MBA Mondays - Business 101 for startups by Fred Wilson

M & A Issues - Price

This is my final MBA Mondays post on M & A Issues. I've been posting about M&A since last December. It feels like a semester long effort. And frankly I'm a bit tired of talking about M&A every monday. But selling your company is an important topic and I think we've done it justice now on MBA Mondays.

Price is certainly the most important issue in a sale transaction. You need to consider all of the issues we talked about when deciding whether or not to accept an offer to buy your company. But at the end of the day, price is the big issue.

The best way to get the highest price in a sale transaction is to have a competitive process. Multiple serious bidders will force the buyers to bid more aggressively than they would otherwise.

However, most buyers don't want to be in an auction. You can lose potential buyers, maybe your best buyers, by overtly conducting an auction. So you must be careful about this. My favorite approach is to get one bid, then quietly get another, and all of sudden you have a competitive process. I don't like to start out the process telling everyone that "we are running an auction."

Sometimes, you will get your best price from a buyer who wishes to pre-empt the auction process by putting out an early aggressive bid in an attempt to win the deal without competition. Pay serious attention to these offers. I have seen pre-emptive offers top bids obtained in a competitive process.

The problem with pre-emptive offers is you don't really know what the "market will bear" if you go through with a competitive process. So the pre-emptive offer needs to come with a premium over what you think that fair price is to incent you to avoid the sale process and sign with the pre-empting buyer.

You should go into a sale process with a target price. That target price needs to be based on some sort of logic and rationale. An investment banker can help with this. It is one of the best reasons to get an investment bank involved in a sale process. But you don't need an investment bank to do this valuation work. If you have venture capital investors, they can help you do it. Or if you have a strong finance team, led by a transactional CFO, you can do it yourself. Some of the early MBA Mondays posts can help you do this valuation work.

I generally like to look out a couple years, no more than three, and figure out what the business would be worth if it remained independent based on cash flow multiples, revenue multiples, or multiples of active users who have an established lifetime value. That becomes the target price. My rationale for using this method is the buyer ought to be willing to pay a premium over what the business is worth today for asking the company to give up all future value potential. But you can't ask the buyer to pay now for all the upside that the business could obtain if it remained independent. So a few years of future value, especially if it is reasonably visible to everyone, particularly the buyer, is a reasonable approach.

If you run a process and you cannot obtain a bid at or in excess of your target price, you should stay independent unless you are in a distressed situation. As painful as it is to the senior management team and the entire company to go through a sale process and end up with nothing, the alternative - accepting a price that you believe is not fair - is worse. I've seen plenty of companies go through a sale process, come up with nothing good, and then go back to business and continue to create value and come up with a much better deal a few years later. It's tough the first six months or so, but then everyone moves on and the failed process becomes a distant memory.

If a buyer meets or exceeds your target price, you will want to seriously consider the offer. If you made the decision to sell the company, ran a process, and hit your target price, you should think very hard before walking away from the deal. If however, you did not set out to sell the company, but were approached, that is another story. I've seen many entrepreneurs regret selling after the fact. Don't let a great price force you into a sale that you are not ready to live with.

In summary, when selling your company, do the work upfront to get to a target price that makes sense to you, your senior team, your investors, and will make sense to the universe of buyers you want to target. Then figure out how to get multiple bidders to the table to get the best price. And make sure you want to sell the business before you go through with all of that. Because getting a great price for your business is not easy and when you've accomplished that, you'll want to be able to say yes comfortably.

From the Comments

JLM added:

Selling a company is a skill and is much like staging an open house to sell a residential property. Put the company on the very best footing to be able to sell it. This will get you the best price.

I think that a skillful seller and a disciplined sales approach can get up to 20% more for a company. Value is in the eye of the beholder and what something is worth is purely subjective. Resist the temptation to substitute your judgement for that of the buyer.

Sounds dopey - spruce up your offices. Get rid of all the junky furniture. Get the people to dress just a bit spiffier. The guys who own options will understand this.

Give yourself a chance to get lucky.

First consider what the transaction documents are going to look like - the letter of intent, the purchase/sale agreement and the due diligence checklist. Review all of this stuff long before you ever decide to sell and then anticipate each and every problem long before it happens.

Then fix them all.

Put together a due diligence package which incorporates each and every element of the prospective purchaser's due diligence, don't wait until they ask for it. As an example, clean up the options schedule until it is perfect and you can simply hand it to the prospective purchaser.

Assemble a list of every - every - every prospective financial or strategic buyer for the company. Do research on each and every one of them. Know them. Know who the deal makers are and research their methodology.

Don't kid yourself about trying to auction the company on the QT - not going to happen. A shrewd buyer is going to insist on a "no shop" provision in any LOI.

Your rejoinder is a "no shop" provision exhibit excluding a long list of folks with whom you are "already in contact".

Give them the no shop provision just carve out the likely suspects and then make sure you have, in fact, contacted them.

Appoint a single person to be the seller's primary and sole point of contact. Create an electronic and physical due diligence room. Put all the due diligence materials in that room and do not allow the buyer to speak directly to any of your people until they are ready to turn to the HR elements of the deal. Log in each and every document exchanged and keep track of all of them.

Have a weekly phone call initially and then a daily call when things go live. Insist on a single point of contact on the buyer's side.

Get the CEO's together socially. America does business with its friends. Force the friendship.

Figure out what the buyer has to buy with - cash, securities, notes, options, warrants, etc and anticipate that this is what the trade bait is going to look like.

Get references on past deals and don't ever believe you will get a better deal than ones already closed. Never, ever.

Strike and move quickly when you think you have the right deal. It will get the deal closed and, if not, the embers may still be glowing on another opportunity.

Be gracious, firm, disciplined and tight lipped. Never provide more info than the buyer requests. When you are at the closing table, never leave and never get up. Get it closed.