Everything you need to know before selling your

companyQuick course

Darko ButinaBUDS Consulting Ltd.

What Do The Following Have In Common?

• Company business• Business success• Attracting investment in company• Selling company

Key Indicators

• EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization – put really simplified, it shows what kind of potential free cash-flow the company can generate• Revenues – growth• Profit – profitability over time• Liquidity and cash-flow – liquidity is not indicator, it is a „state“ – put

really simplified, it reflects whether you are able to regularly pay your dues; cash-flow is a statement, which shows how your status of liquidity changes over time• Net debt – short-term and long-term debts minus cash and other

very liquid assets (including really short-term claims)

Non-Financial Key Indicators

• Number of customers - growth• Churn rate – % of customers leaving the company in a certain period• Average order value• Number of visits• Number of visitors

and lots of others…

Before Looking For Investor / Buyer

• Growth – „If the company does not grow, it is dying.“• Clearly defined (and written) plans for the future• Profitable business• Properly managed business

• All contracts are signed – with buyers, suppliers, employees, outside associates (part-time workers etc.), consultants (book-keeping, lawyer, tax advisor, IT support), advertising contracts, lease agreements etc.• Properly prepared financial accounts – proper and timely book-keeping and

reporting• Regular fulfilment of company‘s obligations (including paying debts when

due)• Regular collection of claims• All legal obligations fulfilled – accounting manual (and other manuals and

rule books), declared and paid taxes, acquired all necessary permits to do company‘s business etc.

Phases Of Acquiring Investor / Buyer

1. Decision of owners to receive investment / sell the company2. Selecting consultants3. Define what kind of investor / buyer company wants4. Preparation of marketing materials5. Contacting potential investors / buyers6. Negotiation7. Term Sheet8. Due diligence9. Agreements10. Investment / sale of the company

Decision Of Owners To Receive Investment / Sell The Company

• Reasons to receive investment / sell the company:• Pressure from third parties (banks)• Business reasons (liquidity issues, investments, unavailability of bank loans, connecting for

strategical reasons etc.)• Cash-out

• Raising funds and selling the company are done with people and between people• Transparent and correct relationships• Owners should act jointly• CEO usually represents the company and owners and communicates on their

behalf with consultants / potential partners / investors / buyers• You need to pay attention to have the right focus – it is too quickly only on the

investment / the sell instead of being on conducting regular business – communication and getting everybody on the same page requires extraordinary amounts of time (and other resources)

• Whole process lasts 6 months at the minimum – realistically it lasts 12 months – potentially even longer

Selecting Consultants

• Raising funds / selling the company does not cost nothing – do reserve enough funds• Use experienced consultants so that they protect you from making too

many mistakes and take as much work away from you as possible• What can you expect from consultants:

• Access to more potential investors / buyers as you could have on your own• Help with preparation of the materials (lower workload of key personnel of the

company)• Help with negotiations• Term Sheet and agreements – all legal issues; appropriate content

• What you should be wary of:• Bureaucratic approach• Extra work (larger scope of materials and other work than would be necessary)• More harm than benefit in negotiations – if particular consultant is not

experienced

What Kind Of Investor / Buyer Does The Company Want

• Strategical investor• Understands your business – can see added value in the company (from

market share etc.)• Financial success is not necessarily the only motive for the investment• Can provide also non-monetary added value• Entry of strategic investor often means the investor will buy the company in

due time

• Financial investor• Can help with finding the buyer in due time• Is willing to invest in earlier stages of the company• Achieving financial goals is key

Marketing Materials

• Materials should be prepared with potential partners in mind• Numbers (financial accounts) should support content and vice versa –

plans need to be credible!• Standardly

• Business plan (longer document with all relevant explanations – together with numbers)

• Executive summary (shorter re-cap of the business plan – only few pages long)

• Teaser (1-2 pager – »promotional leaflet«)

• My recommendation• New start-ups – keep it short and simple (business model canvas etc. plus

numbers)• More mature companies – business plan in suitable form (it can be also

shorter – not old school long form) plus numbers• Teaser is mandatory to generate interest among potential partners

Contacting Potential Partners

• Contacting process:• List• First E-mails, then follow-up by phone• Conf calls / meetings in person / Skype

• Consistency – the base of agreement is trust (and consistency is mandatory to build trust; transparency is helpful for consistency)• Single communication channel – ideally 1 person – recommended

also for the reason to have „higher escalation level“ – in case negotiations do not proceed as planned• If owners are not alligned, the deal will not go through – as much as

possible should be agreed when starting procedures (valuation, scope of warranties and representations etc. – if possible, everything agreed should be put in writing)

Negotiations

• Do your homework – there is never enough information about who do you have on the other side – personally and business wise• Negotiations can be extremely personal – keep in mind that it is only

business in the end• The other party invests in / buys your company because of financial

reason – not because of personal conviction or its philosophy…• In the beginning everything is subject of negotiations – every aspect

of the business (valuation, payment structure, payment terms, escrow, competition clauses, conditions for subsequent investments / share sells, payment of costs, various representations and warranties etc.) – towards the end it is really hard to re-open issues that were already discussed and agreed upon earlier…

Term Sheet

• First binding document between the company and investor / buyer• Short TS which leaves lots of issues open / longer TS which defines in

more detail the future deal• Take signing of Term Sheet seriously – and with appropriate level of

negotiations• Be careful of various clauses that protect only the investor and put

company / owners in subordinate position (like full ratchet anti-dilution caluses etc.)

Due Diligence

• Detailed review of the company – before agreement is signed• Lots of deals fall through because of DD

• Proper management of business• Accurate numbers• Consistency and transparency towards investor / buyer

• Experts, who perform DD for the other side, are not always right• You can prevent wrong conclusions with appropriate and timely

explanations of provided data – but you need to understand how DD consultants operate (legal advisors, tax advisors, auditors, business experts – employees of investor / buyer)

Agreements

• You need experienced lawyers to draft transaction agreements – there is not too many experienced lawyers who understand structure of VC transactions and who know how to approach such transactions – make sure you hire the right ones• Drafting agreements does not demand only legal expertise, but also

business expertise – make sure you understand what you are signing – appropriate business consultant should be able to help you with that• All relationships between individual owners and also with CEO should be

clearly defined – it is best, if all relationships are clearly defined in writing• Agreements can be strucutred in different ways – there can be only legally

necessary agreements (i.e. share purchase agreement, new act of company etc.), or the structure can be more complex – with additional agreements (i.e. Subscripttion and Shareholders Agreement etc.)

Investment / The Sell

• Transaction is done, when all obligations have been fulfilled – adding new shareholder / transfer of shares, wiring funds to escrow account etc.• Successful transaction means that also employees are content in the

end – and that they continue to work for the company• As CEO you should always keep your focus on business – business

must not go sour because of efforts connected with attracting investors / buyers• Fulfill all agreed obligations

How To Get The Company Through The Process Without Consequences

• Keep focus on the business despite all the efforts connected with acquiring investor – if the business does not perform as it should, there will be no deal with the investor• Appropriate communication with everybody – owners, co-workers,

potential partners, own consultants, partner‘s consultants etc.• Get the right consultants – whatever you can outsource to them is better

than nothing – if you manage the process as CEO, expect that you will have to work at 150%, not only 100% or only 120%• Again, keep the focus on regular business – if company does not operate

well (as it should), there will be no agreement with potential partner• During the process of acquiring investor you will accept decisions, which

will not be always clear to other employees – be extremely sensitive to reactions of employees – company is worth nothing without its employees (sucessful transaction means that employees continue to work for the company)

Disclose To Co-workers Or Not?

• There is no rule…• It is sensible to disclose the transaction process for companies with small

teams, when the process is at a certain stage (Term Sheet) – potentially even sometime in the beginning• For larger companies it is more often sensible to disclose the process only

when the agreement has been signed• Do disclose what it is all about to individuals, who will work with you during

DD process – they will be able to do their job better and more efficiently• All owners (if there is not too many of them) have to be regularly notified of

the progress – they should be equally informed, do not make any differences between them!• Communication is key – stick with your decision not to talk about the

transaction, as long as you decided not to talk about it; when you decide to talk about the transaction, be transparent – do prepare for questions you do not want to or can not answer (i.e. how much did you sell the company for…)

What Kind Of Valuation Can You Expect?

• Valuations of American start-ups in media are exception, not the rule• The most simple formula for valuation of a company is EBITDA times

certain multiple minus net debt• Multiples for mature companies are between 5 and 10 in general

(depending on the industry etc.) – higher multiples are almost everywhere an exception and not a rule• Again, valuations of US start-ups in media are exception, not the rule• Growth and in certain case also market share influence valuation the

most besides EBITDA• Any kind of higher risk for the buyer will lower valuation – loss, too

high liabilities, restricted warranties and reservations, casual management of business,…

About The Author

Darko is partner at BUDS Consulting. Till the beginning of 2013 Darko led mimovrste=) (largest e-commerce retailer in Slovenia) as CEO. In the period from 2010 he managed to significantly improve company‘s business together with his co-workers. He also led the company through investment from Netretail Holding (leading e-commerce player in CEE region) in 2011 and through acquisition by Netretail in 2012. Prior to mimovrste=) Darko held executive positions in Trimo (in United Arab Emirates and in Slovenia) and at Najdi.si (largest Slovenian search engine). In 2005 Darko founded his own start-up Adeptio (Povej! svoje mnenje) for which he received Slovenian Best business idea award in 2006 and for which he successfully raised funds – from himself (together with his wife and 1 year old son they sold their appartment to fund the start-up) and from various investors. Before Adeptio Darko served as procure holder at NIL Data Communications. Darko graduated in management and leadership (Faculty of Economics, Univesity of Ljubljana).

Contact details:Darko Butina, BUDS Consulting Ltd.

darko.butina@buds.sisi.linkedin.com/in/darkobutina/

@TheDarewww.buds.si