Every company I’ve started or been a part of has had acquisition interest at some point. Some of those acquisitions went through, some did not. Of those that did not, the potential acquirer killed it about half the time.
March 8, 2016
So You Want To Sell Your Startup…
How To Start Assessing Company Value
In each situation, I learned something new about valuation and the transaction, and I can now tell you, empirically, that there is no standard for either.
But I’ve been able to distill a few ground rules.
Acquisition comes down to one basic but extremely difficult question: What the hell is this thing worth?
Sure, you’re always engaging in speculation or back-of-the-napkin math. If you’ve made a run at seeking outside investment, you’ve probably done the research and come up with a number—one that you can write on a piece of paper, then fold and slide across a rich mahogany desk.
But chances are that number, no matter how much discovery was put into it, is about as relevant at throwing a dart at a dartboard and multiplying by a million.
Or a billion, as long as we’re dreaming.
Pricing and value, whether it be for a product, a service, or an entire company, is one of the most difficult determinations an entrepreneur has to make. Too many times, it’s usually glossed over into a figure that “sounds fair.”
But to me, the Rules of Poker apply. You have to make sure that you don’t scare away the other player while at the same time maximizing the value of your hand. Oh, and keep in mind you don’t have enough chips to bluff. No matter what figure you throw out there, you’re all in. This is not an easy trifecta to pull off, but if you don’t check all three boxes you’ll eventually lose.
Now, there are all sorts of conventional means of coming to a valuation that would lead one down the path of spreadsheets and charts with upper-right hockey stick trends that would make anybody’s head spin.
Except finance people, they live for this kind of thing.
But sometimes the most obvious answer is still the right answer—the company is worth exactly what someone is willing to pay for it. The question then becomes how do you suss that out and get the deal you want, because you better believe that acquirers will do everything in their power to try to get the deal they want.
Here’s how you get started:
Step 1: Get an attorney. Get an attorney. Get an attorney. I’ve done the acquisition process exactly once without an attorney. Guess how that one turned out.
Step 2: Come up with quantifiable metrics. This exercise is a lot easier when you have revenue coming in. It gets a little trickier when you don’t, because it’s hard to value potential.
Whether you have revenue or not, you need theorem and proof for what that potential will return in a reasonable amount of time. This is especially true if you’re dealing in new technology or a new industry where there is no proven pricing model or even a proven market.
Step 3: Be prepared to negotiate and be able to argue. The numbers that you propose for the potential side of your equation don’t have to be backed up by hard example or recent history, but you should have enough solid evidence to be able to make your case and fight off every counter argument that the acquirer is going to come at you with. There will be many. Try to anticipate them.
Step 4: Discuss everything and get it in writing. There is no such thing as negotiation after the papers are signed, but a lot of entrepreneurs go into the acquisition thinking they’ll be in a better position to address some of their concerns once they’re working shoulder to shoulder with the acquirer. In fact, a lot of people go into a lot of relationships this way. Again, how do those work out?
Step 5: Detach yourself emotionally. This thing you built, that you created, this is no longer your baby. In this case, your love is worth nothing. This is now a thing with value to be traded for something of equal-but-more-liquid value.
Step 6: Be prepared to leave some on the table. I don’t care if you’re into baseball or even into sports, I’m going to tell you the story of Ian Desmond. Two years ago, his former team, the Washington Nationals, offered Desmond a 7-year, $107 million contract. Desmond turned it down, instead opting to hold out for two years until he became a free agent. In that two years, both his production and the system worked against him. A week ago, his options depleted, he signed a one-year-deal for $8 million.
Yeah, $8 million is a lot of money. But he lost out on over $80 million in guaranteed money. How much more was he holding out for when he declined that offer?
Step 7: Carefully consider any acqui-hire. While there’s not anything inherently wrong with an acqui-hire, a situation in which one company buys another company strictly for their talent, you have to ultimately decide if you want to be an employee or an entrepreneur. If you’re happy with the former, congratulations, you win. If the latter is going to gnaw at you, you should probably reconsider.
With any acquisition, you have to decide if your business is something you want to keep pursuing or if you’re ready to give up and move on to that next great idea. It’s a crucial decision, and it’s even more critical if you have employees that may wind up in limbo based on the outcome of your decision.
But the decision still needs to be made for YOU. I can’t emphasize that enough. If you make the decision for the sake of your employees, you’ll probably end up putting them back in limbo anyway. You’ll still be their leader, and if your passion is gone one way or the other, you’ve kind of doomed them.
And that brings up my final decision step. What is the acquirer going to do with the company?
This is just as important, if not more important, than the deal itself. You’ll want to know what the future is going to hold, because even if your name is no longer attached to your company on paper, your reputation will remain married to it, especially if you already have customers.
To repeat, an acquisition is ultimately about trading value for value. Don’t forget that relationships and reputation are worth a lot too.