Most financial acquirers will arrive at an offer for your business by calculating the profit they expect you to make and deciding what they are willing to pay today, for your profit stream in the future. Because you are competing with lots of other places that the acquirer could invest their money, multiples are usually in the low to mid-single digits of your pre-tax profit.
A strategic acquisition is an entirely different animal.
A strategic acquirer will value your company based on how much more of their product they can sell, which is exactly what Business Objects (now SAP) did when they bought Nick Kellet’s business, Next Action Technologies, for more than eight times revenue.
Yvonne Tocquigny built her Austin-based advertising agency up over 35 years working with clients like Jeep, Dell, Hitachi, USAA and Caterpillar. Then in 2015, she got a call from New York wondering if she would consider selling. The problem was that her agency had become part of who she was. She had become something of a local celebrity and an inspiration for young female entrepreneurs in Austin. In selling, Tocquigny feared she would give up part of who she had become.
Trevor McKendrick had created the best-selling Spanish-language Bible app when he was approached about an acquisition offer. Salem’s original offer was 3.5x revenue but Trevor got them up to 5x with a combination of chutzpah and a knack for reading the fine print.
Stephan Spencer went to sell his consulting business in the late 1990s but buyers all wanted him to sign up for a long, painful, and risky earnout. Keen for a clean exit, Spencer took the business off the market and set out to make it less dependent on him personally. In the episode, he details the three unique strategies he pursued for withdrawing from the day-to-day operations of his business. By 2010, Spencer had the business running so independently that at one point he was able to take a six-month sabbatical. That’s when he knew he could sell without such a lengthy earnout. Ultimately, Spencer sold his business to Covario in 2010 for a combination of cash, stock and a six-month earnout—an earnout so short it's almost unheard of for a marketing services business sale.
Ian Schoen built Two Tree International, up to $4 million in revenue before he sold it in a multimillion dollar exit in 2015. Despite only working in the company for a handful of hours each week, Schoen was able to attract a number of buyers because he had created an operating manual employees could follow.
I loved watching David Price pitch for the Toronto Blue Jays in last year’s pennant race, so I was sad to see him sign a seven year, $217 million contract with The Boston Red Sox a few weeks back.
Of course, it wasn’t Price himself sitting across the negotiating table from the Red Sox brass. He was represented by his agent, Bo McKinnis. Price—like just about every high stakes professional athlete—has an agent in his corner because there are just too many things that can go wrong, too many egos with the potential to be bruised, and too many zeroes at stake to negotiate on your own behalf.
The same is true when you sell your business. When there are more zeroes involved than selling a home, you need someone representing your best interests. That’s a lesson Alexis Martin Neely found out the hard way when she tried to sell her company on her own. What started out as a promising relationship with a buyer ended up as a DIY disaster.
A shotgun deal is the most brutal form of capitalism. When you can’t stand your partner anymore, you offer them a price for their shares. They have two choices: accept your offer or buy you out for the same amount. Triggering a shotgun deal can have explosive results, as Kim Ades found when she offered to buy out her husband’s share of Upward Motion.
Usually a nine-figure exit takes more than a year to complete but when Blackberry found itself behind schedule on the launch of its tablet, RIM founder Mike Lazaridis saw Jakobsson’s business as a saviour. This led Blackberry to a $150 million acquisition in less than six weeks—that has to be the fastest nine-figure exit ever.
When you get an acquisition offer your eye will immediately go to the offer price. That’s only natural. But — there could be two other negotiating points that could have just as large an impact on your windfall of selling your business.
Jack Groot discovered all three when he went to sell JP’s Coffee Shop — a business that USA TODAY® voted one of the top 10 coffee houses in America.
When negotiating to sell your company, the single fastest way to spike your earnings is to introduce a competing offer. But you don’t always have the luxury of multiple buyers. It may be better to simply fake it, which is exactly what Trent Dyrsmid did to boost his take for the sale of his company in 2008.
In this episode of Built to Sell Radio John Warrillow interviews New York Times best selling author and serial entrepreneur, Kevin Kruse. As Kruse went to exit Axiom, the ultimate buyer wanted to avoid competing with Kruse down the road…and that’s where the negotiation hit a giant snag.
When you start a business from nothing, it can be hard to place a value on your “sweat equity”. This is where Phil Carson found himself when he decided to get out of the diabetes testing supply company he and his partner had built from the ground up. He estimated his shares might be worth $250,000 but, through a fortunate sequence of events and some shrewd moves on his part, he was able to capture $1.2 million for his stake.
In this week’s episode of Built to Sell Radio, John Warrillow interviews Beate Chelette, the founder of a Beate Works, a creative company that she sold to Bill Gates for a significant premium in 2006.
Would you rather have one million dollars in the bank today or a chance to have ten million a decade from now? It’s a philosophical question that comes down to the time value of money and your tolerance for risk.
After starting and exiting BabyCenter.com, Mark Selcow built Merced Systems into a profitable business after year one. Ten years later he sold Merced for $192 million, equating to over 3 times top line revenue.
In this episode of Built to Sell Radio you’re going to hear from Erik Huberman, who started Swag-of-the-month, a T-shirt business he quickly scaled from start-up to sale in 18 months.
Huberman considers the exit a success, but during negotiations there was one question the acquirer asked that Huberman wishes he had never answered
Rick Day built Daycom Systems into a $26 million dollar business over a 17-year run. Daycom sold phone systems but the company had a problem: it had become too reliant on one supplier.
Daycom sold phone systems but the company had a problem: it had become too reliant on one supplier in a business where the technology was changing fast. Motivated by the fear of becoming obsolete, Day decided to assemble an advisory board to help him prepare the business to sell. The board helped him to see his business through the eyes of a potential buyer and exposed a number of things that Day needed to fix.
Mark Patey started Prodigy Engineering in 2010 to help companies leverage hybrid engine technology. Four short years later, Patey accepted a multi-million dollar offer to buy the company.
Prodigy Engineering is the latest in Patey’s pattern of starting businesses for the purposes of scaling them and then quickly flipping them. Patey has flipped six companies, and his approach could be considered the counterbalance to the prevailing view that businesses should be built to last a lifetime.
When you get to know Patey, his compacted timelines start to make sense. He – like so many successful entrepreneurs – suffers from ADHD, a blessing and at times a curse. Patey credits his ADHD with much of his success at selling businesses.
Andrew Yang had built Manhattan GMAT into an $11 million business when Kaplan Test Prep, an 800-pound gorilla in the education business, threatened legal action against his company.
Rather than react defensively, Yang sought to build a relationship with Kaplan executives, who would eventually go on to buy Manhattan GMAT for more than 8 times EBITDA.
To see how Yang turned a potential crisis into a clean offer of more than 8 times EBITDA.
Derek Sivers sold CD Baby for $22 million dollars and decided to do something interesting with the money.
As an independent musician, Derek Sivers was blocked from selling his music through mainstream distribution channels, so he decided to start a company that would give his band, and other artists like him, a way to sell their music online.
The business grew as Sivers entered into distribution deals with iTunes and Amazon.
Ten years later, Sivers sold CD Baby for a cool $22 million dollars – and you’ll never believe what he did with the money.
Small service-based businesses are typically not worth very much, but Walter Bergeron made one simple change to his business model that garnered a $10 M acquisition offer.
Bergeron started a small company servicing circuit boards for large food processing plants. It was a “break/fix” business with lumpy demand and cash flow.
Struggling to grow, Bergeron starting offering a membership model where instead of calling when they had a machine to repair, subscribers paid a monthly fee so they could have their circuit boards serviced at any time.
The switch to a membership model transformed the business and Bergeron quickly grew the company to $7 million in annual sales, at which point he was offered $10 million to sell it.
The first time David Phelps sold his dental practice, he ended up in a legal battle that cost him more than $100,000. Phelps eventually got his practice back and was determined to sell it the right way the second time around.
David Phelps started his dental practice in 1986 and built it for 20 years before his daughter was diagnosed with Leukemia. Fighting for his child’s life, Phelps decided to sell his practice in a hurry.
He agreed to provide financing to the new owner to buy the practice, which would end up being a decision he would come to regret.
Bobby Martin had built First Research up to $6.5 million dollars in revenue when he sold the business to a Fortune 500 company for 26 million dollars. But despite getting four times revenue for his business, Martin ended up feeling empty after the sale.
In this week’s episode of Built to Sell Radio, I interview Bobby Martin. Bobby built his business from the ground up and had a great exit. He sold his business to a Fortune 500 company for $26 million dollars – four times his top line revenue at the time.
Martin’s exit was a financial success but life after the sale took a big turn for the worse.
John Ratliff started Appletree Answers in a spare bedroom of his house in 1995 and by 2012 had grown it to 650 employees and 24 locations when he decided it was time to sell.
John Ratliff was able to scale Appletree Answers by buying small competitors for around 3 times EBITDA using borrowed money. He quickly went from 1 to 650 employees in less than twenty years while his EBITDA went from nothing to more than $5 million a year. Then one day, he got a call from a strategic acquirer that would change his life forever.
Finding a buyer for Killer Shade was relatively easy. Closing the deal -- and getting paid -- was a whole lot harder.
Mike Campion had built Phoenix-based Killer Shade up to more than $3 million in sales and $700,000 in profits when he decided he wanted out. Killer Shade was in the business of constructing shades and awnings for playgrounds, patios and parking garages. They did large, profitable jobs but city hall paid slowly and Campion was always stressed about cash.
Campion was able to find a buyer and agree to a price, but that’s when the problems started.