Maximize Your Exit By Not Selling Your Company

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A version of this article previously appeared in Forbes.

In 1987, a representative of Michael Jackson approached the modest Sycamore Valley ranch house and knocked on the door. The owner of the ranch was shocked by the visitor’s message. He told the homeowner that he represented someone who wanted to purchase the ranch at a substantial premium over its current fair market value. He also indicated that the offer was non-negotiable and the home owner had to respond either “Yes” or “No” in a matter of hours.

Although this is a somewhat unusual real estate transaction, it reflects a surprisingly common scenario in the business world of mergers and acquisitions, with one important distinction.

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My House Is Not For Sale

When someone knocks on your door and tells you they want to buy your house, despite the fact that it’s not on the market, you would not expect the potential buyer to then ask, “So how much do you want for it?” Even the eccentric King of Pop communicated the price he was willing to pay for Neverland.

However, in many cases, acquiring companies behave less rationally than Mr. Jackson. When we sold Expertcity (creator of GoToMeeting) to Citrix, we experienced this awkward, yet common situation. Citrix politely approached us, told us they had an interest in acquiring our company and then asked us, “How much?”

Our response was that there was no “price” as our company was not for sale. We were not rude nor indignant. We simply stated the truth. At the same time, we made it clear that we were flattered and happy to further explore if a reasonable deal could be crafted. We then turned Citrix’s question around, saying, “You knocked on our door with an intent to buy so you obviously have some idea of the price you are willing to pay. What is your price?”

As our negotiations became serious, I realized that we needed to define our Best Alternative to a Negotiated Agreement (BATNA). We boiled our alternatives down to the following:

IPO – To bolster our negotiating position, I engaged an investment bank to explore the public capital markets. This option was not attractive to the management team because the SEC’s onerous regulations would have severely constrained our liquidity. Most importantly, management’s ability to autonomously run our business would have been significantly compromised, as we would have been forced to answer to Wall Street on a quarterly basis.

Run A Sales Process – Establishing an auction was the least attractive option, even though this approach might have driven up the purchase price. We were more concerned with ensuring a cultural fit with our acquirer, rather than squeezing the last dollar out of the deal. Citrix promised to operate Expertcity as a separate division and maintain its offices in Santa Barbara and it was unclear if other potential acquirers would have been willing to make, and keep, similar commitments.

Additionally, we were concerned with our deal becoming shopworn by not initiating a bidding process. There is a well-worn adage in the world of mergers and acquisitions that, “companies are not sold, they are bought.” In other words, the most attractive companies generate unsolicited buyers which can often lead to premium purchase prices. Companies that seek buyers are often viewed as damaged goods which cannot otherwise succeed as self-sustaining entities. Such companies, if they are able to complete a transaction, usually sell at a discount.

Do Nothing – Taking no action was the potent competition faced by Citrix. Due to our revenue growth rate, Expertcity was quickly becoming too expensive for Citrix. Thus, doing nothing became our BATNA, as it encouraged Citrix to expeditiously prosecute the transaction.

We eventually sold Expertcity to Citrix for $236M. I am proud to say that Citrix lived up to all of its commitments and Expertcity, renamed Citrix Online, went on to become one of the largest employers in Santa Barbara county and one of the world’s largest SaaS businesses.

VC Funding Alternative

During late 2006 I helped the CEO of RedMojo sell his company to Novell. Our BATNA to a sale was to accept funding from venture capitalists. Taking fresh capital would have pushed out an acquisition by several years, as the institutional investors would have encouraged management to substantially grow the institutional value of the business before considering a sale.

Our approach was a bluff, as RedMojo’s management was not inclined to accept venture funding, as it would have required the team to work several additional years to generate a return sufficient to warrant the dilution caused by an institutional investment.

Fortunately, there were multiple companies interested in acquiring the company. This competition, coupled with the legitimate BATNA of venture funding, allowed us to sell the company for nearly $10 million, despite the fact that the company’s revenues were negligible and the team was comprised of a handful of people.

Who’s There?

It is impossible for you to fully understand the potential strategic value of your venture, once it is part of an acquiring company’s organization. Thus, a fair response to the question, “How much do you want for your company?” is, “What would our assets be worth as part of your organization?”

Once the potential buyer states the expected value of your assets within their organization, you can then focus your arguments on the combined value the two organizations can jointly create, rather than allowing the acquirer to drive down the standalone value of your company via comparisons with other companies or by assigning a multiple to either your revenue or net income. Attempting to determine the combined value of the entities is a worthwhile exercise because it forces both parties to think through the acquisition and contemplate how the combined company would work together.

When someone knocks on your door and asks how much you want for your company, your response should be, “Thank you, I am very flattered. However, there is no For Sale sign in front of our building. I know what my company is worth to me, but the important question is ‘What is it worth to you?’”

If the potential buyer wants your company as much as Michael Jackson desired the Sycamore Valley ranch, they may be willing to pay you a very, pretty penny indeed.

You can follow John on Twitter: @johngreathouse.

Image credit: Associated Press

John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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