You've met with potential acquirers, received an LOI, and have communicated it to your board members. Now comes your chance to negotiate and maximize the value of the deal. So, what are the most important elements here? How do you make sure you are getting the best deal you possibly can, without being too greedy and turning away great buyers?
The price tag may have value for a couple of reasons—like crossing the mental barrier (for some of your investors or acquirers) and perhaps establishing your credibility and reputation for launching future ventures. Having sold a company for $1 billion or more certainly carries some weight. Many significant acquirers won't do small deals. They are more likely to buy roll-ups with higher price tags. A big price tag can make investors and cofounders feel special and accomplished.
Although the top line price tag shouldn't be completely dismissed, the terms are far more important because they may dictate these outcomes:
Be keenly aware that giving up a lower top line price may actually be more beneficial when it comes to the net proceeds and future (thanks to the terms) and that a higher price tag may not always yield a better outcome.
The terms (and, more specifically, what the outcomes will mean for you and all the others involved) are far more important than the price or valuation.
There are two parts to communicating outcomes:
Your board, shareholders, and cofounders need to know what different potential offers really mean to them. A $1 billion offer may sound great, but it could still net, for some of those involved, zero dollars—or they may have to make further long-term commitments in order to get paid anything.
Is this a last chance deal for some of your investors just to get their capital back? Or can they expect the 10× returns they were hoping for?
Of course, you hope you all are on the same page as to what is really best for the company going forward. After all, that is the real mission and obligation.
When it comes to communicating outcomes with interested buyers, you should be clear about the necessary outcomes that will make or break a deal:
Obviously, there are expectations for these asks or musts, too.
Some companies will find themselves in a crisis situation, in which selling is the most attractive option. If it is a matter of selling, going bankrupt, or folding the company, then you have to take what you can get. You can and should still try to negotiate the best deals, though you may not have the ability to demand much.
In other cases, your startup may have hit a ceiling or maybe you've just lost interest. It may be most efficient to grow your venture by merging or putting it in the hands of a much larger corporation. Perhaps, you just want to be set free to explore another venture that is consuming your thoughts and interest. In these situations, price may be a distant second or third to the terms and speed of exiting.
Deadlines can be hugely important when it comes to M&A deals.
You should have deadlines on offers, be wrapping up negotiations and inking a purchase agreement, and closing the deal.
Drawn-out negotiations can be a downward spiral. Even if the market improves and your company performance increases and the tangible value of the company goes up, you are probably going to find it hard to renegotiate a much higher price mid-process. That means trying to find a way to back out without legal liability and starting all over again or leaving a lot of money on the table.
More likely, you could face a declining market, business disruptions, and running low on cash—all of which make it likely your acquirer will want to renegotiate a much lower price to account for any loss in value and increased risk.
If you are close to alignment in negotiations on price, don't let it get drawn out too long. If you are making counter offers, put a deadline on it. Make them sign or move on.
The same goes for closing the deal. Some M&A deals may close in just a few weeks. Most take months. Some can even take a year or more to get to closing and funding. Final payments from earnouts and other terms may not come for years after the close.
The further out the closing is, the more risk. The more time that goes by, the higher the risk that the buyer will back out of the deal. That may be due to a change in management, strategy, its financial position, or disruption in wider markets, as well as declines in your own company or the urgency to buy it. If the company wants out, it will find a way, even if it takes a hellish due diligence experience to get you to walk away and pull the plug.
Time means internal risk as well. It is more time you are tied up dealing with this deal, rather than working on the business and pushing growth or seizing the perfect timing for the next venture you hope to pursue. As the excitement wears off, your team and shareholders may also lose interest in the deal or think there are better options. Some could sabotage it and cost the company and other stakeholders a lot in the process. That risk keeps growing over time.
You owe it yourself and your shareholders to get the maximum value for your startup. You can't know that you are getting that or prove it to others or in court unless you've solicited other bids for your company.
Bidding wars are a fantastic, proven tool for maximizing offer prices. It's why auctions have been popular for hundreds of years. Bidding is what big startups such as eBay were built on, as well as iconic brands such as Sotheby's.
Once you've received an offer in the form of an LOI that you are taking seriously, you really have the obligation to shop around. You may do that as a company yourself by putting together your pitchbook and presenting the opportunity for other target buyers to make an offer before it is too late and they miss out. Or you can hire an investment banker to handle this part and drum up a bidding war for your company.
It is basic Psychology 101. People can't help but be motivated in bidding war scenarios. The competition drives them, as does the fear of missing out. Provided there is a fundamental need and desire to buy your company, with a good story about the future value, they can justify that to their investors, and there's a good chance you can push up the price.
Even if your initial offer came from what you see as the best buyer, the process and competition can drive the buyer to up its bid or even just speed up the process and agree to a shorter closing period, with more attractive terms for your side of the table.
Again, don't be too overconfident or greedy to the point that you lose the initial offer and fail to sell or burn exit opportunities with these buyers in the future. Set yourself an internal deadline, too.
Warren Buffett says, “Price is what you pay, value is what you get.”
How do you elevate and maximize the value of this deal for both your company and shareholders, as well as your buyers?
Price and value may be related, but they aren't always directly intertwined with each other every step of the way. There are different forms of value for both sides, some of which can be independent of the price.
Although “win-win” may sound cliche these days, both sides do have to feel like they are winning something. Otherwise, they aren't going to stick with the deal—especially not in a transaction like this, which can be long and full of challenges and excuses to back out.
What can you do to increase the value of the deal for your side of the table?
One thing that may seem important—and pivotal—from some board members, cofounders, and key team members with equity is what happens to them after the close. This may be purely psychological and ego-driven or there may be income and a career path in mind. Securing their positions in the company after a merger, plus good job titles, compensation packages, and learning opportunities, can provide them with lots of perceived value and may not really cost your acquirer anything extra.
Earnouts and other post-closing, performance-based payouts can also boost value for your side. This greatly de-risks this portion of capital invested by a buyer. In fact, anything you can do to lower and remove risk for your buyer will make a big difference. Not having to factor in that extra liability or potential for loss raises the value of every penny the buyer puts in. That can justify a higher price for your company, too.
Another way to provide confidence and reduce risk for the buyer is through contracts. Contracts, such as for sales and revenues with customers, suppliers, distributors, and even property leases, provide security going forward. Anything that locks in income and keeps costs fixed helps.
Given that failed integration is typically the main source of loss and failure in these transactions, the better you can prove integration can be done well, the more value you are creating. Test, test, test. Put teams together and run collaborative campaigns together. And if you can exceed expectations, that can add a lot of dollars to both sides.
Taxes make all the difference between the gross top line and the net value. Anything you can do in preparing your finances and structuring the deal in a more tax-savvy way can add a lot of value for everyone, even without any changes to the price. It matters for the taxes they are exposed to and what bite gets taken out of your investors' payouts.
If you know your buyer as well as you should, then you should have a clear understanding of what the buyer wants, what the buyer is really trying to acquire, and what has value to the buyer. Many of your other assets may not be of interest to the buyer. In fact, such assets may be considered a hassle and costly to manage and liquidate. You can help the buyer create more value, while retaining more value on your side. This may include IP, real estate assets, equipment, and more, such as items you can use to start a new business or sell off to create more cash proceeds.
Successful negotiations are all about being able to put yourself into the mind of the buyer and being able to structure a deal that gives them their musts. This checks the most important boxes for you, too.
Unfortunately, just throwing out your best offer first, even if it is a good one for them, doesn't always work. They want to feel like they are winning something and getting a deal, just as people on your side of the table expect.
By knowing a buyer's triggers and levers and your essential shortlist, you can create a give-and-take scenario in which you appear to concede on the things the buyer wants in exchange for getting more of what you want (for example, your closing time frame and price in exchange for accepting its preferred method of payment and other small technical concessions).
In some cases, buyers feel better being just under a certain price point. Maybe $880 million makes them feel a whole lot better than paying $1 billion; yet, the details may make it more profitable for you. Or paying $2 billion may actually do more for their ego and reputation, even if they are overpaying—like being the first to buy a $100 million NYC penthouse. The bragging rights and press may be worth the splurge for a few fund managers and tech companies.
People want to look smart in front of their peers. They want to be admired by people for their intelligence.
As already discussed, the more you can de-risk this deal for them, the better. Beyond the money, it gives them the confidence they won't look foolish if the outcome implodes on them.
If you can convince them they are seeing the opportunity before others or they are seeing it for its real, higher value, that can also be a draw for those looking to make their mark.
Although you may do better just focusing on your own business, many subscribe to the mindset that others are out there plotting their downfall, working teams overtime to take them out of the game. They are paranoid about their competition and about being beaten out and overtaken, often rightly so. In this scenario, price should take a back seat compared to timing, getting the deal, and locking up your company before their competition does (and then uses it against them).
What is it that your buyer is really trying to acquire? Is it your IP, data, customers, team, income streams and yields, or something else? Use this knowledge to maximize the exit for your company and shareholders. Know this information and assign most of the price and negotiations there. Kindly be willing to exclude other elements the buyer doesn't care about, and consider other ways to get value out of those.
Ironically, Big Tech and Silicon Valley are still very local and about physical presence, despite the fact they are supposedly driving so many virtual and cloud-based innovations. If you are willing to relocate and be under their physical umbrella, then use that as a bargaining chip or bonus you can offer. Make sure you offer it, because the buyer won't always ask. They often just assume.