June, 2002
There may indeed be beauty in truth-but there's also
something elegant about how a few self-deceptions seem
to recur whenever people approach the sale of their
technology businesses. Often exacerbated by wishful
thinking, greed or inexperience, these mistakes almost
always stem from the principal's inability to view the
selling process objectively.
1. "I'm better off going with the first offer.
If I shop the deal, word will get out."
One of the realities of virtually any sale process is
that word will almost always get out, one way or another.
That's why sophisticated sellers tell their employees
at the outset and give key people incentives to stay.
Generally, the increased value from competing offers
will greatly outweigh the cost of the retention incentives.
2. "I don't need an investment banker."
This is literally true, I suppose. You also don't need
a car to go from Downers Grove to Uptown in Chicago,
but try it with public transportation sometime. Time
after time I see companies stumble as they try to sell
themselves, only to create tremendous value when they
finally hire an investment banker.
3. "There's no other buyer that is good for my
company."
While there can be compelling synergies with a particular
party, this statement is usually made about buyers who
say they won't tinker with the existing business. This
plays well to principals who feel duty-bound to employees
to keep the business intact. Unfortunately, and even
given the best intentions, what buyers say they will
do and what ultimately happens can be two very different
things.
4. "My company is very clean: I don't need to
worry about due diligence."
This one always gives me a secret chuckle. Bankers have
a similar line: "These projections are conservative."
The truth is, in the vast majority of cases due diligence
will uncover some problems. I recommend that people
do their own due diligence investigation before the
sale process. First-time sellers almost always ignore
this advice; second-time sellers almost always follow
it.
5. "An earn-out is the best way to bridge the
gap between the seller and buyer."
An earn-out is a mechanism by which an additional purchase
price is payable at a later date if the company performs
to expectations-usually a revenue or earnings target.
They sound nice, but it's rare for a company to stay
the same after being purchased. With some incredibly
lucrative exceptions, earn-outs almost never pay out.
6. "There's no investment money out there anymore;
time to sell."
A lot of technology companies have learned a hard lesson:
Make money. If you can't, buyers will be as scarce as
investors.
7. "The contract process is just for lawyers."
Every word in an acquisition agreement has economic
impact. If it doesn't, it shouldn't be there. Read and
understand it better than the buyer and I guarantee
that you will not regret it.
8. "Once I sell, my worries are over."
Sorry, but no. Most acquisition agreements carry continuing
exposure to the seller to back up the representations
and warranties made to the buyer. This exposure can
last anywhere from six months to many years, depending
on how much leverage you have and how good your lawyer
is at negotiating. If you are not careful during the
contracting process, you will not make it to the end
of the period, no matter how long or short it ends up
being.
9. "I'm getting an employment contract, they must
want me."
Well, they certainly want a non-compete from you, and
they may even want you for a short while. However, most
founders don't last very long after the deal closes.
Be prepared to update your resume.
10. "No one will notice this problem."
Not only will they notice that problem but it will cost
you money if you don't deal with it early in the process.
If you are unfamiliar with the sale process, surround
yourself with experts who have an interest in your success
and listen to what they have to say. The surest way
to protect yourself is by telling the truth-to yourself,
first and foremost.
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