Design of Business

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Tag: acquisition

How much money do you want?

English: The Miz's Money in the Bank briefcase

 (Photo credit: Wikipedia)

“I remember the first time I closed a big deal – was for about 50,000 bucks. That evening, I went out and got myself a fancy watch – that probably cost me half as much,” my friend Murali recounted. He’d been invited to talk to a group of young entrepreneurs, who were looking for mentors. “I was so ignorant, that I didn’t know that revenue is not profit,” Murali continued. “And of course, I knew nothing about revenue versus cash flow even. So here I was spending money that I didn’t have and in hindsight couldn’t have afforded to spend, even if I had it.”

 

Murali is by no means the first entrepreneur to fall into this particular hole. He’s the one that I’d seen recall it with the most relish and absolute candor. His point was that doing business requires a good understanding of financial basics. Not an MBA but just plain nuts and bolts of understanding, what revenues are, net and gross margins, cash flow versus revenues. In other words everything your mother, or for those of you lucky enough, your spouse, felt you should learn about budgeting and handling money. And of course if he could do it, so could you – was his unstated message.

This is never more evident or critical than when you set out to sell your company.

As entrepreneurs when we engage in sales conversations, we tend to focus on the “selling price” a great deal. And all too often, they mistake their selling price with the cash that may flow into their accounts. This is made a lot worse, especially when the negotiation is around selling their business.

“How much money do you want to have in your bank, after this whole thing is done?”

You’d think this is a simple enough question to answer. And it is. This is usually the first question I pose to entrepreneurs when they talk about selling their business. Most of them, after some initial hemming and hawing, are able to give reasonably specific answers – “A million dollars. five crores.”  It’s almost always a round number. I don’t ask why that number, whatever it is. But have a slew of other questions?  The first one I ask them, is this before or after taxes? And what if it is not in cash but in stock? What if it is deferred or staggered in time? Against deliverables or future performance? And how would you partners answer these same questions? By this time, the entrepreneur’s turned quiet and introspective. Given how often this conversation takes place, I reckoned it makes sense to capture these starter questions.

How much money do you want to have once everything is done? The answer to this obviously is a very personal thing. One woman’s 250K maybe another woman’s billion dollars. But this is the amount you want – never mind if you will get it – in your bank account with NO strings attached – no further taxes to pay and no assumptions about what more you may get. In other words, you would be perfectly willing to walk away from you business, for this much money in the bank NOW.

What taxes are you liable for? Knowing this is critical. Keeping the usual disclaimer, that I’m no tax expert and this should not be deemed as any sort of competent tax advice, consult your own tax advisor, recognise that you are liable for capital gains tax – which may vary from taxed as straight income (up to 33% in some cases) to varying degrees (long-term vs short-term, privately held vs publicly held) and liable to state or local taxes in some jurisdictions. In other words, if you wanted to still have that X million dollars, you may have to clear (x/(1-tax rate) (1.5M to have 1M left over after 33% tax for instance)

Will the cash all come in tomorrow or will some of it be deferred? Does this matter? It may if you need or want all the money now. It may also matter whether the amounts are deferred simply over time, to retain you for instance or they are tied to performance or other deliverables. In both cases, will you be ready to walk away if you got nothing beyond the first payment or tranche? If so would you revisit your answer to the first question?

Will it all be in cash? While our answer may always be yes, reality may not be. And getting some of it in stock may not be all bad – but as my mentor Chandrashekar would put it, balancing your need and greed is important. And how would this change your answers to the questions we’ve already asked?

Finally, how would your partners answer the above questions? Whilst what you need or want should, in an ideal world, be not influenced by what your partners want, reality is that a good deal can be consummated only if all parties are at least semi-clear on what they want. While this is NOT critical, as with salaries or many things in life, we might be happy with the answers we come up with, till we find out what the other guy is making. So thinking about it and factoring it in, helps our mental wellbeing if not our bank accounts.

In an earlier article, I spoke about Valuation 101 – how you can value your company. The reality is that your answer to the first question “How much money do you want to have once everything is done?” is really what sets the valuation of your company – or the walk-away price. So stop reading and get out a piece of paper or a spreadsheet if you prefer and begin answering these questions as the second step to selling your company. For those still looking for the first step – you can find it here.


As many companies that I’ve been involved with grow past their fifth or even seventh anniversary, they are facing new questions around exits – be the outright sales or mergers or in some case existential questions. I’m hoping to write about these questions in what I’d like to think of as “Selling your startup” series

5 Questions Founders Need to Ask, Annually

“Can I meet with you today?”  Usually, when I get such a call, which I do about once in two weeks, the entrepreneur wants to meet immediately. In this instance, I suggested that we can meet the next Tuesday. The entrepreneur, let’s call him Jack, persisted, “If it’s okay can we meet today please?” So I agreed we’d meet at 530pm that evening and moved around a few meetings to make it happen.

At about 445pm I get a call. It’s Peter, Jack’s partner. He says “I’m going to be about 10 minutes late.” As I’m wrapping up a meeting, I tell him “Don’t worry about it. I will be at the coffee shop. See you there.” At that time, I didn’t pay attention whether Peter had said “we’d be late” or “I’d be late.”  So at 530pm, I’m surprised to see only Peter show up with no sign of Jack.

“So what was so urgent that it couldn’t wait till next Tuesday?”

Peter was polite enough to apologize for Jack’s absence, “A major customer crisis has arisen. Jack had to go in person to placate the customer,” before jumping into why he’d asked for the meeting.

“BigCo has made us an offer. We’d approached them as a strategic investor. As we talked to one another, the discussions turned into an M&A one. They are interested in acquiring us. So we’re looking for advice on what we should do.”

Over the previous six years Jack, Peter, and another partner had at first bootstrapped their tech business and then raised both an angel round and a series A. They were on the verge of operational breakeven and had impressive Fortune 100 customers that any startup would kill for. They’d also dabbled in hardware and systems, pivoted a couple of times and overcome significant challenges in pulling together a fragmented supplier marketplace. In short, they were not just smart and hardworking but successful by any measure.

“What do you want?” I asked. “What does Jack want?”

Peter’s responses, many of which were questions rather than answers, sounded similar to ones that I’d faced more than a decade ago when my own startup was acquired. And one that I’ve heard from many entrepreneurs since. Most founders rarely stop during the madness that is doing a startup is, to ask, let alone answer these questions. So regardless of where you are in your own startup journey, here are some questions for you to ask yourself. I’d suggest revisiting these once a year, more frequently they’d be a distraction.

What do you want? Why are you running/doing a startup? To make a zillion dollars? Because people don’t have easy access to mental health? Because every kid should go to college? Whatever be your reason – only money, only greater good, some combination of both or yet another reason, knowing what it is, is important. This will help you figure out, are you close to it? And regardless of your distance from it, do you want to keep doing it?

How much money do you want? Despite startups being businesses, many entrepreneurs haven’t really put thought into how much money, specifically, they’d like to make or have. So when they are faced with a sudden offer to sell or particularly when they face a hostile or shall we say unwilling ejection, they are in no position to figure out what they want in any dispassionate manner. Surprisingly many entrepreneurs, starting with myself, find that they are uncomfortable talking about money for themselves. So this is a good question to answer if only to get comfortable talking about it.

What do your partners want? Usually your co-founders, especially at an early stage startup, much like you would also have not given this much thought. But in some cases may have greater clarity, which is usually a good thing, but you’d better know what it is and how different it is from your own answers to the question. Again, they may have thought of things only in terms of money or in terms of outcomes and not money. Knowing the answer to both and knowing your differences will be immensely useful.

What does your team want and what do you want for them? This may or may not matter to you, or you may even be unclear if this matters to you or not. Knowing this is critical at some many practical and even ethical reasons. For instance, what matters to them – that they work in a startup, the freedom or independence they get maybe very different than what they get from BigCo once they acquire you. What are they likely to get monetarily if you sell your company?

What will you do tomorrow, if you get what you want? If your company were to be acquired today, in an all cash deal, with no strings attached (and let me know if there are such deals out there 🙂 what will you do tomorrow or ninety days hence, after you take that well-deserved vacation. In many ways, this is similar to the first question around purpose? If you’d still do what you are doing today, what does that tell you? And if you’d do something totally different, what are you waiting for – what should you do differently today?

I believe if you ask and answer these questions both individually and collectively as a founding team, periodically, it would help you make better decisions when you are at crossroads in your startup.


As many companies that I’ve been involved with grow past their fifth or even seventh anniversary, they are facing new questions around exits – be the outright sales or mergers or in some case existential questions. I’m hoping to write about these questions in what I’d like to think of as “Selling your startup” series.

Selling Your Business – A Primer

This last weekend, I gave a talk at the Unpluggd Conference in Bangalore titled “Selling Your Business.”

It appears that the internet and world at large is filled with information on creating business plans, getting co-founders not to mention loads of advice on fund raising. Yet there is mostly silence or a lot of speculation on selling your business. Sure you hear about “OMG! Did you see Little Eye Labs got acquired by Facebook!” So when you read about RedBus being acquired or an acqui-hire (BuyNBrag) happening or product buy-out (Mango) – what is it that actually goes on? More importantly what is it you want? Are there lessons to be learned from entrepreneurs who’ve sold their businesses with various levels of (un)preparedness and differing degrees of (dis) satisfaction?

The talk was intended to serve as a brief How-to ranging from, “Should you sell?” “Where do you start?”, Who should be involved? What do investment bankers or other consultants do? all the way to the mechanics and esoterica of valuations, deal structuring etc. and the lessons learned from other Indian tech and non-tech firms going through a merger and acquisition (M&A).

Thanks to my friend Ramani, who originally inspired me to put this together.

3 Simple Steps to Generating Revenue

A former colleague reached out to me recently seeking help. He’d inherited responsibility for a set of retail outlets in medium-sized city. Unfortunately the inheritance did not come with a marketing budget and he was wondering how he could set the business on fire. We briefly discussed what their business was about, what challenges he faced, what his competitors were already doing and such. We brainstormed a little and then tried to put down some specific action items or at least things to try.

As I reflected on our conversation it struck me how much of what we’d discussed was true not just for this retail gig, but for any business. As with all great truths, they seem simple enough to articulate, but is well worth reminding ourselves periodically. More importantly, regardless of the tactics we’d use, and these will change with both our business types, time and place, these three strategic steps will rarely change.

Creating Awareness People need to know you exist, before they can buy from you. It’s even better if they know why you exist, what you stand for and how you are different. But you gotta start with folks being aware. How do you create awareness, especially when you don’t have a marketing budget? In my friend’s case, it begins with the tried and tested real world methods such as handing out flyers at the street corner or a man with a sandwich board neither of which costs much. In his case given milk and dairy products he sells, targeting local apartment complexes, with both inserts in newspapers as well as display booth maximizes number of folks who get to know he exists. Of course getting his current customers to spread the word – word of mouth – is a great way to get the word out. This works whether you are an online school, SaaS B2B service provider or social network for new moms. Thought leadership, writing for the local (or hyperlocal) paper, presentations at local schools (or corporates) are ways to identify your brand/store/product to value for the prospective customer. Content marketing in many ways enriches all the above and builds a long tail of awareness creation.

Generating Footfalls Ok, now you gotta a lot of people aware that you exist. Now you gotta get them into your store – physical in my friends case, possibly online in your own. This is what marketers think of as Call to Action (CTA). How do you get someone who’s aware of you to act upon it – usually by visiting you. Promotions, contests or freebies are common ways of generating footfalls – for instance the chappie handing out flyers at a street corner, could offer a free ice cream (or n% of a second purchase) as a way to induce footfalls. Online free e-books, flash sales, or other forms of giveaways could be used to induce footfalls. Keep in mind, what tactics you use to generate footfalls will change with the nature of your business, physical vs online stores, target audience, time and place. In fact tactics that work at one time may not work or worse yet backfire at other times. Generating footfalls need not be only about price or giving away stuff for free, but is always about providing value for the customer. Skin type testing, bra fitting, financial education – all these are things of value to the user that can help them cross your threshold, and it need not cost you money, at least not a whole lot.

Building a relationship All of us, however good or bad, can get one customer or some customers to buy. The trick is how do you get a lot of them buying on an ongoing basis, bringing others in or inducing others to buy. This requires that we build a relationship with our customers. Just because we want to have a relationship with them doesn’t mean they’d want one with us. Worse yet, if you did a poor job with creating awareness, either by misleading them or worse, they’d want nothing to do with you. Also if you generate footfalls under false pretence – using bait and switch tactics or worse, they not only run away but tell 10 other people to avoid you. So being authentic, understanding their needs is the first step in building a relationship. Consistently serving their needs, ideally anticipating, setting and exceeding expectations is the way to build lasting relationships. While not trivial, it’s not rocket science either. In my friend’s case, it’s knowing the regulars, keeping in touch with them, not just in the store but outside. In your business it may involve newsletters, making recommendations or connecting with partners or other service providers and above all listening to them, what they are saying and what they aren’t.

As the writers Sean Platt and Johnnie Truant advocate Write, Publish, Repeat, to become a successful writer, building business is all about Create Awareness, Generate Footfalls, Build Relationships. Repeat.

Good hunting.

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