> I was advised that 50% of signed LOIs actually close. I bet it’s less. You will see the LOI and dream of trading stress for riches. Remember: Less than 50% chance of closing.
100%
Which is why I hate that exclusivity is industry standard.
It feels exploitative that acquirers can demand exclusivity in a deal when the chances of it closing are less than 80%.
Imagine selling a house and taking it off the market because you got an offer with a 50% chance of actually closing 3 months later.
Even worse, most acquirers will say “nope” if you ask them to cover your legal fees if they back out of the deal.
This happens because sellers of companies only sell 1 or 2 companies in their lifetime, while buyers of companies typically do dozens and dozens of transactions. There’s an extreme power imbalance in favor of acquirers. Most sellers learn these lessons the hard way.
> There’s an extreme power imbalance in favor of acquirers.
1. Sellers can tank the deal as well for any reason, e.g. if they feel the deal is not going as fast as they like (and I recommend agreeing on a general timeline).
2. Sellers generally don't get very many offers, so the opportunity cost is often not as high as you might suppose.
3. Sellers can negotiate more friendly terms (e.g. closing sooner), but usually choose to concentrate 100% of their leverage into the price.
4. Due diligence is expensive for both parties, but the seller can easily re-use much of their side. Non-exclusivity would mean the seller could easily entertain many costly offers simultaneously.
No buyer in their right mind would agree to non-exclusivity, though they can agree to a reasonable window for that exclusivity.
These are definitionally the most sophisticated buyers and sellers in the entire economy. Organic market norms dictate what the industry standard is; it doesn't make much sense to think about protections. If you're selling, and you want some kind of protection, structure the dealmaking or negotiate the deal to get what you want.
> it doesn't make much sense to think about protections
Why?
If I’m going to put my business on hold for 3 months to entertain your offer to buy my company, why would it not make sense to make sure the buyer is serious enough to offer something they shouldn’t need to ever pay out if they are serious about their offer?
> structure the dealmaking or negotiate the deal to get what you want.
You usually have lawyers doing a lot of the legal strategy for you. It’s easy to say “negotiate what you want”, but realistically this negotiation happens via redlines back and forth between lawyers who consult the buyer and seller who both make concessions. Whether or not you make a concession is often influenced by what’s most commonly occurring in other deals.
What’s most common in other deals doesn’t automatically equate to what’s the most fair and balanced transaction terms.
tptacek was referring to mandatory legal protections.
Typically, those are only created for unsophisticated parties who don't know what to negotiate for.
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> If I’m going to put my business on hold for 3 months
I've had a failed LOI before (as a seller). Very rarely should an LOI ever fail after 3 months of exclusivity.
The LOI is "hey we'd like to dig deep into this, but we want to be sure we aren't wasting our time." Competent parties shouldn't take much more than a month to figure out whether it works or not. (Funding logistics, or SEC approvals, etc can stretch that out.)
I’ve anecdotally heard of sellers being strategically strung along to distract them/tie them up, to help their portfolio company get additional market traction.
This is by some less than ethical Chinese investors.
That said; it could also be (unsuccessful) sellers remorse.
Absolutely. You can get squeezed by a potential buyer. You're exposing your books, and if the buyer is particularly shrewd, it can manifest a very unfavorable position, especially for small companies. They squeeze, back out, and come back in 6 months if you're still around. If you're looking to sell your company, you need to know this and set up milestones to mitigate this.
If you're talking large M&A transactions where you have bankers and investors and advisors and a well built out team supporting the entire transaction process, absolutely.
But the volume of deals that happen in the $3-50 million range is very high (especially if you include non-tech companies, like PE's buying up a veterinary clinics or dentist offices) -- this segment of companies generally are not "sophisticated" re: M&A by any means.
To be fair this article is talking about a $100m+ transaction, so maybe that's the segment your head is in. I'm coming at it from the perspective of a < $50m transaction.
Coming from Australia the way London house sales work seems like such a complete disaster. It seems like you can make your buy contingent on selling your old house, which creates chains of buys and sells which fail the instant anyone pulls out. I can't imagine how anyone can operate in that environment.
That is quite normal in Denmark as well. Part of the reason is that the bank cannot approve of the deal, if you have not sold your old house. So either you sell your house and move into a rented apartment, or you commit to buy a house if you can get your old sold in some specified timeframe. Usually the sellers realtor advice the seller if the house is likely to sell or not at a given price.
You can make your offer contingent on selling your old house (or on an inspection, or anything else you want). Sellers are also free to not accept such offers. Both of my house purchases were from submitting a no financing contingency offer with significant earnest money, and I think that helped me win both bids.
Yes, for sure. Even if you are coming in 10k or 20k under others, having a 0 contingent offer is so much more clean and more likely to get approved. My last offer I went even further and added a note "I know both the roof and HVAC are old and ruined, I will not ask for either to be fixed as part of closing" and I won the house despite not being the highest bid.
As I suspect you know, Scotland has a distinct legal system from England & Wales, and large differences to England in laws around house buying & selling in particular.
There's still the 'offers over xxx,000' blind auction, but gazumping which is allowed in England (still I believe) is not in Scotland, and a good thing too.
They do take backup offers. We got our place that way. We didn’t want to beat the winning bid, but had a no contingency offer. We let them know if first fell through we’d still be interested at our price with a quick close. Someone missed some deadline and they were quick to call.
> In a free market, you should be able to market what you’re selling until the moment it’s officially sold.
That's not what free market means. In a free market (which this is an okayish example of) buyers and sellers are free to set their own terms, rather than having them externally imposed. So you are free to try and negotiate a lack of exclusivity, it's just that likely nobody will take you up on it.
SEC oversite and similar mechanisms, by comparison, is an external imposition on the market.
Ironically, what you seem be suggesting (exclusivity terms "not allowed") could only be enforced by regulation, therefore making the market less free.
What part of that is not fair? If someone else has more ready access to funds, and a seller wishes to prioritize highly for that, they should be able to. It would seem to me to be unfair to a seller to say "you must wait an extra N weeks on all sales because some buyers will need that long to get funds together".
We should look at why they don't close. How often is it because the seller misrepresented their product/company? And don't forget information asymmetry - theoretically seller knows 100% and buyer knows very little. TBH I find it amusing where people take that kind of risk at all - let alone paying for the trouble. It reminds me JPMorgan's acquisition of Frank - no wonder JP did all kinds of due diligence on this stuff, it is extremely hard to differentiate forgery from reality without being an insider.
As a seller, not going exclusive is an absolute PITA.
Based on anecdotal experience, I'd bet that most of the "50% of signed LOIs" don't actually close because the seller misrepresented themselves.
> There’s an extreme power imbalance in favor of acquirers.
Buyers do NOT like dead deal fees (it doesn't get paid out of the LP fund), so there is little incentive for them to play games there. So, no, this is not true.
I don’t think you’ve provided any evidence other than “buyers like to make as much money as possible at others expense” which everyone knows to be true which doesn’t bear much weight on a skewed power balance existing.
Buyers do like to make as much money as possible. That is why they purchase companies. Sellers also want to make as much money as possible. That is why they negotiate. If they can't agree, the transaction doesn't take place, which is usually for the better.
> doesn’t bear much weight on a skewed power balance existing.
What's your proof that a skewed power balance exists? Just because buyers have experience buying 100s of companies? Well then my experience advising 500+ companies tells me otherwise. So who's right?
Also, you're saying there is a power imbalance because. I was specifically commenting on that power imbalance affecting the poor (50%) success rate.
I don't know what the second one he has in mind is; the some of the ones I know are:
1 - operate a profitable business that throws off a ton of cash (these can be huge, like Koch, Cargill, Aldi, and can make long term employees extremely, and privately, rich).
2 - sell part of your company to the public (IPO)
3 - sell the whole company (M&A)
4 - spin out or sell off a division (a kind of M&A)
One major disadvantage of 2-4 is that other people tend to hear about it.
The second one the author had in mind is almost certainly IPO.
Your (1) isn't a pot of gold in the colloquial sense of "suddenly finding a life-changing amount of money". Running a profitable business is ideal, especially in a post-ZIRP world, but it almost never culminates in a single "all my hard work has paid off, I can take it easy now" moment like IPO or acquisition.
> Running a profitable business is ideal, especially in a post-ZIRP world, but it almost never culminates in a single "all my hard work has paid off, I can take it easy now" moment
That first time you pay yourself $20MM sure feels like that, and repurchasing from your employees or paying out large bonuses sure can for them too.
> like IPO or acquisition.
Have you been through either? "Take it easy now" is the opposite of what happens in an IPO -- you're now subject to the scrutiny of the financial press, SEC, and random shareholders when before you could send monthly updates to your board. And unless you avoided an earn-out in your acquisition, the slog just continues.
agreed. I think IPO is the opposite of "take it easy" (gotta keep that stock price up quarter by quarter.)
acquisition is also "long term". Usually there's months involved before hand, and months, if not years, hitting targets after acquisition to actually get the fully agreed-to payout.
Equally, sure, I agree, there's seldom a "can take it easy" moment running a profitable business, but over the same sort of time frames as IPO and acquisition you can certainly "wake up" and realize that all that hard work is now paying off. Once a company is in the black, for multiple years, and has accumulated "large enough" reserves, and you're not putting out fires three times a week, it can certainly feel like retirement (financial independence) is getting closer...
Why on earth would you want to let someone know that you had a big payout? It's none of anybody else's business how much money I have and if nobody knows you can walk downtown in peace, go to restaurants, hang out with your same friends, and still have lovely ski or yacht holidays in peace.
The Bay Area and Seattle have quite a few "unknown" billionares. For example if you had less than 5% of Microsoft when it IPOd you were not listed in the S-1, and if you hung on by the mid 90s you could have been worth 8-9 figures.
> Why on earth would you want to let someone know that you had a big payout?
One reason is that it can help attract talent & useful connections. If you're a known billionaire, I imagine it's pretty easy to get a meeting with anyone, which could lead to educational & enriching conversations that you otherwise wouldn't have access to.
I'm curious if there's information from ppl who've experienced this type of publicity, where they thoughtfully evaluate the pros & cons, and evaluate how they net out.
The concept of profit itself means you are beating the market by taking advantage of someone else or extracting value through arbitrage. In a perfectly competitive market with zero barriers to entry, profit margins will converge on zero as new entrants capture market share or competitors leave overcrowded markets.
Edit: this is classical economic philosophy, not my personal opinion
Just because you dislike it doesn’t mean it’s not a useful framework. And yes, it does come up in first year econ classes, as well as in advanced courses that study the history of economic thought. If you bothered to read the linked page or do your own research on “economic profit” you would realize that the “normal profit” you’re thinking of is a distinct subject.
Edit: also keep in mind that literally all of economics up until relatively recently relied on broad assumptions like the rational consumer. Kepler thought the sun was the center of the universe, does that invalidate his laws of planetary movement?
> Just because you dislike it doesn’t mean it’s not a useful framework.
You've got your arrow of causality backwards. People dislike it because it's a useless framework when taken in the simplistic way you've presented it.
The actual concept doesn't say that you can only make a profit by stepping on people's heads. It says you can't profitably do the same thing in a market forever. You have to introduce new and better products, which you can profit from until your competitors catch up.
The implicit assumption you seem to have here is that building the “machinery” to get to the point of a “frictionless”/perfect markets is not fundamentally valuable to everyone.
The implication in fact is that it’s immoral to be ‘paid’ for doing so?
I’d argue that just makes the world a poorer place overall, as there is no direct incentive to do things better. In the typical environments this plays out, there is actually a lot of incentive to do things worse.
Cost plus is one way of doing this kind of thing, and that gives strong incentives to inflate costs, for instance.
gov’t budgets are another, and anyone who has worked in the government or other large organization knows you’d better spend your budget each year or you’ll lose it. So no one ever has any left over short of something crazy happening.
>People often get into startups because of the chance for a pot of gold at the end of the rainbow.
Few people will take the chance to join a risky venture if the didn't see some kind of payout down the road. I once left my stable job to join a startup. I took a salary cut and even loaned them money to make paroll. But I got some founders stock and had confidence in the product we were building. It payed off years later when the company was aquired.
But I also knew that I had to contribute effectively if I wanted that company to succeed. Too many will join a startup just to be on the bandwagon if an M&A event happens. They think they will win big even if they do little to make that actually happen. These people are parasites that can kill a startup.
Of course, there are no guarantees that a startup will be successful. But it wasn't just luck. Myself and others worked hard to create something valuable. If I wanted the safety of a paycheck while working just the minimum hours, I would not have made the leap.
My criticism was of those who join a startup for the chance at a payout but don't want to put in the effort to help make that a likelihood.
The problem with founders is that, in my experience, they usually can't tell who's good and who's just being useless for 12 hours in a row at the office. So they use "hours" as their metrics to decide who's the best.
Agreed that success such as yours is not only luck!
But as a co-founder of a SaaS company that has survived over a decade, I would stress that luck* is also part of it.
Many people work very hard at a startup and the thing just crashes and burns, sometimes very quickly. It's not just hard work and being competent at your job - other things outside of your control or influence have to happen to align, too.
* I think "luck" is a pretty good descriptive word for things outside of your control and influence going your way.
Startup stock can get diluted to hell during a non amazing acquisition. So founders and key staff (3-4) sometimes get a deal structure that rewards them for doing a year or two at buyer
The author basically says this - but companies are not sold, they are bought.
Build a great business and focus on running a great business. Selling is just time in the market. If you're creating value, someone eventually will want to buy you (US centric mindset btw).
> Your post-money valuation is a hard floor on your sale price
This doesn't have to a hard floor but:
1. Most fundraising is done on a 1x liquidation preference. (Investors get paid back first at 1x their investment.) So selling less than your previous valuation means additional dilution for common shareholders.
2. Investors will likely be unhappy and could even block the deal if it is less than they thought it was going to be worth.
Yes, there can be limits in the contract, making it not possible to sell for less than X in the next Y years. So if you want to do that, you then need to convince your investors this is the best deal they will get.
Also, the investor also often have liquidity preferences. So if they invested at a valuation at $100, and you want to sell at $50, they might get all their money back before previous investors and yourself get a single cent. Then it might not be worth it for you to sell at all.
Even if there isn't a contractual limit, I think this is a pretty easy logic problem for an engineer (such as myself):
If a stock costs $10, and I spend $100 to buy 10 shares of that stock, I don't want to sell that stock if it's worth less than $10.
Will I consider taking the loss? Maybe... but I will probably be unhappy with it, so I will do everything in my power to wait to sell until the stock is worth more than $10 again.
It’s implied when OP says “run a good business”, but as someone who’s been on the acquiring side - it becomes a lot harder to be the advocate to buy a company when it’s losing money.
(The business case math gets hard fast, with unprofitable companies & introduces a lot more risk)
Companies losing money can still sell, but expect the price to be a lot lower, to make the business math work better, and to offset the risk.
You can't sell "potential" but you can buy it. In other words a "good" company, with a "good" product, but running really inefficiently (and thus making a loss) can be very attractive to a buyer, if they can get it cheap. They might see that AWS line, or that Google marketing spend, or the giant sales team, or whatever and realize that by refactoring that part of the business they can extract a lot of value in the short term.
But this "potential" is not reflected in the price. You can't sell a business saying "oh, you just have to make AWS go away..." etc.
Ultimately any seller is saying "you're offering me a price where I think I get more cash now than waiting for later". Usually with time commitments built in.
The buyer is saying "you have something interesting, but I can get a lot more profit out of it than you are currently doing." Often by doing things you have specifically rejected (downsizing staff, cutting expenses, maximizing revenue etc)
Be aware that any _principles_ you have, which are suppressing your profit (open-source licenses, fair wages, pride in customer service, reasonable price increases, employee benefits, whatever) are all _almost certainly_ going to be changed after the sale. Those things are exactly where the purchaser is going to get their return from.
> Deciders on M&A [do] not include the VP corp dev or the corp dev managers. Those are good relationships to have, but they don’t initiate large offers.
What is corp dev’s role then?
Maybe they like an in house recruiter: they conduct negotiations and ease the process by meeting with both parties, but the yay/nay decisions are made by the hiring manager?
No, they're less recruiters or negotiators and more as scouts.
They are supposed to go out and find interesting things in (or adjacent to) your space, get to know them, understand how they measure up among their peers and competitors, and bring all that information back to the company.
They're all waiting for the company - usually the CEO, CPO, or CRO - to say something like "we have a need for X."
Background: I was at Okta through the Stormpath, Azuqua, and Auth0 acquisitions. I didn't have a role in any beyond knowing the M&A team and observing it throughout.
Thank you, that’s a useful explanation. I suppose, in that sense, the way corp dev operates between businesses is the same way that diplomats and business envoys operate between nations. The public role is about developing new opportunities but there’s a good amount of intelligence work (spying) going on at the same time.
Ha, I figured it must be Tiny even before realizing who the author was (or seeing the name in the url).
It's tough as a founder who only ever expects to sell one company though. You don't really know how much you're potentially giving up for that easy deal if you haven't tried to solicit other offers. But you can't know of any offer is really real without spending months working on it. I'm really not sure what I'll do when I'm ready to sell. Maybe the perfect offer will just drop into my lap someday; that'd be nice.
Yes: “Hey, our company is on the market for sale and I thought you might be interested in taking a look before we accept another offer.”
And you can tailor it based on the specifics.
Working with an advisor can sometimes make this easier because they can be more direct and say things like: “Competitor X has made an offer and I know it’d make your life difficult if this asset ended up in their hands, so I wanted to give you an opportunity to take a look first.”
By the way, waiting until you get an offer to start trying to bring in competing ones isn’t great, definitely better to do that as early as you can if you’re serious about selling. You risk pissing off the interested party if you’re making them feel like they’re just being used as leverage and drag things out before giving them an answer.
In many ways. Like adjusting to the new company's culture. In staying the relevant length to exercise options. In producing at a similar caliber prior to acquisition. The list goes on and on.
Yeah, I'm a bit burnt out on startups personally. They tend to give somewhat mediocre compensation, and they give you a bunch of shares with some bloated arbitrary value number to make up for it.
Obviously it would be awesome if those shares end up being as valuable as they claim it is, but honestly it just kind of feels like lottery tickets. Most startups don't end up becoming the next Amazon or Apple, and as such those shares end up not being worth anything.
I think startups and venture capitalism is destroying the economy. I think this is pretty clear qualitatively, but I'd also like to start investigating it quantitatively.
It certainly feels a bit ponzi-ish to me. Historically it feels like you raised funds by IPO-ing immediately and going from there. With VC, it seems like the plan is "waste VC money until we IPO, and then it the public's problem, not ours", and everyone who can realistically make money exits.
I suspect a place to start investigating would be to try and find the number of dollars being spent by the VC firms in relation to how many startups go belly-up. It certainly feels like startups are more volatile than ever but I don't have any data proving that.
100%
Which is why I hate that exclusivity is industry standard.
It feels exploitative that acquirers can demand exclusivity in a deal when the chances of it closing are less than 80%.
Imagine selling a house and taking it off the market because you got an offer with a 50% chance of actually closing 3 months later.
Even worse, most acquirers will say “nope” if you ask them to cover your legal fees if they back out of the deal.
This happens because sellers of companies only sell 1 or 2 companies in their lifetime, while buyers of companies typically do dozens and dozens of transactions. There’s an extreme power imbalance in favor of acquirers. Most sellers learn these lessons the hard way.