BERKONOMICS

Isn’t the goal of any negotiation to get the maximum possible out of the other side?  I have learned from long experience that the last bit of concession is the most expensive in a negotiation.  Invariably, it’s after the negotiation, whether during the final documentation of the deal or after the closing when the buyer finds those unexpected surprises, and that the seller who drives the hardest bargain is the one attacked with the most energy by the affronted buyer. 

Certainly, sales contracts usually call for a basket or amount of findings below which the buyer will absorb the costs.  The problem comes when the buyer finds surprises that could have much greater effect, but whose cost will not be known for years.  Customer contracts that come up for renewal but are not renewed as expected, a customer bankruptcy after the closing, a group of employees that leave together to start a new business.  There are so many unforeseen opportunities to make a buyer unhappy after the closing, that it is good strategy to leave enough on the table, labeled carefully as such, so that there is no doubt as to the “gift” from the seller.  As a percentage of the total package, often such a gesture is small, but the benefit can be great if the unexpected happens

You’ve surely heard of Maslow’s Hierarchy of Needs, in which Abraham Maslow laid out a human’s needs from the physiological first, to safety, then love and belonging, on to esteem and finally self-actualization. Assuming that you have now passed through a successful sale of your shares in a business, and the money is in the bank, enough to at least temporarily satisfy your needs, if not much more, you have climbed the ladder within Maslow’s Hierarchy. You have arrived at the point where you can think about love, belonging, esteem and self-actualization.

I have great respect for the young entrepreneur CEO of the game company I described a few weeks ago, because he disciplined himself enough to take extensive time for family after the closing of the sale, increasing his participation in all things family.

[Email readers, continue here…] During our business formation years, we pay much more attention to the enterprise than we know we should, at the expense of family and community. I propose that there are few times in life when the opportunity opens to look only outward, to participate in charity events, extended family vacations, community boards and even coaching other entrepreneurs.

If you ever have the opportunity to experience the simple power of having few personal worries, you will have known the freedom of choice that allows you to reinvent yourself, dividing your attention between people and organizations outside of your previous circles. How empowering. And how many organizations are in need of management skills and relationships such as those you could bring, along perhaps with a new focus upon philanthropy.

Maslov demonstrated it as well as can be done. Beyond some point, whatever that is for you, money is not the only measure of success.

Some companies have good, formal stock option plans with properly priced options set to reward all in the event of a corporate sale.  Usually, the higher the ranks, the more the options held and therefore the greater reward at exit.  If there has never been outside investors to organize such an option program, many CEOs never get around to creating a system for rewarding employees in a sale.   

I found myself in such a situation upon a sale of my computer software company.  There was no question that each of the five vice presidents had been greatly responsible for our success and getting us to the successful exit.  Yet there was no formal reward in place other than the employee stock ownership program (ESOP) which was set to pay all employees for their accumulated shares at the exit.  So I wrote into the final distribution instructions a surprise five figure bonus for each of the five executives.  Each was surprised, pleased and effusive.  Upon reflection, I should have given each even more. 

                Be honest now.  Have you ever thought of what legacy you’ll leave behind?  If you are an entrepreneur or CEO, surely you’ve thought of how you’ll be remembered by your associates and stakeholders after you move on. 

                We’ve all heard the stories of tough SOB bosses that took advantage of employees, vendors, even stock holders.  And such stories do get around.  How many people who know those stories are willing to trust their next chapter to that person’s next act?  In my past, I made it a practice to hold exit interviews personally with nearly all separating employees, gaining insights from them they would not be willing to share while still employed with the company.

                And invariably, I’d end each with a handshake and the admonition: “I want us to part as friends. We never know how we’re going to meet again, perhaps with the shoe on the other foot.”  I did not know for many years, until a most successful reunion planned by my former executives bringing back over a hundred past employees, how much that and other signs of respect and dignity for the employee-associate made our workplace rare and desirable.

 [Email readers, continue here…]  I used to receive a list of birthdays for the next month from my assistant, culling the information from the corporate books spanning offices in many countries.  Once a month, I would maintain the ritual of going to the local gift shop and buying enough birthday cards to fit each employee or associate.  And once a month, while watching TV, I spend part of an evening writing personal messages to each birthday employee, recalling an event or complimenting a behavior or success.  Such amazing accidental returns for such a small gesture.  Even today, years later, I am met at industry events by former employees with a common refrain, “Our company was the best employer I have ever had, before or since.”

                That is a legacy you cannot buy, at a cost of acknowledging individuals with respect and personal recognition.  And what do I remember about that ten-plus year experience, among the thrills of rapid growth, great workplace, and great lucrative exit?  Most of all, it is those personal moments of contact with former employees, each recalling with appreciation their time at this one company.

               I’ve been involved with well over a dozen successful exits and four initial public offerings over the years, some of them with monstrous gains, some more modest.  Then in addition, there are the exits that returned some portion of capital, but nothing more.  And finally, there are the sad exits that were complete write-offs for the investors, regaining some portion of note-holder or creditor money in the process. 

               I can tell you with great enthusiasm that the high gain exits are by far the most enjoyable in every way.  There’s almost always a closing party where the board, prime investors, attorneys and investment banker all get together to celebrate the victory.  It is an exhilarating ending to a great journey.  The entrepreneur, whether remaining to the end as CEO or not, is celebrated for his or her prescient timing, great vision and excellent execution of the plan. One such celebration was even characterized as “We stuck the pig!” – the overly enthusiastic celebration of an outcome larger than expected.

                But I cannot recall ever attending a closing dinner for a sale in which we returned only a portion of the investor group’s money. In fact, I don’t recall any formal post-sale meeting at all; even to digest the lessons learned from the entire experience, a missed opportunity for all.

[Email readers continue here…]   And there is the sad truth of the large percentage of early stage investments that die an unceremonious death, often with the entrepreneur-founder left with a bitter feeling that “if only” there had been more cash invested, more co-operation from board members, more time to get to market, more of something, then the outcome would have been much better for all.

                Of course the successful outcome is preferable for all.  But more importantly, it marks a passing of a successful journey by a team first formed by a visionary entrepreneur, usually attracting smart money from good investors, who together effectively planned growth and finally a great exit.

                Whenever those forces come together, celebrate them and the team that brought them all together.

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.   The year was 1998. After presenting a “state of the company” 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, “I have a problem.  I’ve been offered $15 million for my company and my partner is suing me for all I am worth. What can I do?”  I promised to come see him at his office the very next week.  What I discovered was a contradiction that was too intriguing to ignore.  The company of eight was engaged in web design, hot at the time.  And yes, the partner had a valid suit, having been locked out of the business and denied access to decisions and accounting information.

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 ‘net.  The tool it turns out had been posted on the company’s website and downloaded by over a million gamers. Over a million of these came to the company’s game web site each month for new information and to form an early Internet game community.  The company made little effort to charge for the software or community.  Microsoft had just bought Hotmail for $9 per registered user; AOL had just bought ICQ for $40 per registered user.  And here were over a million users, with no apparent value to the web designers, except as a community of friends with similar interests.

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

I immediately agreed to come aboard at no cost to clean up the corporation, deferring my investment until that was done.  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.  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.  In addition, I loaned the new company $150 thousand for working capital.  By this time there were not one but four million registered users.

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

We now jump forward to February, 2000, 14 months after formation of the company.  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. 

Fast forward a month to a meeting between a senior executive of the buyer, our hero the entrepreneur, our corporate attorney and myself.  In planning for the transition about to take place, the executive stated to the entrepreneur, “You 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.”  Our entrepreneur, engorged with the year’s effortless value increases, turned to the executive without a pause, and said something to the effect of “Hell no!  We can make this company worth a billion without you!”  And so, a mere month before the crash of the Internet bubble, the buyer withdrew the offer.  And, even if some of us were more than unhappy, we went back to the work of building the company value.  And a month later the bubble burst.

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.  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.

Could I have found a better example of “Timing is everything”?  The lesson: Look for cycles in your business and in the marketplace.  There are natural high points in one or both that may not be obvious until looking back.  But they occur often enough to watch for and take advantage of if ready to make the run for a liquidity event.