{"id":964,"date":"2011-09-17T09:30:11","date_gmt":"2011-09-17T16:30:11","guid":{"rendered":"https:\/\/berkonomics.com\/?p=964"},"modified":"2011-09-17T09:30:11","modified_gmt":"2011-09-17T16:30:11","slug":"timing-is-everything-in-a-sale-of-a-business","status":"publish","type":"post","link":"https:\/\/berkonomics.com\/?p=964","title":{"rendered":"Timing is everything in a sale of a business."},"content":{"rendered":"

I have saved this next story until now because it is one of my favorites, and certainly illustrates the point as well as anything I could devise from fiction.<\/span><\/span><\/p>\n

First here is a bit of the background.\u00a0\u00a0 The year was 1998. After presenting a \u201cstate of the company\u201d report at a national meeting of resellers for a company where I sat on the board, I was approached by one of the audience members, complimenting my presentation and stating, \u201cI have a problem.\u00a0 I\u2019ve been offered $15 million for my company and my partner is suing me for all I am worth. What can I do?\u201d\u00a0 I promised to come see him at his office the very next week.\u00a0 What I discovered was a contradiction that was too intriguing to ignore.\u00a0 The company of eight was engaged in web design, hot at the time.\u00a0 And yes, the partner had a valid suit, having been locked out of the business and denied access to decisions and accounting information. <\/span><\/span><\/p>\n

But the real asset became obvious at almost exactly 5 PM that day, when all eight stopped what they were doing and began using a tool they had licensed from a Florida company to find other Internet gamers to join them in playing intense first party shooter games over the \u2018net.\u00a0 The tool it turns out had been posted on the company\u2019s website and downloaded by over a million gamers. Over a million of these came to the company\u2019s game web site each month for new information and to form an early Internet game community.\u00a0 The company made little effort to charge for the software or community.\u00a0 Microsoft had just bought Hotmail for $9 per registered user; AOL had just bought ICQ for $40 per registered user.\u00a0 And here were over a million users, with no apparent value to the web designers, except as a community of friends with similar interests.<\/span><\/span><\/p>\n

[email readers continue here…]<\/em><\/span>\u00a0 Did I forget to tell you that on that day, looking into the company\u2019s books, I discovered that neither the company nor its founder had filed Federal income tax returns during the three years in business?\u00a0 And there were other quite obvious problems, unattended to, along with the partner\u2019s suit hanging over their heads.<\/span><\/span><\/p>\n

\"\"<\/a><\/span><\/span>I immediately agreed to come aboard at no cost to clean up the corporation, deferring my investment until that was done.\u00a0 I negotiated a settlement with the partner for $100 thousand which I paid, then filed all of the overdue tax returns of various types, and cleaned up the books.\u00a0 Offering to reincorporate the game company as a new entity to avoid any more surprises, we negotiated 10% for my $100 thousand, with the remaining 90% for the founder.\u00a0 In addition, I loaned the new company $150 thousand for working capital.\u00a0 By this time there were not one but four million registered users.<\/span><\/span><\/p>\n

Within three months, we easily obtained $3 million of investment at a pre-money valuation of $30 million.\u00a0 Can you begin to tell that this is a story of timing, and of the Internet bubble?\u00a0 Three months later, another investor company in the business offered to invest $3 million at a valuation of $60 million.\u00a0 Two months after that, a French game company offered $1.5 million at a valuation of $80 million.\u00a0 Of course we took all of these.<\/span><\/span><\/p>\n

We now jump forward to February, 2000, 14 months after formation of the company.\u00a0 Another major competitor in the industry, directly competing with one of our investors, offered $140 million for 49% of the company in a combination of equal cash and stock in its public entity.\u00a0 <\/span><\/span><\/p>\n

Fast forward a month to a meeting between a senior executive of the buyer, our hero the entrepreneur, our corporate attorney and myself.\u00a0 In planning for the transition about to take place, the executive stated to the entrepreneur, \u201cYou know, we are buying only 49% so that we do not have to roll your losses into our income statement; but we do expect to make the decisions as if a majority owner.\u201d\u00a0 Our entrepreneur, engorged with the year\u2019s effortless value increases, turned to the executive without a pause, and said something to the effect of \u201cHell no!\u00a0 We can make this company worth a billion without you!\u201d\u00a0 And so, a mere month before the crash of the Internet bubble, the buyer withdrew the offer.\u00a0 And, even if some of us were more than unhappy, we went back to the work of building the company value.\u00a0 And a month later the bubble burst.<\/span><\/span><\/p>\n

It took almost four years to sell the company for over $60 million, not at all a bad outcome for us founders and the early shareholders.\u00a0 And I do need to note that the entrepreneur in the meantime became a model executive of a growing company, much more mature and understanding of market forces than that fateful day in February, 2000. <\/span><\/span><\/p>\n

Could I have found a better example of \u201cTiming is everything\u201d?\u00a0 The lesson: Look for cycles in your business and in the marketplace.\u00a0 There are natural high points in one or both that may not be obvious until looking back.\u00a0 But they occur often enough to watch for and take advantage of if ready to make the run for a liquidity event.<\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

I have saved this next story until now because it is one of my favorites, and certainly illustrates the point as well as anything I could devise from fiction. First here is a bit of the background.\u00a0\u00a0 The year was … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"_uf_show_specific_survey":0,"_uf_disable_surveys":false,"footnotes":""},"categories":[13],"tags":[],"class_list":["post-964","post","type-post","status-publish","format-standard","hentry","category-the-liquidity-event-and-beyond"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/posts\/964","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=964"}],"version-history":[{"count":0,"href":"https:\/\/berkonomics.com\/index.php?rest_route=\/wp\/v2\/posts\/964\/revisions"}],"wp:attachment":[{"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=964"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=964"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/berkonomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=964"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}