Getting Acquired: Selling Your BusinessFeb 02, 2021
For many entrepreneurs, the dream scenario falls under these 3 categories:
- Having a successful business
- Having a successful exit
- Going IPO
Having a successful business simply means making money and having a comfortable life.
Going IPO means taking the business public through an Initial Public Offering. The upside is being financially set. The downside is that everything done in the business will be for the financial benefit of your shareholders.
Now let's talk about having a successful exit, which is an interesting one. In my opinion, if an entrepreneur is starting a business with the intent to hopefully sell it one day, then that intention signals the entrepreneur may be more interested in chasing the dollar than being truly passionate about the company.
However, lets say the Founder builds something great and it draws interest from a larger company that wants either the Founder, the business idea, the technology, the intellectual property or the customer base and they offer a "Buy-Out". In other words, they want to acquire the Founder's company!
Now, lets say the Founder is open to selling the company…what happens next? Many Sellers hope that the process looks like this:
- The Buyer asks the Founder "How much for the company?"
- The Seller replies with a desired price
- The Buyer agrees
- The Contract is signed
- Both parties shake hands
- The money is shortly wired into the Founder's account
- The founder is on a tropical island, celebrating success
Well, that would be nice, but the truth is that it's more complicated than that. I'm not a fan of keeping anything complicated, so I've simplified the process of getting acquired into three points:
First Point: Valuation
This is an extremely important point. Entrepreneurs can go two ways on this, where they can either undervalue or overvalue themselves and their company.
- Undervaluing a company is very common for first time entreprenerus selling a business. This is because, the idea of not having to grind, having a buyout offer sitting on the table, seeing more money than ever before, and adding the "I've been acquired" notch on their belt clouds their judgement. Also, many times entrepreneurs feel if they do not take the offer, they will miss out on the deal.
- Overvaluing a company is common because the entrepreneur truly believes the business is worth more than it really is. I've heard from so many aspiring entrepreneurs who haven't even created the product or service and are still in the ideation phase that they have a billion dollar business concept. Listen, everyone has a billion dollar idea. Since we are just throwing numbers around, why stop at a billion? Just say it's a trillion dollar idea! Give the idea any desired value, so long as it helps the entrepreneur sleep at night. Just know that when he or she wakes up and you look into the bank account, it's going to be the same as it was yesterday.
It's imperative for the entrepreneur to either have someone on the team that can accurately value the business using fundamentals, financial statements and cash-flow projections. Alternatively, the entrepreneur can hire a third-party company do this as well.
Second Point: The Dreaded Due Diligence Process
Once the Buyer and the Founder have mutually agreed to an acquisition in principle, the Buyer will have their Mergers and Acquisitions (M&A) attorneys dig deep into the Seller's company. This process is called "Due Diligence", which is an in-depth look at the business, contracts, finances, operations, systems, industry, employees, outside investors, on-hand debt and the Founder's personal life.
The due diligence process can average 60 days, but don't be surprised if it's even longer. An important point to note is that the Buyer will be asking for all types of documentation that can add up to hundreds and hundreds pages, therefore be sure to be organized. Additionally, it would be in the Seller's best interest to also have a lawyer involved during this process.
A difficult part of the due-diligence phase for the Seller are the restrictions placed by the Buyer. These restrictions include sanctions on:
- Raising additional capital, either in the form of investments or debt.
- Selling the company to another party
- Selling additional shares of stock
Third Point: Transitional Terms
What does "Transitional Terms" mean? Essentially, identify the terms of the "Transition" process after the sale is concluded. Answering the following questions will flesh out the Transitional Terms:
- Is the Buyer acquiring the Seller's entire company, only the contracts, the technology, the patents, the customers, or just the Founder?
- Is the Seller's company is being bought outright, where the Founder has not involvement after the sale?
- If the Founder is asked to stay-on after the sale, what will be the Founder's role?
- If the Founder is staying-on after the sale, will the company be absorbed into the Buyer's organization and brand or will the Seller be allowed to operate as a stand-alone?
- If the Seller's company is allowed to operate as a stand-alone, will the Buyer require any operational changes, such as new websites, email addresses, technology and systems, HR and Admin protocols, and employee retention?
There's a lot that can go into selling a company. But as long as the Founder is prepared, and has done the research, then there are no surprises.
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