In March 2020, just before COVID-19 hit Canada, I participated as a panelist at Growth & Exit Strategies conference in Toronto. The conference was organized by Corum, an organization that specializes in mergers and acquisitions (M&A). At the Sellers’ Panel, I and three other panelists share their learnings after selling their companies.
Among many good advice, I would like to share four that I learned to be invaluable.
Keep your company’s “value” squeaky clean
In the eyes of potential buyers, your company probably has a combination of values. For example:
- Intellectual property
- Processes (that differentiate your company from others)
- Market position or access to a certain market
Whatever value your company presents, it needs to be clean and ready to be handed over to new owners with no strings attached.
In my case, my company’s biggest value was in its intellectual property and the associated product. However, the intellectual property did not fully belong to the company. The “foundation intellectual property” was licensed from an academic organization, while the “follow-on intellectual property” was developed and owned by my company. This situation resulted in a challenge to the buyer, because they did not want to deal with the academic organization and own the complete intellectual property after the transaction. Fortunately, my company and the academic organization were fully aligned on the potential sale and the value it brings to both parties. As a result, the transaction was (relatively) easily structured so that the buyer would own the full intellectual property once the acquisition was closed.
The lesson learned is your operational structure may not fit that of the buyer. A licensing deal that worked fine for you may not be what the buyer wants, which results in either reduction in valuation or, in the worst case, a lost deal. Therefore, even if you are not considering selling your company, it is best practice to keep your company’s value fully owned and clearly documented so that the buyer can take full advantage of their investment. This, in turn, increases the valuation of your company.
Be prepared to fight for the best valuation you can get
This goes without saying and every seller will do their best to get the highest valuation for their company. The nuance here is to put yourself in the shoes of the potential buyer and assess the value of your company from their perspective. For example, what can they do with what they will buy from you? Does 1+1 add up to more than 2? What is the combined value they will achieve post-acquisition?
In my case, the value to the buyer was two-fold:
- Competitive situation – the buyer’s competitor was moving into the field that we addressed and our buyer needed to offer a similar solution to its customers.
- Growth potential – Our products, once integrated with those of the buyer, had a potential to help grow the buyer’s product portfolio.
Putting our ego and emotions aside and thinking from the buyer’s perspective arguably helped us negotiate effectively with the buyer and agree on a valuation both parties thought fair.
Keep your company squeaky clean
One thing I learned during my fund-raising activities, before the sale of the company, was that I need to be able to present the company’s financial and operational health in the most straightforward way. Investors and buyers are understandably looking for issues and risks during their due diligence process. If your balance sheet, cap table, intellectual property rights, human resources, and other financial/operational details are complex and convoluted, they will raise red flags to investors and buyers alike.
This may not be the most exciting thing for an owner and/or CEO to focus their attention on. However, a well-structured and well-maintained company has two benefits:
- It is easy to run – the effort one puts up-front pays off later.
- It is easy to present your company’s status to potential investors and buyers.
My advice to all founders and CEOs of small and mid-sized private companies is:
Be prepared as if you will sell tomorrow,
Run your company as if you will never sell it!
I welcome your comments on my blog. Please share this posting if you find it helpful. If you have any questions, comments or thoughts, I would love to hear from you.