Every entrepreneur hopes that if they build it, someday someone will come knocking at their door with a large check. But what does it take to get someone to knock on that door? And, how do you make sure your caller actually has a large check? Selling. Companies are bought because they are always being sold.
Selling a company doesn’t mean putting out a press release with a giant “FOR SALE” sign. It is a delicate and long process that influences a company’s strategy and positioning. The key to successfully getting bought, is to sell a company throughout the company’s development and to build relationships with and obtain key insights from prospective buyers along the way in order to create value and awareness. Whether this means selecting the right lead compound, the correct indication, optimizing trial designs and endpoints to address potential buyers’ key questions, or crafting a target product profile around a commercially viable product, keeping a lens on what information and data will optimally position the company for a future transaction is key. If you neglect to sell while building, you may successfully build a company around a program that has no utility and no logical buyers … no one will come. If you successfully build a company around a program that has one, or limited, logical buyer(s) … how do you ensure you get fair market value?
While you should always be building relationships and gathering feedback from potential buyers, it is often difficult to determine the opportune time to sell. Determining when to sell a company is a complicated process. Companies should carefully consider their current exit options and assess the risks, costs and value creation potential with further developing the program. Ultimately, the key question revolves around the company’s existing resources and access to additional resources in the future to continue development in an effective manner that doesn’t impair the value of the program.
When a company finally does reach a point where its resources, whether financial, personnel, intellectual, or otherwise, become too stretched such that it is no longer ideally suited to take the program forward, it is time to sell. More often than not, a company will begin to stretch its resources well before a buyer comes calling. In such cases, it becomes more important than ever to sell and not rely on a buyer coming to your door. If the company has been interacting closely with prospective buyers up to that point, it has already paved the way for a transaction and will save considerable time instead of forging new relationships and educating potential buyers on the program.
When starting the selling process, it is common to have an outcome in mind. As unbiased as entrepreneurs try to be, aspirations tend to result in an envisioned acquisition with a substantial upfront payment. While such an outcome may be obtainable, it is not always best to start out communicating this expectation to potential buyers.
We typically recommend that companies start a transaction process with some flexibility around deal structure and terms. We recommend looking closely at (i) comparable transactions (ii) intrinsic valuation of the program and (iii) management/investor deal structure preferences when evaluating what should be reasonably expected from a deal. Providing deal guidance to a potential partner/acquirer is often a productive way to communicate preferred deal structure and loose economic expectations while not compromising a flexible position, if communicated appropriately.
Remaining open at the outset to licensing or structured agreements signals a belief in the technology’s success and will often yield broader interest and more bidders. Flexibility with regard to deal structure allows you to pursue a broader group of potential partners and drive greater interest in the program. Ultimately, obtaining your preferred structure and economic terms is driven by competitive interest. Competitive tension within the transaction process can push the most interested parties to alter their offer and, if interest from the market of buyers is strong enough, be altered to reflect management’s initial aspirations. However, starting a process with too rigid a demand may overlook potential interested parties that could either be buyers or add to the competitive tension that helps negotiate price and deal structure to an optimal outcome. For instance, if you start the process expecting an acquisition with a substantial upfront, the number of logical parties that can accommodate such a transaction becomes more limited. Being open to alternative structures doesn’t preclude you from getting the deal you want, but opens the opportunity set to provide more options and allows for a ‘market driven’ process that likely results in economics and deal structure that more accurately reflect the true value of the program.