Sammy is the Managing Director and Cofounder of Blossom Street Ventures. Email him directly at sammy@blossomstreetventures.comRecently an investment banker named Tom Metz was kind of enough to share his book with me entitled “Perfect Your Exit Strategy”. It’s about going through an exit with an investment banker. Below are direct quotes I found most informative.
“Business owners should begin thinking about their exit strategies two to four years ahead of time.”
“The best time to sell is when the company is doing well and enjoying excellent growth and profitability. This is when the firm can sell for top dollar. Of course, few businesses want to sell when this is the case. They are enjoying the ride. Companies usually want to wait for the growth to slow before selling. In my experience, companies usually wait too long before deciding to sell.”
“… the company should continue building when the value being created outweighs the risks of staying independent.”
Mid-size buyers are best. “One of the mistakes that I have seen over the years is that small companies believe that the largest companies are the best buyers for them. As a result, they end up focusing on the wrong companies. It is much better to focus on the midsized and smaller buyers even though these companies are not as visible. A small acquisition will rarely make an impact on a $1 billion company. So unless your company has revenues greater than about $30 million, it is not productive to reach out to large buyers. It is simply too small to get their attention…….An acquisition is an excellent way for a midsized company (with revenues from $150 million to $500 million) to add capabilities and expand into new markets. A midsized buyer acts a lot like a big buyer; however, the midsized buyer will consider a small acquisition of $10 million or $20 million if it achieves a strategic objective.”
Competitors wont pay up. “Competitors are rarely the best buyers. Even if the seller’s technology is superior, it is unlikely that the competitor will replace its current technology with the seller’s technology. Consolidation is the typical reason behind acquisitions made by competitors. Acquisitions in a consolidating industry are usually made to gain customers. These types of transactions generally do not pay high prices because the customers are the only real asset.”
All employees need employment agreements. “New employees should sign noncompete agreements too. Most buyers will want senior and technical employees to have signed a good, modern employment agreement.”
Be up front. “The buyer will eventually find out anything and everything about your company so upfront honesty will go a long way. You might as well be frank about it. There are no perfect companies. Being straightforward will help build a relationship with the buyer based on truthfulness and this is a good thing.”
Limit the negotiating. “Unseasoned negotiators make the mistake of thinking that if they ask a high price, they will be more likely to obtain a high price. This is rarely the case … My advice is to get as many offers as you can and then take the highest one.”
Use a banker. “An objective third party can help defuse unreasonable claims, establish a constructive atmosphere and minimize extreme posturing. Friction can develop in negotiations. To avoid an adversarial relationship, let an intermediary handle the negotiations and be the bad guy.”
Asset versus equity sale. “Buyers prefer to purchase assets on small transactions because it reduces the possibility of unknown liabilities. The C Corporation itself must pay taxes on the gain for a sale of assets and then the shareholders must pay taxes when they receive the proceeds from the sale. In one transaction that I was involved in, the deal actually fell apart because the buyer wanted to purchase assets, not stock. The selling company was a C Corporation and it had to pay taxes on the gain and then the three founders had to pay additional taxes individually.”
Stock swaps. “If a company trades its stock for stock of the buyer, the transaction will be tax free in most situations. If stock is sold for cash, the shareholders will have to pay taxes on the capital gain.”
Earnouts are ok. “An earnout can be a versatile tool to bridge the price gap between what a seller thinks his company is worth and what the buyer is willing to pay. In other words, they can’t agree on price.”