Shaping Up Your Business
By: Eric Reyes
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"We will try to
form strategic partnerships with companies
that may be buyers down the road," he says.
"You get yourselves known to buyers without
putting yourself on the block."
Holoubek confirms, "Nobody really wants
to know that you are looking to sell." Kwatinetz says that there is a lot of danger for an entrepreneur
who can make a mistake by trying to appease someone who
could be a buyer later. "It's hard enough building a company
without going down a rat hole."
Todd Dunlop, president of British Columbia-based online
marketing company Neverblue, brought in KPMG
to help advise them when they thought they were ready
for acquisition.
"We wanted to see what would be the best market condition,"
he says. "When would be the best time to be acquired?
We leaned on them a little bit." Direct marketing services
company Vertrue bought Neverblue in February. During the
six to eight months it took to close the deal, Dunlop says the
hard part was staying focused on "keeping the company going
forward while doing this process."
Get Your House in Order
Going forward means keeping your financials in order. Devon
M. Cohen, COO of Customer Acquisition Network and
who was CEO of FordDirect, says having a strong financial
and management reporting system will make a deal more
seamless. "Lots of companies are built on QuickBooks [accounting
software]," he says. "And that's OK, but realize that
if you are acquired, you need good financial statements and
that they will be reviewed."
Bruce Kreindel, CFO of Customer Acquisition Network,
adds that "young entrepreneurs know their business but don't
know how to measure their own operations." He says a beautiful
core diamond could be muddied by bad bookkeeping.
Conversely, says Holoubek, a company can look great on
paper but the principals stumble over explaining the business.
This is especially true in marketing companies where
services and products can be somewhat
intangible. "Marketers are the worst
marketers," she says. They sometimes
have "a hard time explaining what their company
does." You want everyone to talk about you but in a positive
way, she says.
"Everything is a story," says Cohen. "What are you selling
and what are you buying? What are the strengths and
weaknesses of your business? How can we strengthen them
together?" Holoubek says to "get your story down tight and
understand the process before talking about it. Bankers can't
be fooled."
Speaking of bankers, a common mistake entrepreneurs
make is inflating revenue when they sit down with investors,
banks and suitors. Holoubek says that may work well at industry
conferences when no one is checking your numbers,
but doesn't when the books are open. She says that a banker
may get a call from a company who says it is probably worth
$2 million to $5 million, but that banker's going to say to
come back when they are worth $10 million. "If a CEO can't
admit that he doesn't make $100 million, I walk away," she
says. Kreindel says that, "We may still buy them if they aren't
ready, but the valuation will be different."
Make Sure It's a Match
Just as the talent is really with the people behind a company,
Cohen says that corporate culture is more important than
first thought. "Blending corporate cultures can really be
bad for the merger," he says. His first business sold to Mercedes-
Benz but when it came time to integrate the teams,
they could not blend them together. ValueClick's Paisley says,
"If you don't ever have that chemistry, you will never close."
Entrepreneurs who are one of only three people in a company
may have a more difficult time not being in charge, not
being the one to run the FedEx packages down the street,
not being able to pick up the lunch check without approval.
Neverblue's Dunlop says that the similar corporate cultures
helped close the deal between them and Vertrue. "We were
both very entrepreneurial companies."
Part of that start-up culture may include a determination
to grow the company without any outside help – VC or otherwise.
One downside of VC money is the potential control
they take of your idea. Just ask Jim Kukral, online marketing
consultant who runs AskTheBlogger.com. He hates the idea
of start-ups taking VC investment. A recent blog included:
"Taking money from anyone besides yourself is risky and
complicates the issue. Yes, yes, yes. Perhaps you must take
money to grow to a certain level, etc. In my experience, owning
what you build is 1 billion times more important in the
long run than the money you raised and the control you had
to give up to get it."
Along those lines, experts suggest that just because a VC firm is
willing to invest in a company doesn't mean they are doing so wisely. A
company should also do just as much due diligence on the funding firm
as they do on you. Equity investment firm Golden Center for Private
Equity and Entrepreneurial Finance at the University of Illinois
Urbana-Champaign says companies should ask for references from a
potential investor, meet up with other CEOs the firm has invested in
and grill them on how involved the investors are – do they meddle, do
they know the industry, do they come to meetings knowing about your
business?
Neverblue's Dunlop acknowledges that when being
acquired, the greatest fear is fear itself. "Fear
was around every corner that there would be a
problem," he says. "Or if you let your guard down
the acquirer would take advantage of it. We
were lucky and smart in our choice of acquirer.
Vertrue bought seven or eight companies over
the last several years and we talked to some of
them. They gave us great insight."
There were 399 company acquisitions or
mergers in the media and information industries
in the first half of this year, on track to
beat out last year by more than 20 percent,
according to The Jordan, Edmiston
Group. "Are you ready psychologically
and strategically?"
asks Holoubek.
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