Small time Merger/Takeover/buy out

[ROAVAIDE]

Hi all, I need some advice, hope you can help

I have had preliminary discussions with a client of mine (who are a larger firm) to go into some kind of partnership/or have a buyout etc. I have one employee but the business is all based around me. Without me and my input there is no business, so realistically they are buying me

Currently we undertake work for them as sub-contractors carrying out most of their installations, support and servicing. They want my company to merge into theirs and take over the operations/service delivery side of their business. This would mean wrapping up my company and becoming a shareholding director of their company.

I see this as a very good opportunity but need to get the right deal and I don't know if this is a takeover or a merger. So I am unsure what I should ask for financially.

So the main question is, how do I pitch myself and my business value-wise?

At the back of my head I think what I want is a full buyout/merger and in return I would get a stake in their business plus a high salary plus commissions/percentage of profits.

Any thoughts, ideas, pointers etc would be very much welcomed!

Thanks

Rob

[Harold Mansfield]

So the main question is, how do I pitch myself and my business value-wise?

At the back of my head I think what I want is a full buyout/merger and in return I would get a stake in their business plus a high salary plus commissions/percentage of profits.

Any thoughts, ideas, pointers etc would be very much welcomed!

Thanks

Rob

That would be perfect. But doesn't sound realistic that you'll get a nice buyout price, AND stock in their company, AND a high salary to keep working for them.
A buyout usually means you get your money for the whole thing, and it's theirs to do what they wish. Not necessarily with you in the picture. In a lot of buyouts the previous owner sticks around to show them the ropes as part of the deal. In tech buyouts the major players will stick around to oversee assimilation or finish projects.

I've seen some buyouts where the talent is really what they are purchasing, and the employees then become the new company employees.

A merger is a different story and I can see that working out as you getting some up front money,and then being in charge of your department for a decent salary and maybe you'd get a part of that department. Mergers are usually 2 companies similar in size, market share, and value. But honestly it could be anything. It can be structured however the parties agree to it.

If it i were me buying, giving away a stake in my business wouldn't even be on the radar. I know it happens with tech companies, but we're talking plus $100 million deals and even then they aren't giving away any major stake. And a lot of that probably has to do with some tax dodge. The big companies just buy the whole thing and don't mess around with all that.

Your best bet is to get in touch with an attorney or consultant who specializes in this so that you get the best deal that you can and know what to ask for. I wouldn't try to wing this on your own unless you know exactly what you're doing. There's really no cut and dry way this is done so having someone in your corner would probably help quite a bit.

[ROAVAIDE]

Hi Harold

I don't necessarily see myself getting a nice buyout price, AND stock in their company, AND a high salary, that's what advice I am looking for. What should i be looking for considering I will be giving over all of my business along with client base and effectively paying for myself anyway.

The talent is indeed what they want or in this case my talent. I just need to know that I am not getting short changed and then end up doing the same, if not more stressful job, for the same money or only slightly more. There is no benefit in that to me as I go from my current "own boss" lifestyle to an employee clocking in everyday with a whole world of stresses that I don't have now. I need to be earning substantially more for that or have a big say/shareholding in the company so that I can retain some kind of ownership motivation? If that makes any sense!

I agree about having professional help but my funds are limited which is why i have turned to the forums for as much advice as i can get. My accountant is also helping me but is no expert in this field.

[Harold Mansfield]

I'm really kind of winging it with general advice here. Without knowing the business or anything about your company or theirs...value, profits, and so on...it's hard to give any specific advice. Also, doesn't sound like there's a deal on the table so there's nothing to consider or compare.

I imagine the first step for you would be to know what you're company is worth. Probably helpful if you have some growth numbers to show as well. At least then you can determine what it is you're looking for or what kind of deal would make sense for you.

I think there are a few members here who have been through it and I'm sure they'll chime in soon to offer their perspective.

[Fulcrum]

If the other guys approached you about a possible buyout/merger, I can almost guarantee that they have a price in mind. You need to try and get them to give you a number; however, they will do all they can to get you to set a price.

You will also need to figure out why they want the buyout merger. Elimination of competition? Acquisition of new accounts? Attempting to setup more vertical integration as you are already their primary contractor? Acquisition of your company to get the trained skills of your employee while getting you out of the industry? To be honest, I think this is more important than actually setting a price at this point in time. Any rumors floating around of some juicy contracts about to be awarded?.

Personally, if it were me selling, I don't come with the sale. Give me the bulk of the proceeds in cash, a small note (1st position only with a clause that will not allow the note to fall out of this spot), and possible some stock if it can be easily sold (also with a right of first refusal clause in the event the other guys choose to ever sell). Shoot, for the right price we'll go to the bank, do the deal in front of the manager, give him the keys, shake hands, and take a holiday.

[ocovarrubias]

Most every time a larger company wants to acquire a smaller competitor is to reduce competition, but many times is because they realize the smaller company does a better job and they do not want to re-invent the wheel. You need to learn what their motive is and if you will be in charge of this part of the business, if they will not give you the control of it and want to put one of their people in charge, you can argue that you know better than them how to run this part of the business and that is the reason they are interested in buying you. Second. Make sure you have a contract to run this part of the business and an assurance that you will not be left alone and set for failure. You also can negotiate a fair price for your business, on top of having a contract and a salary. Best luck to you!

[Freelancier]

I know I'm late to this, but this happened to me 15 years ago, so I have some experience with it. I also had friends at the same time getting caught up in a merger.

If they're buying YOU, then expect to be paid something for giving up your company plus a minimum 2-year contract at a set salary commensurate with your position in the new company (you're not going to be paid more than the CEO unless you bring in more revenue than the CEO) -- and make sure the contract survives anything but you quitting -- plus stock in the resulting company. The contract doesn't survive bankruptcy proceedings (because it's an employment contract and courts void those in bankruptcy first thing).

The stock is where it gets tricky. Is the stock public or private? If private, the tax situation gets messy, because you'll get taxed on the value of the stock that you can't dispose of, so taxes go out, but you can't cash in on the stock. Don't be lured by the siren song of "we're going to go public at some point in the future," because what if it doesn't? What if it goes bankrupt instead? You've paid out tax money on an asset that turned out to be worthless, which is like you getting smacked twice.

So... take the cash at closing, take the employment contract, but when it comes time to take any private stock, accept the lowest possible valuation on the stock... or just have them give you cash instead and spend that on a publicly traded stock.

Publicly traded stock, even with limitations on when you can sell it, is definitely worth something, but it's better to get options. And to talk to your friendly tax expert who can advise you how to handle the entire package.

Watch out for provisions that eliminate your stock deal on a future buy-up. In other words, if your deal is you get 100,000 shares at option price $0.10 each make sure that the deal will immediately vest in the case of the company that's buying you getting bought by someone else after. I've seen where the deal is that the options get CANCELLED at that buy-up deal, and that is put there because the buying company expects to get bought before you vest.

Oh, and withhold the company name from the deal, in case after 2 years you decide you want to go back and start it up again.

Yes, I learned a lot of bad lessons from my deal. :)