Workshop: Getting your business acquired.
Organizer: TiE
Speaker: Bikash Barai
One of the frequent sessions organized by TiE at their Bangalore chapter. I like these sessions as they’re meant for a small audience of just under 30 people, hence it gets meaningfully interactive. The relevance of this topic particularly caught my interest just as it would to every new-age entrepreneur looking an exit sooner or later. The speaker spoke from his gut, giving realistic examples of what he did right during his recent stint of having his company acquired. His company, iViZ Security, started in 2006 backed by IDG Ventures was acquired by US based Cigital Inc. in November 2014.
A few intriguing pointers that served as takeaways from this session:
When to Exit? When is the right time?
– There is really no definitive answer to this since it’s more like a ‘when is the right time to get married’ genre of question. Subjective answers here. However, a few ideal suggestions could help.
– Big acquisitions hit the headlines and sound all glamorous yet they are just a small part of the pie. Many many smaller companies get acquired usually when they are in the sweet-spot of about $30 million or lesser which is emerging as a ‘good-time-to exit’ trend lately.
– Ideally, right time to sell your company would be when:
(a) You’ve got a proven business model. This usually takes a couple of iterations before you get it right and have a stable one.
(b) Your company is seeing steady, healthy growth. If the growth isn’t great, the buy-out might be average too.
(c) Buyer need. The acquirer should be on the look out for a value addition that your company provides. This ensures a good deal for both parties.
– Another aspect to factor in is: Knowing the amount of money you need. How do you figure that out?One simple manner could be this: An ‘x’ sum would fetch you approximately 8-10% returns YOY, factor in a certain inflation percentage with this. Now, would this monthly earning from returns suffice you until your next plan? This calculation could simply be done backwards as well.
Identifying Potential Buyers
(a) Find out ‘Why’ someone would like to buy your company
– This can be tricky. You might think that x,y,z are the greatest strengths of your business and yet acquirer may be interested in your company for a completely different reason.
– It would be a smart thing to think of multiple ‘Why’s’ so you have more playing cards to steer your game.
The ‘Why’ bit is a worthwhile introspection since it gives you a reality check on whether you are attractive to your prospects? or would you need to further work on it?
(b) Figuring out ‘Who’ would be interested in buying your company
– Research on whose business you could add value to – Helping them scale, Reduce operational cost, Making their processes simpler or Bringing in automation in their field. These might not necessarily be companies in your industry segment.
– Larger companies who are into an exaggerated version of your business. Your business could well be a small part of their big picture. You could have a Go-to-Market strategy around this. Get in touch and start building a relationship with them. A genuine business relationship with key decision makers prove constructive in the long term.
Eventually, we have multiple ‘Why’s’ which can be matched to the list of ‘Who’s’ and therefore proceed with greater conviction. Prepare yourself to get multiple offers before you seal the deal in actuality.
Further reading: There’s a popular TED video by Simon Sinek on a similar note – ‘Start with a Why’.
Investment Bankers and their Role
It isn’t necessary that buyer or seller use services of an ibanker. In fact, many well-known recent technology acquisition deals have been made without the advise of a banker and the trend seems to be increasing,
– If you do decide to go the banker way, this is how it typically works:
You tell them the ‘Why’ bit, then they bring to the table some research (probably, Gartner quadrant analysis) with a likely ‘Who’ list. Then, you might want to sit down and study the research, check if any magic quadrants were missed out on, and ask them to re-do the ‘Who’ list.
– They help you with the mailers and content to be sent to each suitor on the list. You could work with them to do some fixing in the content.
– Bankers also aid you in building relationship with possible buyers.
– A cautionary note here would be that ibankers aren’t always motivated to get you the best deal. They would simply want to close a deal as quickly possible whether or not a beneficial one. An ibanker might most likely introduce you to a lawyer who may not necessarily negotiate keeping your interests in mind.
– Rough timeline to get your company acquired:
- 3 months to sign up with an ibanker
- 3 months to prepare yourself, get documents in order etc..
- 12 months to get a good offer (although, your ibanker may promise 6 months)
- 6 months to close the deal
So, that adds up to 2 years. However, you could wrap this up within 1 year taking half the time for each of the above activities if you are aggressive or if you get lucky!
Partnerships & Documentation
– In due course of running your company it’s advisable to build healthy partnerships. They could help during an exit strategy and add value through partner’s contributions.
– Partnerships could be developed keeping in mind a Go-to-Market strategy , strengthening Technical expertise for your business or even Marketing and Business Development.
– Documentation is a big plus when large companies evaluate small, mid-sized startups. Emphasis is given to meticulous records of company history, processes, product versions, use cases, offer letters, stock option agreements, proprietary information and related documents. It would make sense to take a look at a checklist of sorts.
– This would be a major plus on the due diligence front.
Negotiating Financials
– Firstly, how much money you get upfront is the obvious question. For high-tech and service businesses with high-growth potential, a typical deal might include an upfront amount from an acquirer of anything between 60 and 80 percent.
– Then, you look at the Earn-out clause. Earn-out is a contingent payout, where the seller gets a part-payment upfront and the rest over a period of time tied to performance outcomes. During this period, the founders are obligated to join the acquirer and achieve benchmarks stated in the clause basis which they would be eligible for the remaining payout. So the owner here is ware of the delay in price and the fact that they might never get it.
– The Earn-out is best when kept simple. Structuring an earn-out involving complicated set of goals around exceeding earnings, customer retention and innumerable circumstances that might not be under your control would not be a wise act. Work out clauses that benefit both parties.
– Joining bonus and stock options are vital terms as well. Termination clauses like golden parachute might require negotiation and detailed description of benefits.
– Deciding on Asset sale vs. Stock sale. This may take a good deal of home-work in understanding advantages and disadvantages meticulously. From a seller’s perspective an Asset sale would mean greater tax considerations and higher exposure to liabilities – this could be mitigated by allocating the liabilities to be borne by the buyer, stated clearly. In addition, an asset sale is associated with greater procedural complexity than a stock sale and takes longer time to consummate.
– Also pay heed to investors side of the spectrum. Negotiate terms and ensure they are happy with the sale when your liquidation preference is set to be executed.
– Another pointer to note would be that RBI/SEBI guidelines in India are not currently Escrow friendly. It is quite common with Indian startup exits to put up with an almost double-digit escrow percentage amounts delayed due to the M&A regulations in India. Fortunately, escrow management is evolving to meet these challenges. It’s advisable to consult your lawyer and have structural changes made that help reduce the delay.
Post acquisition
– It’s crucially essential that growth remains consistent. In case of a decline, acquirers look at re-negotiating terms and other such unknown factors crop up.
– Know that due diligence will be a constant in your life for a couple of months, which eats up into a lots of your time and as well as your team’s schedule. Have a dedicated team that caters to due diligence requirements. Ideally, the founders must concentrate on growth.
– Maintain complete transparency with all parties involved throughout the course of acquisition.
Your Team
– Understandably, you might not wish to share with all employees in regard to being acquired, particularly during the initial stages. Nonetheless if the word does get out it, would be good to admit you have some incoming interests and it’s being evaluated as opposed to denying it all.
– Once things begin to materialize, you could formally discuss and explain why an exit could be good for them. Address their concerns if any.
– Take this up as a responsibility; to get your team to like the company that is acquiring yours. The impact that it would have on them and their careers. Familiarize them with the retention strategy adopted by the acquirer (eg. bonus due for employees that stay for over a year post-acquisition).
– Celebrate, it’s important you do so; because what is celebrated gets perceived as positive!