So why do you really want to sell your business? There are actually many possible answers to this opening question. Here are a few of the more common ones:

1. You don’t want to sell any time in the next 10 years, but you’re making sure that if you if and when you do, you’re able to do so.
2. You don’t have any plans to sell any time in the next ten years, but someone might make you a great offer and you’d like to be able to respond effectively, without throwing a spanner in the works. (This is smart – many businesses go off the rails trying to handle a sales process, expected or unexpected).
3. You’re planning to retire sometime in the next few years and you’d like to sell it for the best possible deal.
4. You need to retire immediately and you need the best possible deal
5. You want out, but you’d like to keep a stake for old time’s sake and to show your continued faith in the business.
6. You want some cash for other things, but you’d like to stay in control.
7. You think you’ve taken the business as far as you can, and it’s probably worth more to someone else than you.
8. You reckon that the business is going well today, but its future isn’t that great if it stays as a standalone entity.
9. You’ve got another more exciting project and you want to get some or all of your money out to pursue that.
10. The business is just not as good as you’d hoped and you want out.
11. The business is a dog and you want out now while there’s still something left.
12. You’re bored/exasperated/overwhelmed by the business.
13. Your co-shareholders are dysfunctional/unrealistic/broke/ etc/etc - meaning expansion, major transactions, capital raising, share issue and board appointments are virtually impossible; the only way out is to sell the darned thing.
14. Some of your fellow shareholders want out, but you can’t afford to buy them out.
15. You want out, but your fellow shareholders can’t afford to buy you out.
16. You don’t want to sell the business to anyone else outside the firm, but you’d like to pass it on to family, staff, or an employee trust sometime (having taken enough to give you a comfortable retirement).

There are many more, but you see why I ask the question. Each answer (or combination of answers) puts a very different slant on the way we might think about the business strategy and any preparation for sale. You and your inner cabinet need to be honest about the reasons for selling, so you can plan accordingly.

Yesterday I wrote about the possible challenges for owners of established midsize businesses who want to exit their investment.  In an  occasional series, I’ll cover how to address those challenges.  I’ll be drawing on my experience of being involved as a CEO, owner, director and/or adviser of mid-size businesses undergoing or thinking about ownership change, as well as having been involved in pre- and post-deal situations on the buyer side (mid-size and large size).

Your exit might be many years away, but it’s never too soon to start planning for it. These are some questions I’d be exploring with you:

1. Why are you selling?
2. What exactly does your business offer the world?
3. What are your goals and dreams - inside the business, outside the business and after the business?
4. How attractive is your business, and what’s wrong with it?
5. Who are your key people, customers, suppliers and partners, and are you vulnerable to their departure?
6. How do you make yourself unnecessary to the business?
7. Which buyer types should you target?
8. Who would want to buy it and why; who should, but doesn’t, and why not?
9. Should you sell gradually or all at once?
10. Should you sell to family and/or staff?
11. What can you do to improve your business attractiveness?
12. What should you do to be ready for sale?
13. How to you manage the sale process?
14. What’s in a good sale agreement for you, and for your buyer?
15. How do you ensure a successful transfer?
16. How much should you be involved after the deal is done?

The best way to have a great business to sell is to have a great business. Actions you’d do to prepare your business for sale are often actions you should do anyway. The answers to these questions and the ensuing discussion will help you formulate a business plan with successful exit in mind.  I’ll be addressing each of them over the next few weeks.

PS. I have other questions when looking at raising capital for expansion and when looking at an acquisition, but those are for another time.

There’s a real problem developing for many private companies whose owners are contemplating exit.   They expect that they’ll be able to sell their businesses when they’re ready to retire, but who to?

The NZ Herald notes that 35-45 year olds, who should be the next generation of business owners, are much smaller in number than the baby-boomer generation looking to retire, both because of lower birth rates and because of a higher proportion living overseas.  From a survey of companies with turnovers between $5 million and $150 million, the NZH reports that:

• 59% of medium-sized firms are run by people over 50; 23% are run by people over 60.
• 63% of owners are concerned about who will take over; 17% have done something about it.
• 42 per cent of owners had family members working in the business and almost as many (38 per cent) thought they were capable of taking over; but only 24 per cent believed they could afford to.
• Forty per cent would consider selling to management, but only 18 per cent regarded that as financially feasible.

These stats are probably replicated in many developed countries. They explain why so many business owners (74%) expect their exit will be achieved by a trade sale (i.e. to another business). While many owners would love to sell their businesses to their own teams, the reality is that the virtually no employee can afford to buy an established mid-size business.  You don’t make that kind of money working for someone else.

So the obvious solution is to sell to another business. But here’s the next problem. Unless your business is big enough and successful enough to attract the attention of much larger players with the available cash and the potential to do even more with your business than you have, who will want to buy it?  Most other similar midsize businesses are not cash rich, and their owners want out too.  Well yes, but you’ve had a special relationship with that larger international firm with whom you share big deals and technology - they’ll be sure to want to buy your business. Unfortunately your golden parachute maker either doesn’t have the wherewithal or simply isn’t interested in actually owning your business.

Starting to get the picture?  Fortunately, there are some things you can do, and I’ll be exploring them in future writings.

Just posted in the Financial Times Alphaville blog:

“It’s a sad day but we’ll get through it, and we may be better off for it… The company that is taking us over, or is merging with us, is a first-class company… That which doesn’t kill you makes you stronger. By now we all must be Hercules… We ran into a hurricane… There’s no anger; there’s simply remorse.”

Alan Schwartz, Bear Stearns CEO, speaking at the shareholder meeting which finalised and formalised the takeover of Bear Stearns by JP Morgan moments ago. The deal is due to close tomorrow.

No, I’m not talking about Icahn’s tilt at Yahoo’s board. I’m talking about the famed activist shareholder’s weblog, announced with much fanfare in January, of which nothing has since been heard. We were expecting fireworks, and so far we’ve had not even a fizzle. Why make an announcement about something people will be eager to read, build a site, and then not post a single article? Better not to have even raised the subject.

I was chatting recently with the CEO of a promising technology company. My companion wondered whether to accept an unsolicited offer for his business, or to hold on and invest heavily in a major new product development which could double the value of the business in 2-3 years time, if it succeeds.

I asked for more information: the size of the development investment required (very large), the probability of it delivering a marketable and profitable product (likely but not certain), the likelihood of market success (reasonable but not certain), and the likelihood of someone being willing to buy his business in future (likely but not certain). On balance, the risk and time weghted returns from investing versus selling were broadly similar. Given he has venture capital investors who are desperate for a successful exit sometime soon, and he himself had always planned for a trade sale about now, the answer was obvious.

‘A bird in the hand is worth two in the bush’. Sell.

Microsoft says it has walked away from its bid for Yahoo, after upping its offer to $33, but Yahoo still asking for $37. Given the scale of the deal, and the potential for a clever play based (as I saw it) on email, I’m surprised. I thought Balmer would go hostile and pursue a proxy fight, which he hinted at. However, Balmer’s withdrawal letter to Yang (worth reading) makes it clear that Yang had more poison pills up his sleeve, and which which he was prepared to use. That, plus the absence of a compelling alternative for Yahoo, puts Yang & Co firmly in the sights of litigious shareholders who now face a major drop in value, most likely to below the pre-bid price of $20.

I’m not the only one surprised. Lance Wiggs shorted Microsoft on the expectation that the deal would go through (and weaken Microsoft as a result). But Lance implies (hopes) that Balmer’s walk-away might just be another negotiating tactic. In the letter to Yang is this hint: “I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares.”

Update: Rod Drury has written a witty paraphrase of Balmer’s letter to Yang.

Berkshire Hathaway and Mars have put together a US$22b deal to acquire Wrigley - yet another example of Warren Buffett’s adage that “the best place to be when the market falls off a cliff is waiting at the bottom with a big bag of cash“. Imagine the market power - effectively owning nearly every bit of space occupied by all that naughty stuff next to the supermarket checkout (which all kids learn is a good place to cause a scene). Cadbury and Hershey will have to move fast to counter this.

I assume (details were unclear when I wrote this) that Mars is the active partner - with BH taking a stake - meaning Mars can integrate and rationalise sales, distribution, merchandising and IT. Sounds like a smart move, and Buffett has a track record of paying good prices (good for buyer and seller) for good businesses.

Conventional wisdom says that big company acquisitions of other big companies are bad. There are certainly plenty of examples that failed to live up to expectations. However, just because some fail does not mean that all will fail.

In 2001, HP’s then-CEO Carly Fiorina proposed that HP acquire Compaq. Fiorina argued that the two computer giants had complementary strengths which, if combined, would enable the merged entity to do even greater things. The proposal met vociferous opposition on all sides - commentators, competitors and major shareholders. Even after the proposal was finally approved, the merger was held to be a folly, evidenced by defections of key people and customers, and 3 years of poor results. Fiorina eventually had to go. But was her strategy wrong?

Writing in The Huffington Post, Ben Rosen analyses the deal 6 years on. He is a former chairman of Compaq, who retired from that role a year before the deal was proposed; so he’s informed, but independent. Rosen hails the “merger” as a great strategic success, but opines that Fiorina lacked the skills to manage the much larger post-acquisition business. A change of leadership brought those skills in. Under Mark Hurd, the combined HP/Compaq business was able to harness its potential and deliver outstanding success:

Today, the merger is nearly six years old. And, surprise, surprise — it’s turned out to be a sensational combination, whether measured by market share, market leadership or increased shareholder value.

The share price chart says it all. 6 years on, and despite those 3 poor years, the strategy looks to have been vindicated. The lessons: even the best strategy needs great execution, and poor execution doesn’t mean the strategy was wrong.

I’m saddened by the news that Compudigm has gone into receivership. It was my first passive venture investment (albeit a small one) after the successful sale of Deltec. The main funder in that round was Infratil, through its shortlived technology investment fund, but I was able to participate because I knew Compudigm CFO Mukesh Ghordan. There was some talk of me going onto the board, but it came to nothing in the end, so I just observed from the sidelines, so to speak.

From what I surmise, Compudigm, after an early flurry of success, was unable to build up demand for its data visualisation software in any markets beyond casinos. Living off support fees and the occasional licence and implementation, it entered “the land of the living dead”. Other things went wrong, until the writing was on the wall last year, when it sold the casino market rights to a gaming systems specialist. I voted for the sale, knowing it was a last ditch attempt to keep Compudigm alive.

Venture capitalists often say that they expect to lose most of their investments, but make good money from the one or two in ten that really succeed. Unfortunately for Compudigm’s investors and staff, that ratio held true. But at least they tried. When politicians, journalists and the public berate businesses for lack of growth and profit, remind them of the risks and the difficulties. Most of them wouldn’t bet their homes and reputations on a business venture that might not succeed. The Compudigm founders did, and for that, at least, they should be applauded.

Remember the rule about angel and venture investing: if you aren’t prepared to lose the lot and smile about it, then don’t invest.

Update: Peter Griffin has written about the demise of Compudigm, including the departure of founder Andrew Cardno.  I know very few details, except that things got very messy towards the end.  Another of the tribulations of being a small, passive investor in such a venture is that as other investors come in, you lose touch with what’s happening, but it’s almost impossible to exit. Again, read my closing paragraph above.

I have to eat my hat. JP Morgan Chase has increased its offer for Bear Stearns from US$2 a share to $10. The board of Bear Stearns must have been totally overwhelmed by the liquidity situation to have agreed to the original offer. Anything they say from now on will have little credibility. Expect heads to roll.

On Monday, we heard the news that JP MorganChase (aided by the US Fed) has made Bear Stearns shareholders an offer they can’t refuse - to be taken over for just US$230 million in JP Morgan stock (versus recent capitalisation of over US$20 billion) and that includes their US$1 billion head office. The choice is stark - accept or go bust.

I’ve seen some of these rescue deals rejected by shareholders, who seem to prefer the company to go under. Why rejected? Because irrationality takes over, because of unwillingness to accept the drop in value, because of a misconstrued idea that somehow this is all unfair. The shareholders effectively say ‘We’d rather lose the lot than let you get something’.

There doesn’t seem to be any room to negotiate a better deal. Given Bear Stern’s board has recommended the deal (and US boards are very vigorous in maximising value in takeovers), the final offer is on the table. I’d be inclined to accept if I was a shareholder (I’m not). At least I’d be getting some JPM shares out of it.

You’re probably familiar with the old Boston Consulting Group 4-quadrant grid of business extension strategies:

You can compare any two attributes of your business, e.g. products, technologies, geographies, customer segments, skills, operational processes, channels, etc. The message is usually the same - it’s easiest to deepen your current position, but if you are going to extend your business, the more dimensions you change, the bigger the challenge.

It doesn’t matter whether you’re extending organically (i.e. doing it yourself) or by acquisition. However, if you’ve got a sound reason to grow in one or more dimensions, then acquisition can be a faster and lower risk route than trying to do it all yourself, if you can plan well, buy well, and execute well.

Of course, you could acquire a businesss you don’t really want, in order to divest it and acquire other businesses that you do, but that’s a whole different area of the M&A game. I still shake my head when I think of how brick and crockery maker Ceramco was turned into bra and pants maker Bendon. That changed just about every dimension possible.

Sam Morgan, the founder of TradeMe, has handed over the CEO role to become non-executive chairman, which frees him to spend more time with his new venture investments. TradeMe - the successful auction, dating, property, cars and jobs website acquired by Fairfax for what seemed a huge, but justifiable, sum in 2006 - has a legion of fiercely loyal fans, not only among its customers, but also among the web business and tech community. TradeMe epitomises for many a new way of doing business. And Sam is deeply entwined in that corporate persona.

No good business should be dependent on one person, and TradeMe has continued to develop its leadership team since Fairfax took over. Sam has been steadily handing over the reins for some time - Jon McDonald has effectively been running the show for over a year. But if ever TradeMe stumbles - and it will, every business does - Fairfax will cop the flak for ‘ruining’ Sam’s creation, and Sam likewise for no longer owning and driving the business. That would be unfair on TradeMe, Fairfax and Sam. All parties are to be congratulated for what they’ve achieved.

Now all Sam has to do is pull off another one. Actually, no, he doesn’t. He doesn’t need to do a damn thing, but don’t tell him that!

It may come as a shock to some people, but when someone decides to buy your business, don’t be surprised if they don’t want to buy your company. Your company is a legal entity that, no matter who owns the shares, carries with it all oustanding liabilities and obligations it has incurred at any time in its past. Nasty tax penalties following audit, product defect claims, employment grievances, contract obligations, undisclosed side deals with customers and suppliers, etc, etc - a smart buyer of a business doesn’t want any of that to come along after the deal is done. While warranties and personal guarantees might help to cover such eventualities, they are very imperfect mechanisms, limited in time, scope and value, and they will restrict your ability to spend reinvest your hard-gotten exit money. So with small and medium size businesses, it’s very common to see what is known as an asset sale or ’sale as a going concern’. It’s usually cleaner and simpler for both buyer and seller.

In effect, you sell your business to the new owner by transferring your assets, staff and liabilities to the new owner, together with the right to operate the business in future. There are several variations on this theme, such as the original owner receiving all outstanding monies owing by customers and paying all outstanding monies owing to staff and suppliers as at the transfer date.

The catch with such a sale is transfering customers, suppliers, distributors and staff, especially if they are bound by contract. Each and every one might need new agreements signed by all parties and effectively substituting the new company in place of the old one. While often this can be achieved (but by no means always), it can take a lot of time, money and effort, and it is likely to delay and maybe diminish the final value. (This is why large businesses are almost always sold by share sale - the paper work is just too hard otherwise - but the risks are perceived to be lower).

Given that almost every business gets sold eventually, it will pay huge dividends if all your contracts (customer contracts, supplier contracts, employment agreements, property leases, product warranties, distribution agreements, etc) are written with such an eventuality in mind. Your lawyer should be able to draft some straightforward contract clauses to enable the transfer of rights and obligations in the event of selling all or part of the business on a going concern basis. Even if you’ve been in business for a while, it’s never too late to start. Insert a business transfer clause into all future contracts, including renewals of existing contracts.

Sometimes someone will refuse to accept a contract with a business transfer clause in it. Then you make a choice whether or not to still do that particular piece business. But, for most practical purposes, such a clause should be your norm and will enhance the attractiveness of any sale of your business.

First Telemedia builds some IP and goes bung. Then Argent acquires Telemedia’s IP but later goes bung. Now Mobilis acquires Argent’s IP. Chris Jones as CEO is present at every incarnation. Is this guy determined, or what? I don’t know him or his companies (I think we’ve very briefly met once or twice at functions or conferences), so I’m in no position to answer that.

Some years ago, I worked with the board and owners of a mid-size business which had the opportunity to expand, and had several funding options available. At the same time, we also considered the implications of outright exit. Adding to the issues was the realisation that the status quo wasn’t a long-term survival option.

This table summarises the discussion of the pros and cons of the options:

Obviously this is a gross over-simplification of the alternatives, and was in the context of the structure and behaviours of their industry.

We explored each alternative in terms of complexity, risk, growth, the impact on shareholder value, and perhaps most importantly, the appetite of the owners for the next stage of the journey. This led to the conclusion for these owners that their first preference was to seek a financial investor for expansion, with an exit strategy based on a 100% trade sale within 5 years. If no acceptable financial investor could be found within 12 months, then the business would be put up for 100% trade sale, while it still had the market expansion opportunity.

Now that wouldn’t necessarily be the conclusion for every business, e.g. Xero went for an IPO as its primary expansion capital funding mechanism. The point is that you shouldn’t make a quick assumption about how you should fund your business expansion or, indeed, if you should expand at all.

The latest ploy in the Microsoft/Yahoo takeover battle has now been revealed. Yahoo has put a poison pill takeover defence in place, in the form of expensive staff ‘termination payment in the event of takeover” provisions.

I commented on Rod Drury’s blog that if I was a Yahoo shareholder, I’d be very angry. Existing staff contracts will already cover termination, and set the ground rules when people accepted their jobs at Yahoo. So what’s this about? Protecting the incumbent management. MS (or any other bidder) will discount the cost of the poison pill in any final price, and Yahoo shareholders will pay the bill.

If you invite in external shareholders, you have to treat them right, and this is wrong. Yang and Co should get the sack for this stunt.

Yesterday’s announcement that global food company Fonterra’s owners (New Zealand’s dairy farmers) need more time (years) to consider the company’s listing plan is code for saying that the board doesn’t have the numbers to get the plan approved, but it’s hoping it can still win the day. (Bernard Hickey, as usual, has something trenchant to say on the matter).

Fonterra dominates cross-border trade in dairy products (commodities, branded food, and specialty ingredients), but is still small compared to Nestle and Kraft. I was in favour of the plan, given the political nature of cooperative ownership. It would see the farmers retain majority control, but allow outside investors in, which would fund Fonterra’s global expansion. There is a certain irony in the possibility that a well-funded Fonterra could have teamed up with the Sage of Omaha to take a major stake in Kraft.
Despite the global scale of Fonterra, it illustrates a classic owners’ dilemma seen in owner-operated and other tightly-held businesses. Do you allow outside investment in order to expand and grow the value of your investment, but also give up a degree of freedom?

Many owner-operators are, frankly, terrified by the loss of control while they’re still working in the business. They are prepared to give up substantial long term value just in case they might (repeat, might) lose some short term income (of course, this fear usually disappears when it comes to exit time). In Fonterra’s case, this is even though the farmers would still be the majority owners and in a position to make sure that they aren’t disadvantaged.

I’ll be looking at the pros and cons of external investors in tightly-held versus widely-held businesses sometime soon, but there is one point I’ll make now. Although you might seek and act on advice, you wouldn’t accept anyone telling you what to do with your business (investment, house, car, holiday plans, etc). Neither do most business owners, especially farmers who are by their very nature tough-minded, individual owner-operators. Fonterra is their business - literally. Whatever other people, or indeed they themselves, might see as more rationale alternatives, they can (within the limits of the law and their bank) do whatever they like with it.

Paraphrasing Warren Buffett, he once said that he likes stock market collapses, because they make great companies cheaper to buy without making them any less great. So it’s no surprise to hear that, during the last year’s US bear market, Buffett’s Berkshire Hathaway has bought enough shares to become the largest single shareholder in global branded food business Kraft. Again paraphrasing Buffett, when the market falls over a cliff, the best place to be is standing at the bottom with a bag full of cash.