Recently aninvestment banker named Tom Metz was kind of enough to share his book with meentitled “Perfect Your Exit Strategy”. It’s about going through an exit with an investment banker. Below are direct quotes I found mostinformative.
Plan for the exit. “Business owners should beginthinking about their exit strategies two to four years ahead of time.”
Sell when you’re growing. “The best time to sell is when thecompany is doing well and enjoying excellent growth and profitability. This iswhen the firm can sell for top dollar. Of course, few businesses want to sellwhen this is the case. They are enjoying the ride. Companies usually want towait for the growth to slow before selling. In my experience, companies usuallywait too long before deciding to sell.”
Value > Risk. “… the company should continuebuilding when the value being created outweighs the risks of stayingindependent.”
Timing iscritical for strategics. “Time is often a component ofstrategic transactions. A buyer may want a particular technology immediatelybecause of market conditions or competitive pressures. A company may be willingto pay a premium if it can acquire the technology now.”
Mid-size buyersare best. “One of the mistakes that I haveseen over the years is that small companies believe that the largest companiesare the best buyers for them. As a result, they end up focusing on the wrongcompanies. It is much better to focus on the midsized and smaller buyers eventhough these companies are not as visible. A small acquisition will rarely make an impacton 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 simplytoo small to get their attention…….An acquisition is an excellent way for amidsized company (with revenues from $150 million to $500 million) to addcapabilities and expand into new markets. A midsized buyer acts a lot like abig buyer; however, the midsized buyer will consider a small acquisition of $10million or $20 million if it achieves a strategic objective.”
Small buyers areright for small deals. “Small buyers are best for smallacquisitions. A $5 million or $10 million acquisition is an importanttransaction for a small buyer. “
Competitors wontpay up. “Competitors are rarely the bestbuyers. Even if the seller’s technology is superior, it is unlikely that thecompetitor will replace its current technology with the seller’s technology. Consolidation is the typical reason behindacquisitions made by competitors. Acquisitions in a consolidating industry areusually made to gain customers. These types of transactions generally do notpay high prices because the customers are the only real asset.”
You don’t knowthe best buyer. “Many times the best buyers arenot in the selling company’s primary market; they are in adjacent markets. Inaddition, the best buyer may not be the first company that makes you an offer…..Sometimesthe best buyers are not in a company’s core market space, but in the littlespaces off to the side, in neighboring areas. Don’t assume that you know whothe best buyers are. Sometime nonobvious buyers in adjacent markets can beexcellent buyers.”
All employeesneed employment agreements. “New employees should signnoncompete agreements too. Most buyers will want senior and technical employeesto have signed a good, modern employment agreement.”
Get rid oflitigation. “As mentioned earlier, potentiallitigation is almost always a deal killer. If you have any potentiallitigation, do everything in your power to settle or eliminate this issuebefore you begin the process of selling the company.”
Be upfront. “The buyer will eventually findout anything and everything about your company so upfront honesty will go along 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 ontruthfulness and this is a good thing.”
The process isrocky. “Almost every deal blows up atleast once. After verbal agreement, there is only about a 60% chance ofsuccessfully closing the transaction.”
Limit thenegotiating. “Unseasoned negotiators make themistake of thinking that if they ask a high price, they will be more likely toobtain a high price. This is rarely the case … My advice is to get as manyoffers as you can and then take the highest one.”
You wont be hotfor long. “Too many CEOs think about valuein financial terms, not strategic terms. The mindset is: “If we wait, we willbe worth more.” For technology firms, the strategic value is typically greaterthan the financial value so waiting does not necessarily increase the value. Waiting for better financial performance isnot usually a good plan. For a company with strategic value, the buyer isseeking technology and capabilities, not revenues or cash flow.”
Use abanker. “An objective third party canhelp defuse unreasonable claims, establish a constructive atmosphere andminimize extreme posturing. Friction can develop in negotiations. To avoid anadversarial relationship, let an intermediary handle the negotiations and bethe bad guy.”
This iscritical. “In addition to the basic priceand terms, the LOI includes information about not hiring away employees and ano-shop clause. In the no-hire clause the buyer promises not to try to hire anyof the seller’s employees.”
Asset versusequity sale. “Buyers prefer to purchase assetson small transactions because it reduces the possibility of unknownliabilities. The C Corporation itself must pay taxes on the gain for a sale ofassets and then the shareholders must pay taxes when they receive the proceedsfrom the sale. In one transaction that Iwas involved in, the deal actually fell apart because the buyer wanted topurchase assets, not stock. The selling company was a C Corporation and it hadto pay taxes on the gain and then the three founders had to pay additionaltaxes individually.”
Accounts payablewill be assumed. “It makes sense for the buyer toassume accounts payable – because it wants to make sure the bills are paid. Thebuyer wants to maintain good relationships with the customers so it willusually assume the accounts receivable and any service contract liabilities.The buyer will not assume past payroll obligation, deferred compensation orprofessional fees.”
Stockswaps. “If a company trades its stockfor stock of the buyer, the transaction will be tax free in most situations. Ifstock is sold for cash, the shareholders will have to pay taxes on the capitalgain.”
You aren’t goinganywhere for now. “Consulting contracts are madewith key management people to help with the transaction period. These contractstypically last from six months to as long as two years. Noncompete agreementsare standard in the sale of companies. By signing a noncompete agreement, anemployee agrees not to work for a competitor for a period of time.”
Earnouts areok. “An earnout can be a versatile tool to bridge theprice gap between what a seller thinks his company is worth and what the buyeris willing to pay. In other words, they can’t agree on price.”
Tax makes thingsadversarial. “The buyer and seller must usethe same amounts for each allocation. Generally, what is good for the buyer isbad for the seller and vice versa.”
Visitus at blossomstreetvenetures.com for more blogs and SaaS metrics.