Nesheim Online

SHOULD YOUR STARTUP ACCEPT THE SALE PRICE FROM A BUYER? Some tips on negotiating to a successful conclusion

 What can you do about selling your company at a good price?

Below is an email I received recently from an entrepreneur whom I respect, and some of the tips I gave him.

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From: Mr. O
Sent: Tuesday, November 29, 2011 10:06 PM
To: john@nesheimgroup.com
Subject: Some questions about M&A

 Hi John,

 Hope you are doing great.

I am shooting you an email because I believe you are the best person who can address some of the questions I have about the process of Mergers and Acquisitions. I've read your blog, but could not find the information I am looking for. So I thought of emailing you directly.

 I am interested to know your thoughts on what the negotiation steps are after the acquiring company makes an offer to the target company. 

How much room is there for negotiation before the acquiring company decides to turn its back?

Let's assume here the offer is on the low end of what the founders had anticipated. Are there specific steps to negotiate the offer up without hurting feelings?

 Looking forward to your take on this.

 Thank you,

Mr. O

 ===============

Hi Mr. o,

Good to hear from you, seeing that good mind of yours in action.

 ABOUT M&A

= It is about process.

= The process needs daily managing to keep it moving forward to the final goal. Expect to be 100 percent consumed with the process. (Your startup business will suffer).

= Final goal is a Decision: Sell or wait or shut down. Start with a realistic assessment of what you should do about each of those alternatives. Put a number on each in monetary value.

= With an offer to purchase on the table, start with an honest assessment of “How can we continue without selling?”

= Use that assessment to draw a line in the sand on the selling price: “We will not sell below this price.” And keep that a secret, of course. This is your Deal Buster number.

= Expect to get closer to -- but not to close up -- the gap between Your Higher Price and Their Lower Price.  You will not get to your Higher Price, ever.

= Document a list of the reasons for  your Higher Price: patents, brand names, trademarks, licenses, contracts, leases, technology, working IT infrastructure (make or buy economics, e.g. web site, ecommerce), location, customer base (existing), new customers (growing rate), business model (translate customers to money), competitive strength (market position versus competitors), compelling product/service, working company (people who get along together, like their work, get things done), management core team (track record of accomplishments with this company), strategic partners (handshakes, contracts), advisors (special talents), board members (wisdom and perspective, network of connections). Put value on each of those in monetary terms. There will be more here than you (and the Buyer) realize.

= Compare your list to that of “similar” companies, private and public.

= Use valuations of any other private companies that you can get your hands on. Related or  unrelated will work. Use multiples of revenue to set values, ignore profit  valuation methods. Even multiples of public traded stocks in the same general industry will be helpful to you.

= Lock up your emotions. This is about money. Period. No one hurts anyone in business, that’s for shrinks and priests to deal with. Simply be a business professional during the M&A process.

= Expect to get to do at least one round of Give and Take on the sale price. The first attempt will tell you how open the buyer is to yielding ground. "We think we have assets you might not be aware of that are worth more than your initial offer suggested and we'd like to discuss that with you tomorrow." is a good way to open the next round of discussions. No one likes to overlook something of value, so the Buyer will typically listen (eagerly).

=  Competition is your Best Friend: look for an alternative buyer, immediately. The leaks in your search will spur the buyer on, in your favor. You might even find a better priced buyer.

= Measure the Make or Buy alternative for the buyer: how long ,with how many people, would it take the Buyer to duplicate your business? Put a monetary number on that.

= How much more, greater, can the buyer make of your company (than you alone)? Put that Opportunity Value into monetary terms.

= Measure the Cost of Time to Market: How much sales and profit will the buyer lose or gain if it does or does not buy your company?

= Get your Champion Inside the Buyer to get excited about buying your company: s/he will have a special reason to make the purchase (find out that reason, and appeal to it daily, e.g. major promotion, chance to run a business, company hero [others have failed in his/her company], produces a Big Winner for his/her company, etc.).

= Talk to people who have sold and bought other companies, private or public. Listen to their stories and learn.

= A lawyer experienced with M&A can be a super asset to you in this process. Don't use a first-timer.

= Practice your negotiations by talking with advisors and friends, before you make the phone call to the buyer. That is a good process to use to get any reluctant board members on your side.

= Remember this  is a process that requires daily effort and management to push it to a conclusion.

Hope that helps you a bit, Mr. O.

(And by the way, there is a lot more to negotiate after you agree on a number: e.g. Your role or contract, ditto for the other people, etc.

========

BOTTOM LINE: Selling your company is part of a negotiating process. It is intense, emotional and draining. Your basic business will suffer. Get the deal done or ended ASAP. If you prepare, then you will be able to increase the sale price. Know when you will leave the room, what your Deal Buster price is. You will be amazed how many people out there have done this. Contact them and learn. Focus on managing the process daily, be professional, put the emotions in a closet until you are finished, and keep going until it is over. Serial entrepreneurs have sold their companies successfully. So can you. It's part of the winning entrepreneur's unfair advantage.

I wish you The Best on your Adventure!

 

 

 

 

SUPER ANGEL versus VC DIATRIBE: What's it all about?

In the U.S. startup community the month of September 2010 generated a lot of increasingly hot and acerbic verbiage about the wisdom of entrepreneurs taking money from "super angels" versus venture capital firms. TechCrunch lived up to its reputation and generated a lot of the stimulus, including a crash visit into a meeting of angels up to what was reported as colluding on keeping startup pricing low.

After reading and watching I reached the conclusion that "there is nothing new under the sun." That was written about 3000 years ago by the writer of Ecclesiastes in the Bible. The phrase is generally attributed to Solomon, king of Israel during its most glorious days. Yet it fits what is going on today.

Collusion has been and remains the most dangerous activity facing the (very loosely regulated) venture community. So far no great scandle has been taken to legal levels.

Super angels are touted as a new breed of startup investor, one with power capital that generates shock and awe in first time entrepreneurs.

So what do I suggest the founder of a new business do about all this controversy? Here is some of what I wrote in response to an Ace founder who asked that question:

= Generalizing from small samples of rare giants is always dangerous (and very easy to do by someone labeling himself as a startup/angel/VC expert). The giant startup winners used by bloggers are statistically rare. The mainstream startups do not conform to the valuations and circumstances leading to the giant startup successes. The result is that the media, including bloggers, mislead the masses when they use the stars to navigate through the dangers of raising startup capital. Using startup “outliers” to guide your life is like using a rock-star/famous-person to guide your personal life: it is fraught with lack of reality.

 = Seed capital deals in the current market are easier to do, get higher valuations, if a working prototype is finished and a core management team (good for six months) is at work. That is not new and makes common sense. This attracts hoards of entrepreneurs racing to do ten lines of code, demo and try to get gigantic valuations for the seed round. It is remarkably the same as the first wave of software applications written for the Apple/IBM personal computer first years of the 1980s boom. Investors that survived waited for code to be demonstrated and then invested (after personal savings and angels paid for the first code writing).

 = “First to get it right” is the principle guiding VCs and related angels. That is why they are looking eagerly at everything (but investing in few). The lure of the next (name of the usual suspects) great gorilla makes the potential investor vulnerable to lust and thus to error. That the clever entrepreneur can take advantage of (e.g. know what the valuations have been for recent great seed and follow-on rounds).

= If you believe you have the idea for The Next Gorilla, you have to have power on your side to get the best deal. That starts with owning something the investors will lust after (“It will get away from me!”). That power includes having enough cash to survive the time it takes to convert their “Not on this round, thank you” into “Where do I send the check?” Those are basics to serial entrepreneurs, not a new revolution.

= Company valuation stats are easier to get and they aide the entrepreneur marginally more than the investor. But serial entrepreneurs figured out long ago how to find out valuations, deal flow and the other “insider” and “back channel” former secrets. That is one reason for the Tables at the end of High Tech Start Up and why smart entrepreneurs talk to a lot of startup CEOs.

= There are more alternatives todayfor getting funding for a startup -- if yours is in the right phase of the un-avoidable boom-to-bust startup cycle. As each new wave begins, money sources appear out of the bushes, competing (wisely and unwisely) for the next Facebook. Entrepreneurs can take advantage of that eagerness and get alternative sources competing for their deal. Super angels are one of a new breed of such investors.

= The “super angels” are to me a new label put on an old model. The great VC partners of the now-great VC branded firms all began with a small amount of money to be responsible for investing, had real management hands-on related experience and were eager to dive into a startup. They helped the new business move from a maybe to a great. If you look at my book The Power of Unfair Advantage, you’ll see such VCs are in the first two levels of VC firms that I discussed in the final section of the book. Smart entrepreneurs are telling me they want such investors because they receive “unfair share of mind” from experienced business people who can do wonders with their minds when applied to the startup.

= The Fad Wave is ever present. The “new investor stars” exploit it. It is what makes deal flow move to people like the Marc Andreessens. Branding is very powerful to such investors, as they combine good luck (funded a Gorilla), skill and experience. Entrepreneurs with power on their side can create feeding frenzies among such “hot” investors, leading to high valuations for early rounds of funding.

= The American IPO market void does make liquidity a problem for everyone. It works in favor of the gorilla entrepreneur who has the power of an amazing startup going for him. He can demand things such as liquidity that lesser cannot. Again this is an example of how dangerous it is to generalize.

 = Quick Time to Sale is on the lips of all investors in the current startup capital market. Google is buying startups daily, as Cisco did early in its rocket climb in early days. VCs on the boards of directors are driving the purchases. It is part of each new wave. Lesser entrepreneurs often give a sigh of relief when such liquidity events happen (even if it means giving up on the IPO dream).

= Central to the power of the entrepreneur is the entrepreneur. His skills in “telling his story” are remarkably central to getting the money at amazing valuations. Real VCs see the founder as the source of value for the new enterprise. You are a standout in this regard. It is difficult for lesser beings to duplicate.

= New alterations have come upon the startup capital market and will continue. Savvy entrepreneurs will exploit them.

BOTTOM LINE: Super angels are individuals with a lot of money to invest in startups. There are more of them than in the past in some places like Silicon Valley. There are fewer of them in other parts of the world where rich people subsitute for them. When you understand what they are looking for, you can work to build your unfair advantage power before seeking capital from them. VCs are looking for the same thing in what you are offering in your startup. There is little new under the sun.

I wish you The Best on your Adventure!

STARTUPS AVOID DEPENCENCIES: Control of your destiny is vital

Are you thinking of a startup idea that depends on other companies, perhaps large corporation who have to agree?

Must some other business group give you permission before you can be a roaring success? Of course you know you will need "strategic partners," but what danger does that put you in? Can it bring advantages that balance the risks?

That issue ("dependency") is a HUGE issue to startups. It contains bad news and good news.

It can be a deal killer with potential investors.

It can inhibit great people from joining you.

Or it can give you near-monopoly power versus your competitors.

Or it can give you a launching boost that rockets you to amazing success.

If you have this issue in your business plan, you'll need a careful plan to deal with it successfully.

First a real EXAMPLE for you to think about:

Today in Tech Crunch I spotted a great sample of this issue and its impact on a recent startup. In a nutshell, AnyClip had to launch without the mass of content-providers it had hoped to get, corporations with videos agreeing to support the AnyClip movie finding service. Read more and you'll see in detail what is happening right now to this respected startup, AnyClip. For today, here are my observations for you to think about:

• Launch delayed. AnyClip had been climbing the "hot ladder" of success, the bloggers got excited and started spreading the word. But the contracts (lawyers, giant corporations, sluggish responses) were slower in arriving than hoped for.
• Launched with less energy. AnyClip went ahead, finally. They decided to make their move now (probably before the hot buzz cooled off). That is less than the best, the hot air is less so the balloon rises less rapidly, to less height.
• Launched with less "Wow". The lack of abundant content plus missing indexing left reviewers of the launch yawning (instead of raving). The central compelling reason to use AnyClip was mooted. Promises not delivered leads to growing criticism and more skeptics.
• Helps competitors. Now me-too competitors are more eager to leapfrog AnyClip. Or to avoid their business model and try one less dependent on signing up content providers.
• Hope still exists. Now AnyClip will have to more slowly sign up the content it needs and index it. That slower growth is not all bad. The startup is still able to focus on its dream (deliver amazing "finds" in viewable video content). It still has the defacto position of leader of a new space. It still is without a competitor leaping over them.

BOTTOM LINE: It is better for a startup to avoid depending on giant corporations for its success. Independence is golden. Free to do what you want is better than having to wait for others to negotiate legal documents. If you must work a bplan that includes giant corporations, do your best to alter it so that if they do not cooperate for a long time (maybe never), you still have a startup that can start up. Mastering the art of managing "dependency" will contribute to your building an unfair competitive advantage.

I wish you The Best on your Adventure!

WORD OF THE DAY: READ

I received an email from a techie with some good business questions about a startup. His team has built a couple of products beneficial to companies who are excited about them. The questions in the email was in essence, "What do we do with our products? Can we make a business out of what we have? What do venture capitalists want to see? What should we do next?"

This is a common situation in the world of startups. Technologists see a problem to be solved, build one and sell it, and then another one and get excited because the first two customers give rave reviews of the product. The first flames have begun, now what?

Here is my response: 

Your good start tells me that it is time to test the water: I recommend you and your team draft a quality business plan and in doing so, it will tell you (1) what the VCs want to see, (2) how large a task it will be to make a business out of your first products, and (3) what you are missing to get the money.

I wrote my second book The Power of Unfair Advantage for people in your shoes. Parts I and II will help you a great deal.  Unfair Avantage is what VCs and top business people are looking for in startups.

I wish you the best.

There are a lot of good things you can read out there besides my works. They are about what investors want to see in a startup. Reading is private, can be done when convenient to your schedule, and generates a lot of basic advice, quickly. And you have a reference to come back to.

If your business has started without a bplan, you will find few investors willing to take time to help you address the key issues that you must address before they will give you money. At least a draft of a presentation of a complete business plan is strongly advised. Reading them (I have a bplan for free on my web site) will give you a more realistic view of what you have to do to get your money.

BOTTOM LINE: If you wonder what to do to make a business out of a prototype after a couple of successful sales, consider reading about what you must do to prepare a quality business plan. As you do, you will quickly answer a lot of your questions about what to do next. That realism is the door to open that will help you be wise with your decisions. I wish you the best.

WHEN TO INCORPORATE/REGISTER YOUR COMPANY? Later than you think is best

Today I got an email from Deepak, asking about how to register (British for "incorporate") a company, what would be the cost and when should he issue non-disclosure agreements and so on.

My basic answer is "Wait until the last minute before you spend the time and money to incorporate."

Here are some reasons:

• You can do a bplan without being incorporated. The bplan may tell you that your idea is weak and should be abandoned.
  
  
• You should not be using NDAs before you are on solid ground with your idea and are ready to incorporate. Keep as much as possible secret until you are ready to go get the money.
  
  
• You can incorporate after you get your money. You do not need to be incorporating to start raising it.
  
  
• If you decide to start work on a small scale before getting serious, do a prototype or experiment a bit, then you are likely to find you still do not need to incorporate. You can still deduct business expenses on your tax return in many countries, including the U.S. without being incorporated.

How much does it cost to incorporate? Ask a couple of different lawyers. That meeting will be at no charge. A good lawyer can save you a lot of money and headaches.

BOTTOM LINE: Wait before running out and incorporating. It is often too early and frequently not needed at that time. Find a couple of lawyers to work with, now and in the future. That will save you time and money and trouble.

START WITH AN EXPERIENCED LAWYER: Pick wisely to save agony and money

Today I will meet with A.C.'s lawyer to set up the incorporation details and begin construction of the stock option program. Then we'll prepare a negotiating plan for the upcoming term sheet. This is part of the birthing of a new enterprise. At such moments a great lawyer is as valuable as a doctor who helps deliver the baby. I learned the hard way in the past that you get what you pay for with lawyers. The amazing thing I found was that the cash for the best is less than others less able. The mistakes and errors are what are the most expensive cost of picking a poor lawyer.

Your lawyer must be experienced with venture capital closings. That is the process of getting to a term sheet and then to cash in the bank. Until it is in the bank, you have not closed on your financing. A lot can go wrong along the way. Yesterday I was told by a VC that Limelight had been raising a lot of money in a fresh round of financing. Several VCs had joined Goldman Sachs the Wall Street firm to do the deal. One day before the closing, Limelight got sued by Akamai. The VCs dropped out. Goldman decided to do the deal. It could have just stopped and the deal would have been dead. Lawyers know how to help you with bad news and good. They are able and willing to go the extra mile with you. Pick them wisely.

There are also a lot of tricks in pricing a deal. A great lawyer knows what to do and what not to do. He will keep you legal and ahead of the power curve, on the best side of the deal. And he will keep the deal rolling to conclusion.

There are also intellectual property issues and patents and trademarks and a lot more to work on with a lawyer. Many startups are incorporating overseas because businesses are immediately global. You need a skilled lawyer to do that.

BOTTOM LINE: Pick your legal counsel wisely. Search for a person familiar with VCs and their special ways. Look for wisdom and street smarts. Such a lawyer will be a real counselor, a business adviser and become your friend. Take you time and make a good choice. It's worth the effort.

PICK A GREAT LAWYER: They are especially good at keeping your competitive advantage unfair

A great lawyer just called me, Mario Rosati of Wilson Sonsini Goodrich & Rosati. He is a rubber-meets-the-road counselor to startup CEOs and a veteran of countless venture capital deals. He helps green CEOs stay out of trouble and also gives practical advice about business decisions. That is the kind of legal beagle you want on your side.

Another terrific example is Mike Phillips of Morrison & Foerster the firm that is spread out over the world. Mike has been both a legal counsel for a world famous startup that went IPO as well as practicing lawyer advising startups that became giants. He is very quick about people's character, abilities and limitations. And he is very experienced with doing deals across borders for venture capital and legal contracts.

Those are examples of legal advisors that can keep your company focused on building its unfair competitive advantage, instead of wasting time and money fighting legal battles.

BOTTOM LINE: Pick your legal advisor from the best. With lawyers, you need excellence. Below excellent is very expensive.

LAWYERS ARE ALWAYS EXPENSIVE: Manage their work or pay a lot more

"The bill is about double what I thought we'd see!" exclaimed the CEO. "Now I have to work with a board of directors that is not going to be happy (I told them all was well and legal costs were going to come close to my estimate for this project). And I have a great attorney at a first class law firm that has to eat a lot of the billing. It's going to be embarrasing for both of us. What should I do about that?" As I listened to the lament, I reflected that I had heard this all too often in the past. It always comes out the same: the legal bills end up much higher than what seems "reasonable" and yet the work done is vital to keeping a startup out of trouble. A great lawyer is worth his or her weight in gold. But sometimes there is a lot more weight than we can bear.

My response to the CEO was simple: "This is normal and both you and your lawyer are going to have to accept some significant pain in this case." The early estimates of the project (an acquisition) were far below the actual hours spent. Furthermore, along the way, the CEO did not put pressure on the senior partner to work harder to get the average billing hour down (by using more junior lawyers wherever reasonable). These projects can be managed. It is up to CEOs to learn how to keep the billing from breaking the bank.

BOTTOM LINE: Proactively manage large legal projects. Don't let them manage you. Cost control for legal bills can be accomplished. Put in the time and effort. It is worth it.