leverage’ as I find them meaningless).
  
  From a market perspective, explain how your application(s) or solution positions the buyer in the value chain of the industry and their own business? Will it increase their market-share and/or their geographic foot-print in a short-growth curve? (Offer a growth-rate chart but only if you know your buying companies business well). This is important as it shouldn’t take a company more than 6-8 months to start integrating your solution with theirs and offer it as an enhanced product line. Typically 2 members from the engineering team should sit in this meeting. You want people to love your product even after there is no company and not bad mouth as to “Look how product X deteriorated after company Y bought them”. Tell them about your client profiles and how their product compliments gaps that need to be addressed within these companies (opportunity to upsell and potential increase in the target market they currently cater). Identify if there is any prestige or brand name association that goes with buying you. Explain why you and only you are attractive as a company compared to your competition. Finally, take them through the current market dynamics to say why there exists big and growing opportunity. No one wants to enter a market that is dead or is going to be dead or a product that is serving a saturated market with very little potential for innovation or growth.
  
  Lastly, talk about your management & board, your investors (if any) and their expectations and you personally (E.g. are you a former entrepreneur, your education, your secondary board affiliations, your share of the company).
  
• Explain What You Do: as a product or a service. This conversation goes hand in hand with building the big picture and depending on who is in the room, you can prioritize arguments. I would rather explain the big picture view first and them tell them how they can get there. It is important that you talk about the defensibility of your product here (as I have mentioned in previous blog posts: How easy is it to duplicate what you do in a short-period?). Explain how you currently cater to your market effectively and better than your competition. Talk about what it takes operationally to manage this process efficiently and where you cut corners and which areas you tend to focus more on. Talk about contingencies in terms of bottleneck scenarios – if any - with development, R&D, marketing, training, etc. Explain how easily they can integrate your product into theirs and what additional resources they may need to make this happen. Make an offer to retain your employees to cut down the learning curve on this process.
  
• Patents & Trademarks: This compliments discussions on your product and how well you are able to ward off competition and sustain the market. If you don’t have any, explain why so and what have you done to protect the company. Explain what existing patents are filed in the market that you serve by your competition or any other emerging 3rd party.
  
• Your Customers: Buying companies want to know if there is potential to upsell to existing customers and put a dollar figure on it. Given this, be ready with providing them with tangible figures on number of customers, average size of the company you deal with, average contract size, length of contracts, your flag-ship customers (and their contribution to total revenue).
  
• Economics: of the model are key as everyone ultimately is looking to make money here. As I always say, entrepreneurship does not equate to philanthropy or charity. Be very specific about the overall capital structure, shareholder agreements & ownership ratios. Then talk about the ‘infamous’ valuation on your company (and be ready to answer how you reached that valuation). Talk about current run-rate details, pipeline revenue, PO based revenue, GPBT’s & NPBT’s and your balance-sheet. Stress especially on the accounts payables & receivables and miscellaneous outstanding debts. The rest should be the usual financial game of trend lines & colorful pie-charts.
  
  Now go a little further with the financials and tell them what your competition’s valuations are to the best of your knowledge. This is tough if your competition is not a publicly traded company. Talk about your financial growth rate now and when you first started the business. The buying company is looking to see if you have plateaued with revenues and if so, why (especially when you promise them the world of market opportunity that awaits them). Tell them how soon after incorporation did you guys become profitable. Reveal your policies and adherence to compliance (records from tax authorities like clearance certificates, bank statements, information protection and sharing, outsourcing agreements, etc).
  
  Discuss if you plan to involve an investment banker in this deal. In some cases, an iBank may give you credibility and M&A representation that may significantly increase your deal-size. A company brought to IBM or Apple by Merrill Lynch or Bain Capital makes a difference unless you know the CEO of the buying company personally. An iBank also displays your compelling evidence on professionalism, structure and engagement in responsible business.
  
• Pending Issues: Talk about any previous, current or potential law-suits/litigations as a plaintiff or a defendant. No one wants to get into a ‘dirty’ deal. Keep this as a last point of discussion if you have anything going on.
  
• Number of Direct Business Vendor Contracts: Datacenters, 800 # providers, ISP hosting, data delivery, logistics partner, etc.

• Key Documents:

1. Release Announcements: When do you plan to inform everyone and how?
2. Reach Agreements: in writing by a legal counsel on the fact that everyone agrees to sell the company. This is actually the 1st doc that is asked before the $ discussion.
3. Transfer Agreements: Plant & Equipment, clients, intellectual property, licensing deals, etc.
4. Asset Transfer Agreements: Extremely important for insurance & taxes.
   

Whoever said selling a company successfully was going to be easy lied to you. In today’s market, especially in developed countries like parts of Europe, US & Asia, what you read above is the standard norm. It typically takes about 6-12 months of research on identifying a sell opportunity and another 6-10 months to identify potential acquisition partners and build the case to sign the documents. Give or take it is approximately an 18 month process. Time-to-market becomes key thus you don’t want to stretch the deal too thin too long and neither do you want to expedite the process.

Anything less than what I mentioned above and you are fooling yourself and anything more is always welcome. But remember the thin line between knowing what to briefly discuss and disclose at a high level vs. which areas need details specs and meetings. If you feel that the buying company is going to screw your clients, you need to ditch them ASAP – however good the offer. There are many reasons behind this including ethical, moral and legal that will affect you, as I mentioned before, on your overall personal credibility. These dynamics are off course very different if you are trying to merge or partner with someone. But some of the core discussions domains may still apply0. This should give you a playing field to work with. Happy selling!

posted by Janak Joshi @ 4/17/2006 10:50:00 AM 0 comments