3 Things Working Against You When Selling a Business

April 29, 2010

Google recently acquired Aardvark, a social media company that lets users tap into the knowledge and experience of their extended network of contacts to get quick answers to specific questions.

Let’s say you’re from Melbourne, but in Sydney on business, and get a dose of back spasms. You can post a question to Aardvark that will ask your friends and friends of friends for a recommendation on a good chiropractor in Sydney.

Google paid US$50M for Aardvark.

Aardvark is a good case study on building a company to be sold. They didn’t try to compete with Facebook for all forms of social media.

Instead, Aardvark specialised in getting obscure questions answered by trusted contacts.

Google is in a Coke vs. Pepsi- battle with Facebook for dominance of the social media category, so it made sense to look at Aardvark as an acquisition.

Could Google have built the same technology? Absolutely !!.

Could Google have acquired Aardvark for less money and time than it would have taken Google to build it from the ground up? Yes again.

Aardvark therefore gets acquired.

We all know that becoming the world’s best at something can help you win business; becoming famous for one thing can also help you sell your company.

Strategic buyers are looking to pick up something new they don’t have and couldn’t easily create on their own. Before doing a lot of due diligence, strategic buyers ask 3 basic questions:

  • How much would it cost us to build from scratch?
  • How long would it take?
  • How much could we buy that company for?

If you offer a broad set of products/services that a potential buyer also offers some/all of, that potential buyer will argue that it would be easier to just build what you’ve created and drop its price below yours or hire a couple of salespeople to go after your customers.

However, if you offer something truly special that is difficult to replicate, the acquirer will want to buy your business instead of wasting the time and money to build it from the ground up.

Becoming a specialist in one thing will not only help you in your marketing; it will also help you get acquired for a premium when you’re ready to exit.

To find out more about where you currently stand as a business you can check out the “Sellability Index Quiz” by going to http://builttosell.com/siq.php and answering the 10 questions to get a view on where your business is at.

Either way, if you’re thinking of selling, you should contact me to help you understand your options (plus I may even know who your “buyer” will be, based on my current clients).

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In 2010, high-net-worth individuals are looking to invest in private companies

April 22, 2010

According to a recent survey of 4,169 Australian investors conducted by Wholesale Investor, investor sentiment in private sector investments is buoyant.

The statistics revealed:

  • 76% of investors are seeking investment into private companies
  • 53% have $500k or more to invest
  • 72% believe now is a great time to invest
  • 79% of investors have over 50% of their funds in cash, ready to invest
  • 91% would invest in an early-stage/start-up if strong Board/Management was in place and in a preferred sector
  • 55% said their biggest challenge was finding suitable deals
  • 63% were looking to invest directly into companies
  • 61% sought an equity stake of less than 20%

In addition, the survey revealed several positive factors influencing the private company market.  These include:

  • Former MDs and CEOs are now actively pursuing high-growth businesses.
  • Many smaller VC and PE firms are forming and looking to gain exposure to high quality companies.
  • Larger private firms are taking advantage of market conditions and looking to make strategic acquisitions.

Contrary to the prevailing attitude of doom and gloom, these figures reveal that this is a golden period for business – for those investors and entrepreneurs who are prepared to see the bigger picture, take a calculated risk and back themselves.  As they say “a crisis for some is a blessing for others”.


What is an Information Memorandum, and why do I need one ?.

April 17, 2010

When I first start working with new clients, that are looking to raise capital or sell their business, this is almost always the first major obstacle we have to get past.

The Blog entry has been created to assist company owners in understanding what is involved in preparing an Information Memorandum (IM), during the process of selling a company or raising new capital for the company.

It deals with these 4 questions:

  1. What is an IM ?
  2. Why prepare an IM ?
  3. How should a company go about preparing an IM ?
  4. How is an IM likely to be used by investors ?

What is an IM ?.

An IM is a document provided by a company to prospective investors after the investors have reviewed a brief Investment Summary, or “teaser”, and signed a Confidentiality Agreement.

Some business owners and financial advisors look at an IM as a marketing document which provides a selective overview of the attractive features of a company.  In Australia this was the major criticism of Prospectus’ in the old days …. They were pejoratively called “The Glossy Bit in front of the Application Form”.

In most Westminster-based legal systems – notably Australia, US, UK, New Zealand, Canada and at least 20 other Countries, an IM by law must contain a full, true and complete disclosure of all information which may materially affect the value of a company.  NOTE to Company Owners …. You’re personally liable if you sell a business whilst withholding information that would have affected an investor’s ability to come to a different conclusion about your business.

However, IM’s are most often targeted at “Sophisticated Investors” who are not protected by the layers of regulation and red-tape that are applied to “Retail Investors”; therefore the law’s position on sophisticated investors is that they had the skills, knowledge, money and track-record to know better and if they lose their money then they understood the risks that could result ion that and still chose to invest.

A company and its advisor(s) must strike a balance when preparing an IM.  The document ABSOLUTELY is a marketing document, in the sense that it should motivate investors to want to invest in the company – but it needs to avoid hype, exaggeration, or omission, and provide a complete disclosure of ALL material facts.  Hype or exaggeration will only diminish the credibility of the company and its management in the eyes of investors, and may also create legal liability for the Directors of the company.

Why prepare an IM ?.

In general, an IM allows the owners of a company to present a comprehensive, accurate, and attractive picture of a company.

It’s also worth stating the obvious here – Investors EXPECT an IM, if you don’t have one you almost certainly will not get anybody interested let alone get their $$$’s.

An IM also helps to ensure that all investors receive the same information.  This is particularly crucial when a seller is running a competitive process.  The more information that finds its way into the IM, the less need there is for investors to pose written questions, saving time for both buyer and seller.

From an investor’s point of view, a good IM demonstrates the professionalism and motivation to sell of the sellers, as well as the quality of the management—all important factors when deciding whether to invest in, or buy, a company.

How should a company go about preparing an IM ?.

Preparing an IM requires a high level of internal organisation.

The CEO or business owner should lead a small team of experts in the main areas (e.g. sales/marketing, legal and finance) that will need to be covered in the IM.

Deliverables and deadlines should be decided for each member of the team. When this process is complete, the final version of the IM should be reviewed by the owner, CEO, and all members of the team, to ensure consistency, completeness and accuracy.

When MSC prepares an IM, we generally aim to provide investors with details of clients, market position, operations, finance, risks …etc – information sufficient for them to prepare a non-binding bid, with an indication of the bidder’s valuation of the company.

As a sanity-check, the Seller(s) and their advisors need to ask themselves what information they would require if they were buying the company – using a company they know little/nothing about as their reference point.

Given the IM is designed to solicit a non-binding offer on the company, with valuation, the omission of one or more key facts may give a distorted valuation, and provides investor with an opportunity to renegotiate their offer – typically downwards !!!!.

How is the IM likely to be used by investors ?.

An IM is the most efficient way of providing a large volume of information about a company to investors.

Even though there may be one person or a small group of people performing due diligence on the company at its premises, there is also a need to communicate with a wider range of decision-makers (e.g. investment committees, boards, advisors) that may never appear on site.  The IM is by far the best way to do this.

Conclusion.

In conclusion, a high-quality IM is critical when selling a company, it is in some ways the equivalent of a CV for candidates looking to get that next great job/role.

And importantly, you don’t get a second chance to make a good first impression.

If you’d like to know more about this topic – feel free to contact me.  I’m also interested in any comments, or experiences you’ve had either involving a good IM or a bad IM.