I’ve been involved with acquisitions, big and small, on both sides of the table.
With small businesses, especially lifestyle businesses, these are some typical factors and scenarios:
Factors that will shape the deal:
- Your goals for exit (financial, personal and schedule freedom, ongoing participation, etc.)
- A specific “magic number” financial goal that will enable the future you desire
- Your timeline for exit
- Your market size (be as specific as possible)(industry association press releases, manufacturers’ press releases, market analysts reports and trade press stories are great sources for market sizing information) You’ll need to come up with specific $ sizing amounts for the applicable current and projected market segments. At a minimum, you need an “order of magnitude” number for your current and projected markets size, e.g. $2m, $20m, $200m, $2b.
- Market growth rate (see previous point on good sources)
- Your current revenue run rate (current revenue rate projected over 12 months)
- Your trailing 12 months revenue (if you have annual revenues over $10m it greatly enhances your chances of acquisition by putting you into a large, general pool of viable businesses)
- EBITDA run rate (current EBITA projected over 12 months)
- Trailing 12 and 36 month EBITDA
- Gross margin %
- Comparable acquisitions in your market or adjacent markets
- Top five companies most likely to acquire your company
- The one company you think would be the best fit to acquire your company and why
- Provisional or issued patents for any of the products
- Trademark, trade secret or any other form of Intellectual Property (IP) protection on any of the products or designs
- Barriers to entry that prevent your existing or new competitors from entering your market by duplicating your designs / products or designing around any of your IP protection
Probable / realistic scenarios:
In acquisitions of this type and size, you are the company and the company is you. Consequently, the acquisition only works if you agree to be an ongoing component of the package for a given amount of time that is viable from the marketing and product development standpoint.
Typically, an acquisition of this general size and type requires “golden handcuffs” that require the acquired company’s products to meet financial goals (sales, profit margins, market share, etc.) and for the key individuals (read: you) to work for the acquirer for a given number of years. The acquiring company will seek to back-load your financial payout as much as possible and to put as much of that payout as possible at risk based on achieving financial goals.
In short, they will seek to pay you as little as possible up front, often in their illiquid stock, and promise you additional cash/stock over the subsequent three to four years if your products (and you) perform. During the “golden handcuff” period is it common for you to have zero control over the resources that determine if your products/division reach their financial goals. It is also common for the acquiring company to do anything and everything to get you to quit before they are required to pay you off.
These scenarios often spiral down into bad endings, since once you sign the contract you lose all control and ability to affect the financial outcome that determines your personal financial fate.
Realistically, nobody is going to write you a lotto check for your company and wish you well as you ride off into the sunset.
Again, from the market’s perspective, the company is you and you are the company. If you are not part of the picture, it’s just a bunch of cool products with a relatively short shelf life (due to ever-newer products/models), a mushrooming number of competitors and essentially no barriers to market-segment entry for even more competitors.
The challenge for you and the acquiring company is to structure a deal where they provide the capital and resources required to grow the product line, compete effectively, build/expand channels and form, expand and reinforce a marketing message while you act as the design genius and “front man” for marketing, PR, manufacturer and channel relations purposes.
Typical Deal Scenarios:
- You sell controlling interest in the company for $X
- You retain 20-40% of the company
- You are responsible for product design and “front man” activities related to marketing, PR, manufacturer and channel relationships
- The acquirer provides the management expertise, etc. required to grow the company 2-10x bigger than it is now over three to five years. The goal during this period is to grow the brand and to separate it from your personal brand/identity, meaning the company is perceived as less you as an individual and more its own entity. This enables the company to be conceptually perceived as something other than you and thus sold separately from you. This can minimize the ratio of “golden handcuffs” obligation and risk in the deal for you.
- The company is subsequently sold in its entirety to a major industry player with minimal to no back-loaded payouts (it is very rare for there to be zero in one of these scenarios, but it is possible to minimize them)
- You are responsible for product design and “front man” activities related to marketing, PR, manufacturer and channel relationships for an additional two to four years, at a workload that matches your personal goals
- You sell the company in its entirety for a comparatively small upfront amount and 50-80% of remaining payout dependent on future performance and financial goals
- You are responsible for financial performance of the products / division but have little to no operational power or control over the resources required to achieve the financial goals
- You have some input on design, but are dependent on allocated resources and strategic product marketing decisions made by others further up the food chain who may or may not even know your name
- You are responsible for “front man” activities for marketing, PR, manufacturer and channel relations purposes to the extent they do not conflict with the agreements, contracts, covenants, etc. of the parent company
Scenario A is relatively rare. Frankly, most people miss the opportunity because they get seduced into a B type scenario with promises of quick payouts. It takes some vision to recognize and realize the larger potential outcomes of an A scenario.
By the time most people get into position to sell they are so ground down by building their company or they need a quick exit due to ticking clock, health, spouse, financial or life circumstance reasons they never consider anything but B due to the additional time to grow out an A.
Scenario B sounds horrible but some flavor of it is the typical scenario. I have multiple clients and friends who lived this or are currently living out their “golden handcuffs” period under variations of those conditions. It can sometimes be a good story but is often really, really ugly.
I also know people who function as the “front man” and design genius for an acquirer while living a very fun and enjoyable life, participating to the extent that fits into their current chapter of life and lifestyle.
Remember the maxim: “The last time you have any power or control over your destiny is the millisecond before you sign the contract.”