What I learned selling my company
harryglaser.com
harryglaser.com
100%
Which is why I hate that exclusivity is industry standard.
It feels exploitative that acquirers can demand exclusivity in a deal when the chances of it closing are less than 80%.
Imagine selling a house and taking it off the market because you got an offer with a 50% chance of actually closing 3 months later.
Even worse, most acquirers will say “nope” if you ask them to cover your legal fees if they back out of the deal.
This happens because sellers of companies only sell 1 or 2 companies in their lifetime, while buyers of companies typically do dozens and dozens of transactions. There’s an extreme power imbalance in favor of acquirers. Most sellers learn these lessons the hard way.
1. Sellers can tank the deal as well for any reason, e.g. if they feel the deal is not going as fast as they like (and I recommend agreeing on a general timeline).
2. Sellers generally don't get very many offers, so the opportunity cost is often not as high as you might suppose.
3. Sellers can negotiate more friendly terms (e.g. closing sooner), but usually choose to concentrate 100% of their leverage into the price.
4. Due diligence is expensive for both parties, but the seller can easily re-use much of their side. Non-exclusivity would mean the seller could easily entertain many costly offers simultaneously.
No buyer in their right mind would agree to non-exclusivity, though they can agree to a reasonable window for that exclusivity.
Why?
If I’m going to put my business on hold for 3 months to entertain your offer to buy my company, why would it not make sense to make sure the buyer is serious enough to offer something they shouldn’t need to ever pay out if they are serious about their offer?
> structure the dealmaking or negotiate the deal to get what you want.
You usually have lawyers doing a lot of the legal strategy for you. It’s easy to say “negotiate what you want”, but realistically this negotiation happens via redlines back and forth between lawyers who consult the buyer and seller who both make concessions. Whether or not you make a concession is often influenced by what’s most commonly occurring in other deals.
What’s most common in other deals doesn’t automatically equate to what’s the most fair and balanced transaction terms.
Typically, those are only created for unsophisticated parties who don't know what to negotiate for.
---
> If I’m going to put my business on hold for 3 months
I've had a failed LOI before (as a seller). Very rarely should an LOI ever fail after 3 months of exclusivity.
The LOI is "hey we'd like to dig deep into this, but we want to be sure we aren't wasting our time." Competent parties shouldn't take much more than a month to figure out whether it works or not. (Funding logistics, or SEC approvals, etc can stretch that out.)
This is by some less than ethical Chinese investors.
That said; it could also be (unsuccessful) sellers remorse.
But the volume of deals that happen in the $3-50 million range is very high (especially if you include non-tech companies, like PE's buying up a veterinary clinics or dentist offices) -- this segment of companies generally are not "sophisticated" re: M&A by any means.
To be fair this article is talking about a $100m+ transaction, so maybe that's the segment your head is in. I'm coming at it from the perspective of a < $50m transaction.
That sounds like a great way to cause your biz to not sell at all.
Is that business valuable in that case? Probably a lot less than they’re trying to get for it, for sure hah.
But it can happen.
In a free market, you should be able to market what you’re selling until the moment it’s officially sold.
That's not what free market means. In a free market (which this is an okayish example of) buyers and sellers are free to set their own terms, rather than having them externally imposed. So you are free to try and negotiate a lack of exclusivity, it's just that likely nobody will take you up on it.
SEC oversite and similar mechanisms, by comparison, is an external imposition on the market.
Ironically, what you seem be suggesting (exclusivity terms "not allowed") could only be enforced by regulation, therefore making the market less free.
Based on anecdotal experience, I'd bet that most of the "50% of signed LOIs" don't actually close because the seller misrepresented themselves.
> There’s an extreme power imbalance in favor of acquirers.
Buyers do NOT like dead deal fees (it doesn't get paid out of the LP fund), so there is little incentive for them to play games there. So, no, this is not true.
I don’t think you’ve provided any evidence other than “buyers like to make as much money as possible at others expense” which everyone knows to be true which doesn’t bear much weight on a skewed power balance existing.
What's your proof that a skewed power balance exists? Just because buyers have experience buying 100s of companies? Well then my experience advising 500+ companies tells me otherwise. So who's right?
Also, you're saying there is a power imbalance because. I was specifically commenting on that power imbalance affecting the poor (50%) success rate.
I don't know what the second one he has in mind is; the some of the ones I know are:
1 - operate a profitable business that throws off a ton of cash (these can be huge, like Koch, Cargill, Aldi, and can make long term employees extremely, and privately, rich).
2 - sell part of your company to the public (IPO)
3 - sell the whole company (M&A)
4 - spin out or sell off a division (a kind of M&A)
One major disadvantage of 2-4 is that other people tend to hear about it.
Your (1) isn't a pot of gold in the colloquial sense of "suddenly finding a life-changing amount of money". Running a profitable business is ideal, especially in a post-ZIRP world, but it almost never culminates in a single "all my hard work has paid off, I can take it easy now" moment like IPO or acquisition.
That first time you pay yourself $20MM sure feels like that, and repurchasing from your employees or paying out large bonuses sure can for them too.
> like IPO or acquisition.
Have you been through either? "Take it easy now" is the opposite of what happens in an IPO -- you're now subject to the scrutiny of the financial press, SEC, and random shareholders when before you could send monthly updates to your board. And unless you avoided an earn-out in your acquisition, the slog just continues.
acquisition is also "long term". Usually there's months involved before hand, and months, if not years, hitting targets after acquisition to actually get the fully agreed-to payout.
Equally, sure, I agree, there's seldom a "can take it easy" moment running a profitable business, but over the same sort of time frames as IPO and acquisition you can certainly "wake up" and realize that all that hard work is now paying off. Once a company is in the black, for multiple years, and has accumulated "large enough" reserves, and you're not putting out fires three times a week, it can certainly feel like retirement (financial independence) is getting closer...
The authors' two options are #2 or #3 (or #4 which is a smaller #3).
I would classify a true third option as private fundraising with secondary sales.
I don’t doubt this, but I’m curious: why do you see the publicity as a disadvantage?
The Bay Area and Seattle have quite a few "unknown" billionares. For example if you had less than 5% of Microsoft when it IPOd you were not listed in the S-1, and if you hung on by the mid 90s you could have been worth 8-9 figures.
To not diversify a concentrated wealth of 8+ figures takes some serious diamond hands.
One reason is that it can help attract talent & useful connections. If you're a known billionaire, I imagine it's pretty easy to get a meeting with anyone, which could lead to educational & enriching conversations that you otherwise wouldn't have access to.
I'm curious if there's information from ppl who've experienced this type of publicity, where they thoughtfully evaluate the pros & cons, and evaluate how they net out.
Edit: this is classical economic philosophy, not my personal opinion
This is to economics what "assume the cow is a perfect sphere moving on a frictionless surface without wind resistance" type of problem is to physics.
In the real world, profit absolutely does not correspond to "taking advantage" or "extracting value through arbitrage".
Edit: also keep in mind that literally all of economics up until relatively recently relied on broad assumptions like the rational consumer. Kepler thought the sun was the center of the universe, does that invalidate his laws of planetary movement?
You've got your arrow of causality backwards. People dislike it because it's a useless framework when taken in the simplistic way you've presented it.
The actual concept doesn't say that you can only make a profit by stepping on people's heads. It says you can't profitably do the same thing in a market forever. You have to introduce new and better products, which you can profit from until your competitors catch up.
The implication in fact is that it’s immoral to be ‘paid’ for doing so?
I’d argue that just makes the world a poorer place overall, as there is no direct incentive to do things better. In the typical environments this plays out, there is actually a lot of incentive to do things worse.
Cost plus is one way of doing this kind of thing, and that gives strong incentives to inflate costs, for instance.
gov’t budgets are another, and anyone who has worked in the government or other large organization knows you’d better spend your budget each year or you’ll lose it. So no one ever has any left over short of something crazy happening.
Few people will take the chance to join a risky venture if the didn't see some kind of payout down the road. I once left my stable job to join a startup. I took a salary cut and even loaned them money to make paroll. But I got some founders stock and had confidence in the product we were building. It payed off years later when the company was aquired.
But I also knew that I had to contribute effectively if I wanted that company to succeed. Too many will join a startup just to be on the bandwagon if an M&A event happens. They think they will win big even if they do little to make that actually happen. These people are parasites that can kill a startup.
Equity might be worth 0. You were lucky… but it's not a fault to not want to bet years of work and just sticking to the paid hours.
My criticism was of those who join a startup for the chance at a payout but don't want to put in the effort to help make that a likelihood.
It’s dumb to want to get rich unnecessarily hard (‘overpaying’ in effort for the actual outcome).
Somewhere in the middle is a good trade off. A big part of being a founder is finding the right people to contribute to make it a success.
There are a lot of freeloader/non-effective types, everywhere.
Big corp and gov’t often has no choice but to accept them, but not so for startups.
The founders ultimately are responsible for who they hire and what they produce.
Agreed that success such as yours is not only luck!
But as a co-founder of a SaaS company that has survived over a decade, I would stress that luck* is also part of it.
Many people work very hard at a startup and the thing just crashes and burns, sometimes very quickly. It's not just hard work and being competent at your job - other things outside of your control or influence have to happen to align, too.
* I think "luck" is a pretty good descriptive word for things outside of your control and influence going your way.
Build a great business and focus on running a great business. Selling is just time in the market. If you're creating value, someone eventually will want to buy you (US centric mindset btw).
If anyone is interested in how things tend to work if you're trying to proactively sell a company (especially a profitable one), I put together a write up a while back: https://www.fivecastfinancial.com/guides/how-selling-a-compa...
(I used to be an M&A advisor - no longer!)
> Punctuated by fielding calls from confused angel investors.
Can someone ELIE - explain it like I’m an engineer?
This doesn't have to a hard floor but:
1. Most fundraising is done on a 1x liquidation preference. (Investors get paid back first at 1x their investment.) So selling less than your previous valuation means additional dilution for common shareholders.
2. Investors will likely be unhappy and could even block the deal if it is less than they thought it was going to be worth.
Also, the investor also often have liquidity preferences. So if they invested at a valuation at $100, and you want to sell at $50, they might get all their money back before previous investors and yourself get a single cent. Then it might not be worth it for you to sell at all.
If a stock costs $10, and I spend $100 to buy 10 shares of that stock, I don't want to sell that stock if it's worth less than $10.
Will I consider taking the loss? Maybe... but I will probably be unhappy with it, so I will do everything in my power to wait to sell until the stock is worth more than $10 again.
I am mooching that. Great phrase!
It’s implied when OP says “run a good business”, but as someone who’s been on the acquiring side - it becomes a lot harder to be the advocate to buy a company when it’s losing money.
(The business case math gets hard fast, with unprofitable companies & introduces a lot more risk)
You can't sell "potential" but you can buy it. In other words a "good" company, with a "good" product, but running really inefficiently (and thus making a loss) can be very attractive to a buyer, if they can get it cheap. They might see that AWS line, or that Google marketing spend, or the giant sales team, or whatever and realize that by refactoring that part of the business they can extract a lot of value in the short term.
But this "potential" is not reflected in the price. You can't sell a business saying "oh, you just have to make AWS go away..." etc.
Ultimately any seller is saying "you're offering me a price where I think I get more cash now than waiting for later". Usually with time commitments built in.
The buyer is saying "you have something interesting, but I can get a lot more profit out of it than you are currently doing." Often by doing things you have specifically rejected (downsizing staff, cutting expenses, maximizing revenue etc)
Be aware that any _principles_ you have, which are suppressing your profit (open-source licenses, fair wages, pride in customer service, reasonable price increases, employee benefits, whatever) are all _almost certainly_ going to be changed after the sale. Those things are exactly where the purchaser is going to get their return from.
What is corp dev’s role then?
Maybe they like an in house recruiter: they conduct negotiations and ease the process by meeting with both parties, but the yay/nay decisions are made by the hiring manager?
They are supposed to go out and find interesting things in (or adjacent to) your space, get to know them, understand how they measure up among their peers and competitors, and bring all that information back to the company.
They're all waiting for the company - usually the CEO, CPO, or CRO - to say something like "we have a need for X."
Background: I was at Okta through the Stormpath, Azuqua, and Auth0 acquisitions. I didn't have a role in any beyond knowing the M&A team and observing it throughout.
Otherwise, no one will buy it, or the price will be much lower than you expect.
https://awilkinson.medium.com/the-berkshire-hathaway-of-the-...
It's tough as a founder who only ever expects to sell one company though. You don't really know how much you're potentially giving up for that easy deal if you haven't tried to solicit other offers. But you can't know of any offer is really real without spending months working on it. I'm really not sure what I'll do when I'm ready to sell. Maybe the perfect offer will just drop into my lap someday; that'd be nice.
Is this true? I don't think so. When they buy a public company, both sides surely have investment banks that help them to correctly value the deal.
Also, "pays below market prices" is probably commentary about his value strategy.
I've always seen the statement of getting competing offers but how does it actually work in reality?
Is it as simple as contacting the key decision maker from competitor and saying...
"I've got an offer X, what can you do?"
And you can tailor it based on the specifics.
Working with an advisor can sometimes make this easier because they can be more direct and say things like: “Competitor X has made an offer and I know it’d make your life difficult if this asset ended up in their hands, so I wanted to give you an opportunity to take a look first.”
By the way, waiting until you get an offer to start trying to bring in competing ones isn’t great, definitely better to do that as early as you can if you’re serious about selling. You risk pissing off the interested party if you’re making them feel like they’re just being used as leverage and drag things out before giving them an answer.
Edit: Nvm, I found some sources for this claim.
At least someone's finally honest about it. Startup culture is in general a blight.
Obviously it would be awesome if those shares end up being as valuable as they claim it is, but honestly it just kind of feels like lottery tickets. Most startups don't end up becoming the next Amazon or Apple, and as such those shares end up not being worth anything.
I suspect a place to start investigating would be to try and find the number of dollars being spent by the VC firms in relation to how many startups go belly-up. It certainly feels like startups are more volatile than ever but I don't have any data proving that.