I've done some time in the music business, where I actually saw deals go down with suitcases of cash. I've had friends who sold their companies, and I've been an employee in firms that were acquired. But I realized that in the process of selling our agency, I had no idea how an acquisition deal was put together. And that's a pretty scary thought as you're sitting down with potential acquirers.
Luckily, we were working with a good consultant who was familiar with the process. One of the first things he had me do was to think about what I would like to get out of a deal, as it related to the following financial details:
- How much cash I'd like to receive
- What percentage (if any) of retained equity would I like in my company
- What my salary expectations were
- What my bonus and/or earn-out expectations were
- How much operational cash I needed to reinvest in the company
- What I desired for employee incentives.
For each of the items above, I put together a chart reflecting:
- The bottom end of what I'd consider
- What I thought was a fair middle ground
- What I thought was a stretch/dream situation.
An offer came in the form of what's called a term sheet. I compared this to the offer letter that a Realtor might deliver if you're selling your house. The term sheet outlines the deal structure in broad strokes, but with actual numbers. This is the starting point of negotiation, and would typically include most if not all of the items above. I was kind of surprised at how simple a term sheet was, especially considering how complicated a potential deal could be.
Once we could come to an agreement on the term sheet, then everything else became minutia for people that get paid a ton of money to review the details. (That would be accountants and attorneys.) Because we were working with a consultant, we were able to get the major points of the deal completely negotiated prior to spending even an hour with an attorney.
And then came due diligence. That's a fancy name for spending countless hours gathering all of the details that support the facts behind every aspect of your firm. Imagine your worst expense report multiplied by about one thousand. Larger firms might have a staff to deal with this, but in a small agency, this meant taking people away from their daily work. And sucked more time from my schedule than I ever imagined.
All of this was mostly new to me. You hear about company X being acquired for $32 million, and you picture someone handing over a giant check to a company owner, like at a charity event. But a $32 million deal doesn't necessarily mean that the owner is walking away with $32 million in cash.
Deals are crafted with a multitude of options at the table, and each party may have an entirely different set of motivations driving these components. Some come into play at the close of the deal, and some far into the future.
Purpose and motivation are key to any deal, and it's imperative that these two things be aligned well before the delivery of a term sheet. Why are you considering a sale? Why do they want to buy? This is so much more important than money. For us, our goals were aligned perfectly with Source Marketing, the company that was acquiring us. We needed cash to grow our agency (item No. 5, above.). I wasn't looking to quit it all and move to Florida (which means my needs for item No. 1 might be less than if I were looking to leave the business entirely). Our acquirer saw the potential to grow the agency, and believed in our vision for a shared Humongo future. Together, we crafted a deal that suited both parties and the long term goals for Humongo. We both got exactly what we wanted and we believe in where we're headed. To a Humongo land of fun and profit.
So the checks were cashed, the bank accounts ready for action, and now we needed to integrate our firm with a much larger agency.
|ABOUT THE AUTHOR|
Darryl Ohrt is a former punk rocker and chief contributor to the greatest blog in all of the land, BrandFlakesForBreakfast. While his official title is president, his business card says he's "Prime Minister of Awesome" at Humongo (formerly known as Plaid). Darryl knows just enough to be dangerous. He's on the internet right now, playing, investigating and exploring. Watch out.