Sell Your Company
If you are successful, you will capture an ever-growing share of your market and its profits. Ideally, your financial charts will show your company’s revenue and profit lines consistently climbing a slope without blips (down slopes), which would be perceived as weaknesses to the outside world.
If you have a track record showing that you’ve been able to handle sustained growth, then there is a reasonable chance for a prospective buyer to expect that trend to continue, and he will jump at the opportunity to bid for your company.
In other words, if your business methods make sense and you grow profits quarter over quarter, then you can likely be bought for a fair present value, and the buyer can capture the future value of your company’s growth. Ideally, these buyers would be strategic buyers who, on top of the cash, could offer you profitable synergistic relationships with their other business assets, ostensibly making one plus one equal three, where each party shares in the accretive margin created by the deal. On the other hand, strictly financial buyers might just see a good deal and want to buy it, with or without a sound forward strategy of their own creation or compatible assets. However, if they will pay you enough to meet your needs, you may want to take it anyway. In addition, they are likely to pretend they are actually strategic buyers. In reality, the most likely possibility would be a buyer who has a little bit of each of these tendencies.
Unfortunately, some players working on deals, be it attorneys, accountants, owners, buyers, consultants, or employees, are hampered by incompetence or egotism. In fact, this is the most common scenario that causes otherwise good deals to cave. It is even more prevalent than the huge issue of sellers who use questionable math. Do not be surprised if they are often the same people. Companies with leaders who have noticeable ego issues should be handled carefully, if you choose to deal with them at all.
If you are a potential company seller, many prospective company buyers and middlemen will try to engage you in a mating game where they woo you with displays of affection to encourage you to sign a contract with them. This dance will include a combination of facts and nonsense being thrown at you. Not to mention that you will be barraged with questions which are meant to elicit what likely should remain confidential information until a deal is certain.
Furthermore, some seemingly friendly people who present themselves as prospective buyers might just be gathering information in bad faith as part of building their internal “Best Practices” arsenal, but at your expense.
Until you have studied the buyers, their reputations and whatever offers are forthcoming, take the corporate mating overtures with a grain of salt. This is a key area where experts on your team, such as attorneys and CPAs, will prove to be invaluable.
Any information you want to disclose should be prepared in advance so you aren’t caught with your guard down. It’s also a good idea to know in advance what type of deal you might accept, if any.
If you don’t want to sell your company for a fair market value, then don’t waste your time and money by working with people interested in mergers and acquisitions. They won’t pay more than what it is worth, and you won’t sell for less.
The most common, conservative model a buyer is likely to use to estimate a target corporation’s current value is discounting its estimated future cash flows back to what they would be worth today, given their expected profit margins over time, while taking into account expected interest rates and competing opportunities for higher yield. This old-school Benjamin Graham/Warren Buffett-type methodology is based on real economics instead of what are often pipe dreams of young entrepreneurs.
This exercise will be used as a guidepost for their offer, which is likely to have many interrelated parts, generally including some at-risk components, like stock options and “earn outs.”
There are many factors a buyer will consider in determining your “estimated future cash flow,” which you, too, must consider for your business “narrative,” to create the intended perception. They will be interested in your longevity, intellectual property, resumes and bios, customer lists and contracts, debts, service liabilities and opportunities, leases, hard assets, non-compete and proprietary invention agreements for staff, the sanctity of your “books,” and a variety of other objective and subjective measurements in their “due diligence” process.
Ideally, if you personally like the people (which would be considered one of the “social” aspects of a deal, as opposed to one of the factual financial aspects) and you believe that they represent the best potential buyer of your company, then you might give their offer extra consideration beyond its price.
However, keep in mind that the attitudes the buyers present might not be genuine, and the people with the most money can afford to put on the nicest presentations, often without being questioned by seemingly lower level businesspersons.
If your own job is going to survive past a buyout or merger, you will definitely want to make sure that you are working with the right people. With that in mind, spend a good amount of time with the prospective buyers to see if your social values and communication mannerisms are compatible.
Your evaluation of the buyers should take into account intangibles like courtesy and stress level during negotiations and beyond. But don’t let their visits become intrusions and distract you from your daily business processes, or your company could become worth less during that period when you are trying to “flip” it.
A Letter of Intent (LOI), or term sheet, which proposes some of the key deal terms in a professional manner, may not be “bankable” but could be a good start to a longer term, more serious deal and relationship. However, you ultimately need bona fide, fully executed, binding contracts (Operating Agreements/Private Placement Memoranda (PPMs)/Subscription Agreements), which have been blessed by your legal counsel, before you should feel comfortable that your merger and acquisition attempts were a success.
A common “package” of buyout terms may include any combination of cash, stock, and performance-based incentives, including “earn outs,” which are tied to future revenues, profits, or events, as opposed to just stock price.
Overall, you want to understand the total value of the package you are being offered from buyers—and don’t believe it until you see it in writing. Each piece of their offer should be balanced with the others until you feel comfortable with your overall impression of what’s being offered.
If you get fewer shares of stock, you should get more cash or other incentives. The overall package, including the aforementioned social aspects of the deal, is what you need to weigh against any other possible offers. If there are no other offers, you can keep growing the company independently and try to sell it again later, or you can choose to take the best of what you are presently being offered.
Most of the intrinsic value in companies is usually created in its formative years. So, if you are productive in the early years of corporate evolution and less productive or interested in more mature operations, you could earn more money by starting and selling many different early-stage companies. On the other hand, switching could have consequences, too: like paying extra taxes, possibly needing to learn a new business, and definitely having to re-orientate yourself to new players in new markets which will likely result in lost leverage.
Another potential problem is that you could have a non-compete agreement, which would prevent you from competing with your former employer, the company to whom you sold out, and thus, require you to start in a completely new industry or territory.
Should you employ this early-stage sell strategy, the best bet would be to focus on emerging industries, even though they are the most risky. By definition, emerging business niches don’t have entrenched players. Generally, you can compete head-to-head with any industry entrant at your level of sophistication and wealth.
But if the game is decided by heavy up-front capital expenditures, then the person or company with the most cash will likely win. However, small emerging industries, which are not terribly capital-intensive, are open to everyone.
When you choose to sell your company, you will need to decide if your company is big enough to require an outside business broker to create merger and acquisition opportunities or if a great lawyer and accountant will suffice with your own leadership. Are people already making fair, unsolicited offers, or is it going to be a much more difficult process requiring more calendar or clock time and some professional help?
There is a common method used in mergers and acquisitions that can help determine the fair market value of your company. FMV is the only price for which you can sell out; nobody wants to be in on a deal where fairness is not taken into account.
The idea is to create an equation where you can plug in your company’s “numbers” to arrive at FMV. Generally, a buyer who wants to disclose his valuation methods refers to a multiple of revenues or profits. This should equate to what they claim to be the FMV of your company.
Often, industry players create commonly known multiples for companies who have similar histories, financial results, and corporate structures. Irrespective of marketmakers’ attempts to homogenize companies, once you review any of them in detail, you’ll find that all companies and deals are truly unique, and therefore, require dynamic human and industry research, abstract insight, and a diligent work effort to discern the information you will need to make or receive a merger offer. For a small Internet company, a popular multiple is eight years of the company’s profits (an 8X multiple). If you succeed in selling your company for a multiple of eight times your annual profits, you get the earnings of eight years hard labor (assuming no growth) in one payment (or however many payments you agree to). In addition, you can compound all that money for the eight years you would have otherwise been working, while saving all the opportunity cost and time to perform another mission of equal or greater importance or profitability.
This same company may have a 25% profit margin, and therefore, their revenue would be four times as high, making their “multiple to revenues” equal 2x to go with the 8x “multiple to profits.”
Selling your company may save you years of work if the buyer delivers you those same years of expected profits from your operations but years in advance. On the other hand, if you don’t successfully make your transaction, you could end up investing a lot of time and money in the sale-making process for negative returns.
Whatever your goals, you should run a business “as usual” during any sale process. It is vital to build long-term value in your company, whether you choose to sell it eventually or not. Buyers only want to buy assertive companies with bright prospects and current growth, not short-term schemes.
