Ask HN: Selling my first company - need help with the process

https://news.ycombinator.com/item?id=1546837

by user2newyork • 16 years ago

75 49 16 years ago

news.ycombinator.com

I built a product which company x is willing to acquire/license. From my estimations, they will be adding at least $*M to their bottom line. Company x also agreed that my estimations are reasonable and accurate. It is really glad that most arduous initial part of the initiation/demo are all done and both of us are completely upbeat about the deal. For a lot of reasons, I prefer selling out instead of releasing it to market myself - unless deal falls apart. I haven't raised any money so far.

Now, I need help in some best practices going forward. Things like, 1. how do I come up with price tag for my product(I don't want to have them low ball or I don't want to ask really high number either). 2. what is involved wrt legal paper work.

anything else i should watch out for in this time frame

thanks

PS: I am a regular user and contributor - I am using throwaway login just to be anonymous.

drewcrawford• 16 years ago

I've never been in your shoes, but one small tidbit I've learned about business in general is that the first person to say a number loses. If you can, try to get an offer out of them, and start negotiations there.

The other rule of thumb I've seen acquirers use is (yearly revenue) * X, where X is some indicator of the risk of the business evaporating. Values of 0.9-1.6 for X seem pretty common for a product with little history.

kirse2• 16 years ago

the first person to say a number loses

This is really just a myth. If you present a buyer with well-justified and thought-out reasons for your number, it's going to be hard for them to counter-offer with something ridiculous, unless they're just being an ass. Not to mention you should always have your base number in mind, at which point you just walk away. The OP also said the company has agreed with most of his initial estimations, so he's clearly in a better position with regards to the number he can ask.

In my deals, I usually take $Well-Justified-Price and then tack on $Extra to swing the deal far in my favor. Usually $Extra brings the price close to where I think the buyer would walk away. Then it's up to the buyer to do their due diligence and we can talk about the facts behind the number and do our negotiating there. Usually it comes down, but that's the point of inflating your own value first.

Regardless, I've done this for selling my Facebook apps, vehicles, negotiating job salary, etc. If a buyer is pulling lowball crap, you basically tell them to cut the BS, reiterate the facts behind the number and make a call-to-action (i.e. "Buyer, you know everything behind this number is legit, now let's come to agreement"). If not, you walk away, simple as that.

Sometimes the buyer does have legitimate sticking points though, and that's usually where you just have to listen and go into "understanding" mode to get to the root of their concerns. Once you hear them out, you cut them a little slack on the price and then again reiterate all the facts behind what you're giving them (ABC - Always Be Closing)... When you present someone with solid facts, they can't help but agree with you, so it helps to get that final "Yes" when you ask them to close with you.

For the OP, you really need to do your research and come up with a solid justification for a number you have in your head. Drew gave one example of revenue * X, which is what I used when I sold one of my Facebook apps. If you're adding $$$ to their bottom line, then use that to make your argument also. This is a flexible process and depends greatly on industry. For websites it can often just be Drew's formula. Regardless, make sure there's at least some "science" behind your wild-ass-guess, and that way it'll at least look like you put in the work to come up with a legitimate price.

To be honest though, that's the fun of deals... it's really a flexible process and there's a ton of learning involved, so have fun with it. Don't be afraid to ask for something inflated though, so long as it's well justified and not pulled from your rear. After that it's the buyer's responsibility to negotiate down.

inboulder3• 16 years ago

"This is really just a myth. If you present a buyer with well-justified and thought-out reasons for your number, it's going to be hard for them to counter-offer with something ridiculous, unless they're just being an ass"

Wrong, you're missing the point entirely, I'd like to buy a business from you...

The point is that if you offer a price first, this is the HIGHTEST the buyer will pay, he might have valued the business at more, in this case you have left money on the table.

user2newyork5• 16 years ago

Thanks for the details. like the $Well-Justified-Price+$Extra.

inboulder3• 16 years ago

0.9 to 1.6 as a multiplier is absolutely terrible, that's a crazy discounted cash flow rate, at those multiples you are guaranteed to be better off just holding onto the business unless you know it is going under very rapidly. 5x is starting to become reasonable.

thiele• 16 years ago

0.9 to 1.6 multiplier seemed really low to me too. I'd love to hear some more opinions of "common" multipliers.

gte910h• 16 years ago

>I've never been in your shoes, but one small tidbit I've learned about business in general is that the first person to say a number loses.

Naw, that's not true.

While they may be thinking in a much higher price range than you'd dare ask, alternatively, they may be thinking in a very low price range as well.

Whomever sets the first price suggestion frames the conversation. It depends how good you are at framing and how much gamble you have in you if you let them do it or you do it.

jaxn3• 16 years ago

I have been in your shoes and priced myself out of the deal.

I am looking forward to seeing the experience of others.

sdesol• 16 years ago

Care to share your experience. It would probably help others.

jaxn3• 16 years ago

We had an application that was getting interest from a company that wanted to license the tech and add the product to their portfolio. I felt their licensing deal was convoluted and left too much room for us to get screwed. I then picked what I thought was a best-case kind of number and it ended up being so much higher than they were thinking that they didn't even want to counter.

It is hard to recover from that.

So I guess the lesson is that just like it is hard to raise your first price, it can also be hard to lower it.

In hindsight we would have taken 1/5 of what our number was and been happy. A win is better than nothing.

_ouxp• 16 years ago

Get advice from a CPA on how to structure the sale to minimize your tax bill.

donw• 16 years ago

Is the product currently generating revenue? If so, at what percentage of the amount that the buyer thinks it will add to their bottom line?

user2newyork5• 16 years ago

No I haven't released the product yet. Buyer has the revenue with a product which my product complements.

SkyMarshal2• 16 years ago

Can your product make money on its own, or only in conjunction with the company's complementary one?

zackola• 16 years ago

Regarding pricing have you explored whether or not companies W, Y or Z might be interested in buying your product? Until you explore other buyers you are limiting the range of offers you may be able to get. By only entertaining what company X might buy this for you have already agreed to a price range which is $some amount of money that's an obscene deal for company X to $the maximum company X might be willing to pay. The max may or may not be a good deal for you though. It may be a bit too late in your case to pursue other options - or you may feel like company X has the resources to give you the kind of deal you are looking for in which case +1 to drewcrawford's answer.

A friend and I sold an app (all IP, etc) several years ago and I've sometimes regretted not exploring other options, and also not iterating for a few more months to see if we could have made the product more valuable. At the same time though, the offer came out of the blue and both of us were more than happy to get some dough for something we had been hacking on in our spare time.

Regarding #2, get a freaking lawyer and a CPA ASAP. When you are talking about $*M, you should have no trouble ponying up now so you don't get screwed later.

user2newyork5• 16 years ago

I tried to reach W Y and Z but unfortunately they are not aggressive enough to entertain new innovative solutions.

tlrobinson• 16 years ago

Lawyers are important and well worth their cost... if the transaction goes through. You don't want to be in a situation where the deal fell through and the lawyer fees you owe are going to bankrupt you.

Assume the deal will fall through and plan accordingly, whether that's through a provision in the term sheet (like a cap on lawyer fees or a penalty for walking away from the deal), or working something out with your lawyer.

Related: deals do fall through.

inboulder3• 16 years ago

From reading a lot of VC blogs, the thing that affects their valuation the most is competition. I think the most important thing you can do for your deal is get a competing bid of some kind, any kind, any outside interest at all will do more for the price than you can do within the confines of the deal with company x. This may sound difficult and it is, but I think it's absolutely critical.

helveticaman• 16 years ago

Or improve the option that always exists: walking away.

chengas123• 16 years ago

Yep, the two most basic things to do in any negotiation are start high since the price will only be negotiated down and develop your BATNA (best alternative offer).

swah• 16 years ago

Just enough to live the rest of your life from it.

malahoo• 16 years ago

Since you and buyer already agree on bottom line impact (i.e. profit, not revenue), I would recommend estimating the intrinsic value of the business using discounted cash flow analysis as a baseline. Make a reasonable assumption about the product's lifetime - let's say 5 years - project out those 5 years of profit, discount each year using a reasonable rate of return for a similarly risky investment (maybe 5-10%), and add up all discounted cash flows. The negotiation then becomes "how much of the business value should each of us retain?" instead of "how much are you going to give me?"

http://www.investopedia.com/terms/d/dcf.asp

dropkick• 16 years ago

A few years ago, I wrote a commercial plugin for a product and later sold the IP to the developer of the product I plugged in to. I'm intentionally being as vague as possible to remain anonymous.

My plugin was on the market for about 9months. In that time, my revenue was in the $60k range. The sale price was around 6x the revenue. However, it was spread out over a few years of me being employed by the purchaser. Of course, I got a nice salary in addition to the purchase price.

One thing that made my situation interesting is that a competitor of the product I plugged in to was interested in me doing the same thing for their product. Once they got wind of the negotiations, they immediately made me an offer. It turned into a bidding war for my IP/company.

My observations from what you've described:

you will almost certainly be expected to work for the purchaser since it sounds like you are the sole developer. They are essentially buying your services and the IP. So don't give them a reason to be wary of you working for them.

On what to ask for: Unless you have revenue, there is no way to objectively quantify at least a minimum value of your IP. There is an art to negotiation that is beyond this post but you've already got them to admit that you will make them millions. I think that is an excellent start. The best negotiators are willing to walk away from the deal. Determine a minimum you want ahead of time and then be prepared to walk away if you don't get it.

If you just want out then act accordingly. Give them a price that you know will keep them interested.

In my case, it took several months between the initial exchange of interest and serious negotiations to begin. They first contacted me in January, An email with an offer price arrived out of nowhere in May.

What I would do differently:

I would have asked for an earn-out instead of a flat price. I didn't know about this until I talked to a few other entrepreneurs. Basically, you give up guaranteed money for a cut of the action from your IP. You're assuming part of the risk. Big company with big marketing budget drives your product to success and you get a cut. It's a very common thing in product acquisitions.

When the competitor made an offer, I disclosed the other company's offer. I should have let them make me an independent offer. Even though there was a bidding war, the price stayed pretty close to the initial offer by the first company.

user2newyork5• 16 years ago

Thanks for the details. Pretty awesome. Yes I am a sole developer just like you.

istari• 16 years ago

Here's some negotiation tips by a professional: http://www.rdawson.com/articles.html

Good to read to get into the right frame of mind.

joelhaus• 16 years ago

First off, congrats on getting this far! Regarding your questions...

1) Price tag - There are three approaches you should consider:

  a) Income - knowing the bottom line revenue 
  add should be very helpful. If they are a public 
  company, you should also be able to determine 
  their weighted average cost of capital (if not 
  public, you could try estimating it). Using these 
  two figures, you should be able to come up with a 
  fairly solid price using DCFs.

  b) Replacement - what would it cost them 
  (time + money) to build this from scratch?

  c) Comparable - is your product unique or do 
  they have the possibility of shopping around 
  for a competitor at a lower price.

2) Legal requirements - Find an attorney that specializes in contract law and IP. If you can't afford one, you might be able to find someone willing to work on contingency.

3) Other considerations - see #2 above and do this before anything else. Grellas, a contributor on here, probably isn't a bad place to start. It also wouldn't be a bad idea to have a fall-back plan if the deal falls apart; you'll alleviate a lot of the pressure during negotiations.

Good luck!

samratjp• 16 years ago

I'd say you could use a little refreshing on a thing called price anchoring - http://www.mint.com/blog/how-to/price-anchoring/ I hope that helps you set your price of your product.

staunch• 16 years ago

Name a price that you're happy with + 75%. Justify it as best you can (good arguments will be repeated internally). Let them talk you down a bit, if they want. Be prepared to truly walk away. If they offer your price + something then take it and be happy -- sign on the dotted line.

gojomo2• 16 years ago

Get a good business laywer. A lawyer can help with both negotiating strategy and structuring the deal. If for company X your product will really make them $Y million/year (Y>1) then the size of the deal is large enough to make getting professional help worthwhile, ASAP.

Two key factors influencing their willingness to pay:

- the net-present-value (NPV) of all expected future profits from your program. If they've already accepted a estimate of $Y million/year for N years then assume a 'discount rate' and the NPV formula pops out a number. (Note that the 'discount rate' assumed for evaluating risky investments will be larger -- perhaps much larger -- than the similarly-named 'discount rate' used between banks.)

- their best-alternative to a negotiated agreement -- aka their "BATNA" -- be it some competitor's software, or an in-house development effort, or whatever.

Neither of these alone consider risks -- upside or downside. (What if it's way more than $Y million in subsequent years? What if a few years in a much better and cheaper competitive offering becomes available? What if they think they can develop it for $Z but it winds up costing 10X more?) But they provide a vague window for possible prices.

These of course work in exact reverse as they analyze what price you'd be willing to sell for. How much would you make in the alternative? What are your other options (such as other bidders)?

retube• 16 years ago

> their best-alternative to a negotiated agreement -- aka their "BATNA" -- be it some competitor's software, or an in-house development effort, or whatever.

This one is important. Just because your product may earn/save a million bucks a year doesn't mean it's worth that. If they can build it themselves for a 100k then it's worth a 100k.

gojomo2• 16 years ago

Be sure to read this VentureHacks note, with an anecdote from Steve Blank about 'flinch pricing':

http://venturehacks.com/articles/pricing

adammichaelc• 16 years ago

Two quick thoughts:

1. The best way to have leverage during negotiations is to have another option. So another potential acquirer, or whatever.

2. I would talk to somebody who has been through an exit. There's this list http://spreadsheets.google.com/ccc?key=tgPKuNIdWWOPUpj2ZnF8N... (was created on HN a while ago). It's a list of entrepreneurs and others who are willing to mentor HN startups. Find one who's been through an exit, and see if they're willing to help.

Good luck!

SkyMarshal2• 16 years ago

Read Fischer & Ury's Getting to Yes if you have time. Great little book on negotiating. One of their main pieces of advice is, before entering any negotiation, work out your BATNA - Best Alternative to a Negotiated Agreement.

A BATNA is not the lowest price you're willing to accept in a negotiation, but rather what you would do if the negotiation never occurred in the first place. Bootstrap your product, try to gain traction, profit? Raise angel/VC money, work towards an exit strategy? Apply to YC?

Once you have that figured out, you can enter into a negotiation with a much better idea of the value of your product to you. If there is overlap with that and what the other company is willing to offer for it, then you can make a win/win deal.

It also helps to have some idea of the value of your product to the other company, as you do.

Good luck, and congrats.

keeptrying• 16 years ago

This is the best video series I've seen on the subject. The guy even wrote a book on exits.

http://www.angelblog.net/Selling_a_Business_Guide.html

Hope this helps. Best of luck!

arethuza• 16 years ago

Be very careful if it is a paper transaction (i.e. you get stock rather than cash) - especially if they are a private company. If they are public, check how liquid their stock is - some small cap stocks are anything but.

A cash transaction, even with an earn out or something similar, has a lot going for it.

isnoteasy• 16 years ago

If company X is a big company, they know better than you the price there can pay for your product. So you need someone than can estimate that number, that is not what is the value of your product but what is the highest price they would pay for your product.

If you can't contact anybody to make this estimate, you should do it yourself but that requires to know a lot about the company that is going to buy your product.

Maro• 16 years ago

Assuming your product is software:

Per your description you haven't marketed your product yet, just built it. Since you seem to be on your own, I assume this is a 1-2 manyear effort. You'd be lucky if a company were to pay multi-million dollars for it, as they could just have somebody code it up for a tenth of the price. The exception is if you have some IP which they feel they need to purchase (unlikely) or time-to-market matters that much (I'd guess this is unlikely, because they'll usually need to integrate your stuff with their existing stuff, which takes extra time with outside codebase).

I'm saying be cautious, don't block your progress on this deal, and don't get your hopes up too high. There are no miracles, there is no free money.

I once spent months hammering out the details of a deal with a client (much smaller deal in the $10-100K range), both sides wrote several versions of contracts, they extensively tested the software, etc, and once everything was hammered out, negiotiations were over and everybody seemed happy (all that was missing were our signatures on the finalized contract) it turned out that the whole deal wasn't that important to them, and the deal died off for lack of interest on their part.

jkeera• 16 years ago

because of the early stage of your product without proven cash flows, it might be helpful to look at comparable transactions in your space or how the buyer (or its competitors) have bought other similar companies like yours. You might even want to look into hiring an investment banker that has represented companies like yours that have sold to larger companies, since they will probably have most relevant valuation figures.

Lastly, cash is king. Try to always get as much cash as you want, unless it is a really stable stock, i.e. Google/Apple.

In the end, get good counsel and it should be a market pricing sort of deal.

canterburry• 16 years ago

One of the strongest tools you can ever posses in your negotiation toolbox is the ability/preparedness to walk away from a deal. If you are unable/unwilling to walk away when things go below your minimum price, you have no negotiation power.

jacquesm• 16 years ago

Decide on how much you want out of it, start off at twice that much and allow yourself to be negotiated down reluctantly.

Be prepared to walk away if you don't get what you want out of it.

Make sure you are indemnified, that the sale is final and that there is no obligation on your part that survives the contract.

Make very sure that you have all the IP that you sell sewn up tight.

Make sure you keep all correspondence, prefer email and such above conversations about pre-contractual stuff.

Put a person that is not emotionally involved in the deal between yourself and the other party during the actual negotiations, unless you are very good at distancing yourself from this.

Never agree on the spot to any deal, always think it over for a night.

Agree that both parties will carry their own costs up to the point of sale.

Get a professional that you can afford in on the deal, someone that is only beholden to you.

Find a person near you that has gone through this process that you can trust and get their feedback on the process as it goes forward.

Do not transfer any assets prior to the actual sale date, even if it looks like everything is 100% a-ok (I know that sounds like an open door, but that sort of mistake is actually fairly common).

Talk to grellas here.

aquaphile• 16 years ago

1. Retain a _good_ securities and corporate lawyer.

2. If you want to have an "independent" valuation done, use a local boutique investment banker. Your lawyer or accountant should be able to recommend someone to help with a "fair value opinion." This may be overkill, but since we don't know large the potential deal is, I thought I'd mention it.

3. Be aware that if they buy/license your product, the proceeds will be recognized as income by both the federal and state tax authorities at both the corporate and personal levels. You could end up giving the government as much as 50% of the gross proceeds (35% corporate plus 15% CA personal income tax). If you are a single product company, it is much more preferable to sell 100% of your stock to them. An acquisition of 100% of your corporate stock means that you should only end up paying 15% long-term capital gains taxes.

Ask HN: Selling my first company - need help with the process

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