If you’re bothering to read this, it’s a fair guess is that you are a Seller or want to someday be a Seller, so for current and prospective Sellers alike, here are a few takeaways from the event.
Before we get into what Buyers want, let’s talk a bit about who Sellers are (or to start, are not):
In short: You are not a Unicorn. In fact, Unicorns don’t exist.[1]
Now that we’ve established that the private placement market has recently been a bit off its rocker over some types of technologies, and that billion dollar valuations don’t fall from trees, we can talk about what our Seller actual IS.
Sellers fall somewhere along the spectrum of:
FOUNDERS (or latest generation) of “family” businesses – with solid revenue, a mature company and either i.) retirement in their sights, with no succession plan, or ii.) just have the gut feeling that “it’s time”.
TO
ENTREPRENEURS – who have successfully raised money from the investment community
No, I don’t define a Seller in terms of how much money a company is worth, because that is just one motivating factor in a sale transaction, whether to a financial buyer, a strategic buyer or an IPO.
Yes, No. 2 covers a HUGE range of folks but if you’ve taken in financing from investors, then at some point down the road, even if you don’t want to, the investor is going to want an exit.[2]
So from the moment you, Entrepreneur, succeed in raising investment capital, you’ve implicitly decided: “I will sell this business.” And if you’re going to be a Seller someday, starting to think like one now will put you in a better position to give Buyers what they want from the very start of the process, rather than finding yourself starting from a disadvantageous negotiating position years down the road.
So what exactly do Buyers want….and why should the Seller care?
When they are evaluating potential deals, Buyers respond to Sellers who are realistic and well-prepared, which make the negotiation, the deal, and the sale price each much more straightforward. Ultimately, if both parties’ expectations are met, both parties get more of what they want.
Be Realistic: Have a Big Tent and Set it up Early.
Everyone wants to cash out for $100 million…and every child wants a pony. Neither of these things will happen for the vast majority of the population. But even if you know you’re not worth $100 million, your sweat and tears may still cloud your judgment leading you to unrealistically believe the company is worth $25 million when it’s actually worth $13 million.
The key to being realistic is to build a collaborative team of advisors that will help you understand your numbers in context, that know the market, and that can give you an idea of what you can expect in a deal. Putting this team in place before entering the market allows you to have a realistic goal and a plan to reach that goal.
Our most successful clients begin thinking about an exit with a range of professionals from investment bankers to attorneys to accountants already in the room. Each team member brings a particular expertise and can provide input on how to maximize value not only through the absolute price, but through what transaction structure is most advantageous and how we can maximize upfront value. If you’re sending a signed LOI to your lawyer or accountant, it’s likely a bit too late to maximize that person’s value to the deal.
Be Prepared: Have a Long View and a Tidy House.
Knowing what terms you want is not “Being Prepared” (though it is important). Being prepared is knowing what the Buyer is going to ask for and to have the answers before they ask the question.
If you’ve watched Shark Tank, even for five minutes, you’ve watched a VC Demagogue lose their cool over someone not knowing their numbers. And it’s possibly the most (only?) accurate point in the show. But it’s not only startup folks that need to understand and be confident in their numbers: if a Buyer is going to give you a large amount of money for your company, at whatever stage, they are going to want to know that you are selling what you claim to be selling.
For Sellers who have mature companies this is particularly important: it is not enough to simply report historical figures. Even though you won’t be around in five years, your company will be (in some form) and it’s important for the Buyer to understand that you know your market, its future and the role your company plays in that future. So projections are important and reasonably accurate projections are a must. Another must is Audited Financials: without them the Buyer is depending solely on your word until after an LOI is signed.
Finally, you will need to have your house in order: corporate documents, stock ledgers and board minutes should 1. Exist, and 2. Be organized; NDAs should be signed; internal documents should be organized in such a way as to be understandable to an outsider. The more uncertainty that due diligence produces, the less likely that you, Seller, will get the final price and terms that you want.
The Result: Minimized Surprises.
The takeaway is that the best M&A deal is one in which surprises are minimized on all sides, from the Buyer to the Seller to the team, and the best way to minimize surprises is to start thinking in terms of what Buyers want as early as possible.
Even in your “seed” Round, it doesn’t hurt to start thinking in these terms. Get into the habit of documenting all corporate actions and taking the additional step of chasing EVERY employee for their signed Stock Option grants are just two ways a startup can give Buyers what they want, even before they are up for sale.
If you are a mature company, be prepared to do the work it takes to understand the lay of the land and take the time to organize historical documents before the Buyer is standing at the door. By having a firm understanding of what it is you have and don’t have early in the process and communicating with your team early you can come up with a plan to address it.
[1] Unless you are ACTUALLY a Unicorn, then by all means get in touch, we’d be happy to represent you in your Gajillion dollar IPO.
[2] This is one part of why it is so important for early stage companies and investors to build a relationship and communicate clearly the goals and expectations of each party.
