The final deal Featured

10:04am EDT July 22, 2002
Kenneth Bob was once the CEO of a small, successful software company in New York, but is now an executive at another software firm.

This isn't the result of failed products, poor cash flow or mismanagement, but rather a business decision. He made one of the most difficult decisions an owner can make: He sold his business.

As part of the deal, his company, Lightstone Group, was acquired by Descartes Systems Group, where Bob now serves as senior vice president of product strategy and business development.

"There have been a couple of moments where I've looked in the mirror and had to tell myself I'm not the CEO anymore," says Bob. "The systems manager was looking at how to redo our network, and I told him I thought he was picking an expensive way to go. He looked at me like, 'What do you care, you're the senior VP for strategy.' You have to realize that it's no longer your decision. On the flip side, I get to do things like strategic marketing full-time, which is the fun part."

Lightstone Group, which manufactures supply chain logistics software, was identified as a potential acquisition target by an industry analyst, who started the sales process. The company's software product wasn't strong enough to stand alone and needed to be part of a larger product offering. At first, Bob and his board of directors had considered an initial public offering to raise enough money to acquire other product lines, but then the right deal was offered.

"We looked at [Descartes'] strategy, we liked the terms of the offer and Lightstone fit right in," says Bob. "From the offer to the close, it only took two months."

Lightstone's product was integrated into Descartes offerings, and the office simply became the New York office for Descartes. The employees were basically unaffected by the deal, other than they now answer to the home office in Waterloo, Ontario.

"This is one of the most difficult things I've done in my life," says Bob. "Change can be good, but no one likes change done to them. But it was a great opportunity for us."


Selling points

"The first thing a person considering selling a business needs to do is figure out how much they need out of the business to achieve their goals," says David Geller, president of Atlanta-based Geller Financial Advisors.

Once the goals are established, they can realistically assess what it's worth to determine if they will be able to meet their goals.

"The second thing is to a make sure you are affiliated with a good accounting firm," says Geller. "You need good financial statements to show the buyer."

One of the aspects that made Bob's deal go smoothly was an audit statement from a Big Six accounting firm that showed everything was in order.

"Once you know what it's worth, you need to hire a business broker or start networking to let people know it's for sale," notes Geller. "What you want to do is get more than one interested party. You want to ideally look for someone who's business will be synergistic with yours."

Lightstone turned down the first offer that came in, but when company officials were presented with Descartes' offer, they saw products that complemented theirs, a similar culture and a fair price-all things that led to a speedy deal with little disruption to the business.

Geller lists the following tips to consider:

  • Get an idea early on of how the potential buyer values the company. "You don't want to spend a lot of time in long discussions when the price is not compatible," says Geller. "Ask them what formula they will use and what a ballpark figure would be. I once spent an enormous amount of time on a deal where the people came in with a price that was 40 percent under what we wanted. It was a complete waste of time."

  • Almost always flinch at the first offer. "Rarely is the first offer the real offer," notes Geller. "Even if it is a high first offer, if you flinch some, you'll probably get more."

    Also be wary of becoming overly emotional during a deal. If a buyer offers $5 million, and that allows you to spend the rest of your life on the beach and that's all you're thinking about, they may drop the offer to $4.8 million. You figure that's still enough to put you on the beach and agree to it, only to find the offer now at $4.6 million.

    "Owners have gotten so emotionally involved that it makes it incredibly difficult for them to say no," says Geller. "The buyer will just keep nicking down the price."

  • Create reasons for key people to stay. In many cases, a business may be almost exclusively people, especially in a service firm. If you can find a way that encourages key people to stay on, it may make a potential buyer more comfortable knowing that the majority of the company's resources aren't going to walk out the door the day after the deal is completed.

  • Keep the deal focused. Completing an agreement can be as quick as 30 days to as long as a year or more. Make sure both sides are committed to the deal to keep everyone focused and the paperwork moving along.

    "Once you bring in the lawyers and accountants, it's not cheap," says Geller. Valuation and other fees can be $7,500 to $25,000 depending on the complexity of both the business and the deal.

  • Expect a short stay. "Many times, a buyer will say they don't want to change anything and keep the former owner on to oversee the operation," says Geller. "That's rarely a reality. They don't own it anymore and aren't the final decision-maker, which is frustrating. Overwhelmingly, most owners I've dealt with are gone from the new business within 24 months."

    If you're selling, you need to emotionally prepare for that. If you run a 50-person company, owning that business is often a big part your personality. It can be a big letdown once the company is gone.

    "They need to think about what they are going to do," says Geller. "Most don't want to sit on a beach and sip Margaritas all day. These are aggressive, bright people who want to do things."

Bob has an escape clause if things don't work out with Descartes, and that type of forward thinking is important to any deal.

"Prepare your decision-makers and your board," says Bob. "Think about how you are going to deal with your employees. As soon as you can tell them, tell them. Think about where you and your employees will fit in the new company, because there could be someone that doesn't fit in. There are a lot of things to consider, and you should be very careful."