This week on Built to Sell News, we’re covering 9 ways to punch above your weight in a negotiation to sell your business, including:
- Creating a market
- Maintaining flexibility
- Choosing your words carefully
- Spinning the narrative
- Keeping lowball offers on the table
- Using silence as a negotiating tool
- Avoiding showing your hand
- Shortening exclusivity periods
- Negotiating a “put option”
Tyler Smith built SkySlope, a software platform that helps real estate brokerages manage the paperwork involved in selling houses, to $12 million in revenue before he received an unsolicited acquisition offer for $60 million.
Rather than accept the life-changing offer, Smith hired an M&A professional to shop the business, ultimately getting nine Letters Of Intent and closing on an acquisition offer from Fidelity National of $82 million. In other words, Smith made $22 million by moving the chess pieces like this:
- Create a Market
The original unsolicited offer is what private equity firms call a “proprietary deal” — a lowball intended to take advantage of a lack of competitive tension. Instead, Smith’s banker created a list of 30 strategic and financial acquirers, got 16 Indications of Interest and 9 formal Letters Of Intent that pegged the value of SkySlope anywhere from $40 to $100 million.
- Don’t be too Picky
Originally Smith wanted to sell a minority of his shares in order to ‘take some chips off the table’ while holding on to control, but Smith’s banker encouraged him to remain open to all sorts of structures, from a minority recapitalization to a majority re-cap to an outright sale. Smith’s flexibility led to a much wider range of offers.
Former guest Arik Levy did the same thing when he sold Luxer One.
- Choose Your Words Carefully
Smith’s bankers coached him to stop using negative words to describe his business and start to use a more positive vocabulary. For example, instead of saying, “our churn is 10%, Tyler reversed engineered the conversation to say our retention is 90%.
This is partly how Jeffrey Feldberg turned an offer of 3 times EBITDA into 13 times.
- Spin a Narrative
It’s common for business-to-business SaaS companies to have higher churn among very small customers compared to churn rates along larger enterprise customers. That’s why Smith isolated and reported on his enterprise retention rates, downplaying his relatively higher churn among small customers. He also removed unavoidable churn (e.g. when a customer closed their business) as not a fault of the software and used a footnote to explain his rationale.
- Don’t write off a Low Ball Offer
Fidelity’s original offer was $40 million, so Smith was inclined to eliminate them from the bidding, given that their offer was 50% less than the original bid that started the process. However, Smith’s banker encouraged him to keep Fidelity at the table, knowing there was a strong strategic fit for them to buy SkySlope and as a billion-dollar publicly traded company, Fidelity had the capacity to increase their offer — which they did — to $82 million to win the deal.
Another example of this can be seen in how Gary Miller reacted to a lowball offer from IBM. Big Blue started at 3 times EBITDA and ended up paying Miller the highest multiple they had ever paid for a service business.
- Use Silence to Your Advantage
Smith’s banker encouraged him to fall in love with dead air, reasoning that in a high-stakes negotiation, sometimes the best strategy is to say nothing. At one point, Smith thought Zoom had frozen as Smith’s banker said nothing to fill a particularly long period of dead air in a conversation with an acquirer.
- Never Talk Price
After their initial lowball offer, Fidelity gassed up their private jet and flew Smith and his partner to Montana to meet Bill Foley, the owner of Fidelity, the Vegas Golden Knights and one of the richest people in America. Smith’s banker coached Tyler that no matter how star-struck he felt in Foley’s presence, he was at no point to discuss price with Foley directly. Smith’s banker didn’t want him to accidentally put a ceiling on how much Foley would pay.
Kris Jones learned this lesson the hard way when Michael Rubin cornered him and demanded Jones tell him what he wanted for his company Pepperjam.
- 25 days
Smith, a former real estate agent himself, knew that a protracted negotiation tends to kill deals. That’s why Smith gave Fidelity just 25 days of exclusivity after signing an LOI instead of the customary 60 or 90 days.
- Negotiate a “Put” Option
Fidelity bought 67% of SkySlope and Smith and his partner chose to roll 33% of their equity. To ensure the remaining 33% had some liquidity, Smith negotiated a “put” option which meant that after five years, he could force Foley to buy 50% of the shares he chose to roll at a predetermined valuation.
🗝️ Make Your Business Turnkey for an Acquirer
Another way to ensure you receive a premium valuation (while minimizing the proportion of your deal tied to an earn-out) is to make the case to an acquirer that your business can run without you. VidGuide allows you to curate a comprehensive video playbook for your business which you can merchandise for an acquirer as proof they’ll be able to run your business without you. Set up a free VidGuide trial.
📽️ Clip of the Week
In this clip, Smith discloses the advice he got from his banker that turned a $42 million lowball offer from Fidelity into an $82 million acquisition.
📣 Quote of the Week
” Don’t bring a knife to a shotgun fight, kid; this is what we do all day, every day.”
What Smith’s banker said to him when Smith wanted to overrule his banker by dismissing the original lowball offer from Fidelity.
🏆 Trophy in Waiting
Smith is struggling to celebrate his big win after selling SkySlope. As he navigates this new phase, he’s turning to the book ‘Die with Zero‘, seeking insights on enjoying success and maximizing life’s experiences.
📈 Recent Deals
- MB Aerospace, a leading manufacturer of aircraft engine components, is set to be acquired by Barnes Group. The transaction is valued at roughly $740 million, which represents just over 11 times MB Aerospace’s EBITDA.
- Custom hydraulic cylinder manufacturer, Southern Hydraulic Cylinder, Inc., has been acquired by the world’s leading towing and recovery equipment manufacturer, Miller Industries, Inc. (NYSE: MLR). The all-cash deal is valued at roughly $17.5 million.
- Broadbean, a global leader in SaaS technology streamlining talent acquisition, is set to be acquired by enterprise AI software and services company, Veritone, Inc. (NASDAQ: VERI). The $52 million cash deal expands Veritone’s AI-based HR solutions, building on its 2021 PandoLogic acquisition.
Do you know a recently exited founder whose story is worth sharing? If so, we ask you to nominate them.
This Week’s Contributors
Colin Morgan, Executive Producer of Built to Sell Radio, John Warrillow, Host of Built to Sell Radio, Daphne Parsekian, Copy Editor, and Denis Labataglia, Audio Engineer.
