I recently caught up with an old friend of mine who, along with his co-founding partners, had just sold his technology business to a public company for $25-million, with the potential for an additional $30-million in earn-out over the next three years based on agreed milestones.
I asked him about the most surprising part of the selling process, and he said it was the sheer "brinksmanship" involved. I thought it was an interesting description, so I asked my friend — let's call him Tim — to elaborate.
Tim was going through the process of selling a company for the first time, and he was being acquired by a large, publicly traded company that counts acquisitions as part of its business strategy. It has a division dedicated to corporate development with the sole mandate of buying companies.
While Tim and his partners were somewhat emotional about selling their baby, their corporate-development counterparts were unemotional mercenaries. Tim shared a first-hand account of what it's like to be an entrepreneur in a boardroom selling his life's work to a public company.
Q: How did you get an attractive offer to buy your business in such a tough economy?
A: We came up with a rational future earnings model and showed the buyer what these earnings could do for their stock-price multiple. We also gave them a way for analysts to categorize their business as a growth stock, whereas today, analysts view them as a utility. Basically it came down to a 1 + 1 = 3 argument.
Q: You used the word brinksmanship in describing the selling of your company. Can you give me an example of what you mean?
A: After we spent a month negotiating and signing an initial letter of intent (LOI), the buyer came back and started to renegotiate the purchase terms, asking for less up front and more on the back end. The acquiring company had a board member who wanted to flex his muscles to show the team he could add value. This one board member had not been involved at all in the negotiation and wanted to come in late in the game and show the team he could play hardball.
We had made it very clear during the LOI process that any variation from the basic LOI terms in the final agreement was going to be a deal killer, so when they asked for a reduction in the up-front amount, thinking we would be forced into negotiation, we called their bluff and basically repeated that if the terms varied at all from the LOI, the deal was off — period. This forced them to go back to the board, and within 24 hours we were back on track with the LOI terms and up-front payment.
Playing hardball with $25-million at stake requires a strong stomach. On Thursday I'll ask Tim to explain what gave him the courage to call the big company's bluff.
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable – sellable – company. Follow him on Twitter @JohnWarrillow.