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What I learned selling my company

harryglaser.com

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Re: What I learned selling my company

#51

Post by paulddraper »

cj wrote: post #9

> I was advised that 50% of signed LOIs actually close. I bet it’s less. You will see the LOI and dream of trading stress for riches. Remember: Less than 50% chance of closing. 100% Which is why I hate that exclusivity is industry standard. It feels exploitative that acquirers can demand exclusivity in a deal when the chances of it closing are less than 80%. Imagine selling a house and taking it off the market becaus…

> There’s an extreme power imbalance in favor of acquirers.

1. Sellers can tank the deal as well for any reason, e.g. if they feel the deal is not going as fast as they like (and I recommend agreeing on a general timeline).

2. Sellers generally don't get very many offers, so the opportunity cost is often not as high as you might suppose.

3. Sellers can negotiate more friendly terms (e.g. closing sooner), but usually choose to concentrate 100% of their leverage into the price.

4. Due diligence is expensive for both parties, but the seller can easily re-use much of their side. Non-exclusivity would mean the seller could easily entertain many costly offers simultaneously.

No buyer in their right mind would agree to non-exclusivity, though they can agree to a reasonable window for that exclusivity.

Re: What I learned selling my company

#52

Post by paulddraper »

cj wrote: post #36
tptacek wrote: post #28

Earlier quoted context omitted.

These are definitionally the most sophisticated buyers and sellers in the entire economy. Organic market norms dictate what the industry standard is; it doesn't make much sense to think about protections. If you're selling, and you want some kind of protection, structure the dealmaking or negotiate the deal to get what you want.

> it doesn't make much sense to think about protections Why? If I’m going to put my business on hold for 3 months to entertain your offer to buy my company, why would it not make sense to make sure the buyer is serious enough to offer something they shouldn’t need to ever pay out if they are serious about their offer? > structure the dealmaking or negotiate the deal to get what you want. You usually have lawyers doin…

tptacek was referring to mandatory legal protections.

Typically, those are only created for unsophisticated parties who don't know what to negotiate for.

---

> If I’m going to put my business on hold for 3 months

I've had a failed LOI before (as a seller). Very rarely should an LOI ever fail after 3 months of exclusivity.

The LOI is "hey we'd like to dig deep into this, but we want to be sure we aren't wasting our time." Competent parties shouldn't take much more than a month to figure out whether it works or not. (Funding logistics, or SEC approvals, etc can stretch that out.)

Re: What I learned selling my company

#53

Post by tptacek »

ramraj07 wrote: post #47
jahewson wrote: post #45

Earlier quoted context omitted.

Don’t sell your company for less than your investors have agreed it’s worth.

I don’t understand how it’s a hard floor though. Is there a contractual limit when you get a funding round?

Yes, and board seats.

Re: What I learned selling my company

#54

Post by sokoloff »

zik wrote: post #25
aidos wrote: post #20

Earlier quoted context omitted.

Not to diminish your point, but you’ve described the UK housing market where that’s exactly how it works.

Coming from Australia the way London house sales work seems like such a complete disaster. It seems like you can make your buy contingent on selling your old house, which creates chains of buys and sells which fail the instant anyone pulls out. I can't imagine how anyone can operate in that environment.

You can make your offer contingent on selling your old house (or on an inspection, or anything else you want). Sellers are also free to not accept such offers. Both of my house purchases were from submitting a no financing contingency offer with significant earnest money, and I think that helped me win both bids.

Re: What I learned selling my company

#55

Post by paulddraper »

gumby wrote: post #6

> M&A is one of two ways a pot of gold happens. I don't know what the second one he has in mind is; the some of the ones I know are: 1 - operate a profitable business that throws off a ton of cash (these can be huge, like Koch, Cargill, Aldi, and can make long term employees extremely, and privately, rich). 2 - sell part of your company to the public (IPO) 3 - sell the whole company (M&A) 4 - spin out or sell off a d…

#1 is not a pot of gold, rather a stream of gold.

The authors' two options are #2 or #3 (or #4 which is a smaller #3).

I would classify a true third option as private fundraising with secondary sales.

Re: What I learned selling my company

#56

Post by sokoloff »

jahewson wrote: post #43
cj wrote: post #27

Earlier quoted context omitted.

Sounds like the US and UK housing markets, as well as startup M&A, suffer from similar problems. In a free market, you should be able to market what you’re selling until the moment it’s officially sold.

That’s not fair though because it takes a few weeks for a broker to close on a mortgage whereas a cash buyer can pay immediately.

What part of that is not fair? If someone else has more ready access to funds, and a seller wishes to prioritize highly for that, they should be able to. It would seem to me to be unfair to a seller to say "you must wait an extra N weeks on all sales because some buyers will need that long to get funds together".

Re: What I learned selling my company

#58

Post by paulddraper »

mcmcmc wrote: post #29
gumby wrote: post #14

Earlier quoted context omitted.

Running a profitable business with happy customers is parasitical? I thought that was for PE and hedge fund clowns.

The concept of profit itself means you are beating the market by taking advantage of someone else or extracting value through arbitrage. In a perfectly competitive market with zero barriers to entry, profit margins will converge on zero as new entrants capture market share or competitors leave overcrowded markets. Edit: this is classical economic philosophy, not my personal opinion https://en.m.wikipedia.org/wiki/Pro…

"On a long enough timeline, survival rate drops to 0%."

Re: What I learned selling my company

#59

Post by paulddraper »

hackitup7 wrote: post #38
thewizardofaus wrote: post #34

"Once you get an offer, try to generate competing offers from your key relationships" I've always seen the statement of getting competing offers but how does it actually work in reality? Is it as simple as contacting the key decision maker from competitor and saying... "I've got an offer X, what can you do?"

Sometimes, although working with focused M&A bankers is the typical strategy for large transactions

Right. This is the entire job of M&A bankers.

Re: What I learned selling my company

#60

Post by paulddraper »

ramraj07 wrote: post #31

> Your post-money valuation is a hard floor on your sale price > Punctuated by fielding calls from confused angel investors. Can someone ELIE - explain it like I’m an engineer?

> Your post-money valuation is a hard floor on your sale price

This doesn't have to a hard floor but:

1. Most fundraising is done on a 1x liquidation preference. (Investors get paid back first at 1x their investment.) So selling less than your previous valuation means additional dilution for common shareholders.

2. Investors will likely be unhappy and could even block the deal if it is less than they thought it was going to be worth.

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