Acquire me! I'll take you to dinner first!

March 8, 2008 11:38 AM

What happens when a little company is interested in getting purchased by a big one? (Take two.)

(Sorry if you happened to spot the first question. I used bad html and broke it.)

In the exact reverse of this previous AskMe, I need some advice about acquisitions and venture capital. I am a senior executive at a small young company (less than 200 employees) that is a leader in the niche tech field of doodad design. I run the unit that handles all our North American doodad efforts.

For several solid business reasons, the founder/president has always been open to selling this unit, although not extremely motivated (there are other sexier units of the company that he likes to be more involved with). But there has been a change in the market: last fall, quietly, a big multi-national technology conglomerate with no previous doodad business picked up a similarly sized small doodad company (an indirect competitor of ours; their doodads don't serve the same customer base that ours do, but it wouldn't take long to add that functionality via development). Since then, several competitors of the conglomerate have been discreetly sniffing around us.

I have convinced the president that right now is a good time to accelerate the acquisition effort. He has given me the green light to go forth and seek a potential buyer. After much research, I have created a short list of companies that I think will have interest. I believe that our NA doodad unit offers everything that improves shareholder value as a bolt-on acquisition (including exceptional market share and brand awareness, synergy, cutting-edge technology, human resources that are tops in the field, and high return on the economies of scale) and very little that decreases shareholder value (we have no debt, it would be a relatively cheap acquisition, and so on).

So... what next? How would a huge global entity expect to be approached in this case? And to whom? I literally have the clearance to call up [some top person at a conglomerate on my list] and say, "So, do you have a few million lying around?" (I kid; I know that wouldn't be the tactic.) But what is the best tactic? What's the best way to get my foot in that door? What should I expect in a get-to-know-you process? What will they expect to see in the pitch? I understand pitching the broader strokes: valuation, projected revenue, being able to demonstrate our market activity, and so on... but is it presumptuous to plan for how I foresee the unit functioning as part of a new entity? Or does a global conglomerate not really care about the suggestions of Tim Smith, Doodad VP? I'm not worried about the legal and financial due diligence part, since once a solid lead came into the picture, my president would bring an outside team in to handle that part of the process.

Also, I have seen that in several similar deals in my industry over the last few years, the two parties came together via a consulting firm, some group that advises specifically on this kind of dea. Do we really have to consider using an intermediary? (I've been offered a finder's fee by the founder if I can bring in a legitimate buyer candidate and the deal goes through, but I wouldn't want to have to share it with a broker.)

FWIW, I believe that we are in the best position to get acquired, as opposed to obtaining (what would be) stage 3 or mezzanine funding. But, I also know very little about the VC world and what the trends in the market are right now, so I could be wrong: is mezzanine funding the way to go here? The founders are going to want to divest of the unit completely, not just get a cash injection in order to then have to futz with it even more; this would necessitate restructuring the management of the unit (which wouldn't really be a bad thing). Am I right in my understanding that a VC firm won't want to bother with an outfit that isn't already fully contained, that needs to fill some management holes?

Also, I am very nervous about the possibility that I am opening the door to being out of a job. There's really no way to absolutely guarantee that I stay employed if we get purchased, is there?

I'm sure there are additional questions that I should be asking that I don't know to ask. Any thoughts, resources, experiences are welcome. Btw, I'm also looking for a mentor to help me navigate this (frankly overwhelming but exciting) opportunity so if you can suggest anyone, I'm all ears. Email me at [e-mail] if you need more info.

posted by anonymous to work & money (6 comments total)

Get in touch with an investment bank who can hold your hand through this process.
posted by caddis at 12:06 PM on March 8

Maybe you should delay initiating unfamiliar transactions until you find a more seasoned "senior executive".
posted by clearlynuts at 1:25 PM on March 8 [1 favorite]

Ignore clearlynuts, Anon, who clearly misread your question as "Should I do this thing, and am I skilled enough." Which although might be valid points to consider, aren't what you asked us here.

But whether you realise it or not, you do sound fairly overwhelmed with the idea of this deal. Maybe a financial intermediary isn't a bad idea. After all, there won't be a finder's fee to claim if it never goes through at all.
posted by cockwaffle at 5:29 PM on March 8

that is a bit insulting clearlynuts. you can sell your business regardless of your experience with selling businesses. that is what experts, investment bankers etc., are for. you also want an experienced law firm to guide you. in some respects the firm is more important as they are billing by the hour and the bank bills by percentage. they will both help you. I have been through very many of these transactions and they really are not that big of a deal, you just need someone with experience to help point out all the issues for you and give you guidance on them from their own experience.

How would a huge global entity expect to be approached in this case?

Well, the ones that do this all the time have something called a "new business development" unit or something similar and you want to talk to them. as a seller your best bet is to set up an auction in which you offer your company to all the major players and let them all know. You will have to provide them with due diligence material, access to your relevant financial and other records depending upon your business. Here the bankers and lawyers can help as they have done this many times before. There are ways to minimize the pain. Then you will solicit bids and don't set yourself up to have to take the highest one. Take the best one, not for you as management, but for the company. It might be the highest one, it might not. Again, talk to the experts.

Negotiate for your employees. Do you have some employee benefits such as retirement and long term compensation that are important to them? Negotiate how these will be handled into the new company. You can negotiate how upper management will be handled as well, but be careful to not breach your fiduciary duties to the owners/shareholders. consult the lawyers.

I have only scratched the surface. However, that is what the attorneys and bankers are for, they will handle these issues with your board. If you get the right people it is an easy transaction, other than your peculiar liabilities and strengths. the bigger job is on the acquiring party. you mainly want to get money, protect employees, and limit future suits against the present owners, although getting the right money is never easy. when it comes to money, remember that money up front is twice or more as valuable as money down the road, especially when some other bozo will be in charge of making the profits or meeting the milestones down the road upon which your money will be based. Cash up front.
posted by caddis at 5:55 PM on March 8 [1 favorite]

I second caddis' suggestion to find a good mergers & acquisitions banker. I'm biased because I used to be one, but the right banker can really make the difference in these situations. They will have relationships with the likely buyers (and the right people within those firms). The bankers will also know interested financial buyers, who can help establish a valuation floor even if you're not interested in selling to them. And most importantly, bankers will do most of the heavy lifting while you concentrate on, you know, actually managing the business.
posted by mullacc at 7:04 PM on March 8

If you have a consistently profitable doodad business, read Berkshire Hathaway's 2007 annual report, page 23. Note, you don't have to meet the $75M/yr pretax minimum if your doodad business fits in well with one he already owns.
posted by zippy at 1:07 AM on March 9