Most entrepreneurs would be willing to take on the right equity partner, at the right price, at the right time. If you think you may have reached the right time, here are four critical factors to think about:
Tops on your list (and the buyer’s list) is how much the company is worth. This will drive how much capital you take off the table and how much ownership the buyer will have. It will likely also have some bearing on how leveraged the company will be after the transaction is complete.
All else being equal, you and the buyer are diametrically opposed on this. You want the highest price and they want the lowest. Your might be willing to take a lower price in return for a faster close and getting more of the price in cash. Don’t be surprised if a portion of the proceeds end up in escrow. The buyer may want this to protect against a change in the company’s performance within, say, 12 months of their acquisition.
Are you staying in?
Some buyers may want to buy you out completely. Others will ask you to roll over some of your equity, so you keep some skin in the game. This does three things:
Gives you an incentive to keep helping the business
Decreases the amount the buyer has to pony up
Changes the valuation conversation a bit, since you are now both buyer and seller
You also will negotiate how your ownership will stay in the business. A buyer may want your equity to sit “below” theirs, or you may negotiate a note (commonly known as “seller financing”) that may have more senior characteristics. This may also be an opportunity for other members of your management team to move into some form of ownership.
Who’s really running this?
The conversation about “who controls what” after the transaction needs to be as crystal clear as the conversation about price. Bringing in a control investor means just that-;they will have control over the company-;and you will need to understand that. Going forward, you will be required to seek agreement from the investor on certain decisions-;mostly large strategic ones, but also on financing decisions, acquisitions and possibly the eventual sale of the company. You will have a board of directors-;controlled by the new investor-;and that board will have power to remove you. If you don’t have a personal attorney to negotiate the terms of your new employment, it’s time to get one. You will need to be at peace with the idea that you are working for someone else.
For some owners/entrepreneurs, what happens to their workforce and their management team is very important. Others have an easier time with the idea of a new owner evaluating the team and making their own decisions about what the company needs. Ask right upfront what if they buyer expects to make a lot of changes to the workforce.
Selling your company is a key life event and can be highly emotional. Explaining to folks who have worked for you, and beside you, for years, that a big change is about to occur is not easy. Expect the new buyer to ask your opinion of your team. Then expect them to set goals for those employees and evaluate them on that basis.
These issues are integral to the sale of any company sales. Before you start the process, take the time to figure out what’s important to you. Then, drive those terms into your transaction.
Based in New York, ED POWERS is a managing director and head of the Capital Access Funds team at Bank of America Merrill Lynch. Capital Access Funds is an experienced, returns-driven private equity fund-of-funds.