Stuff I Learned from Selling Our Company to Microsoft
Over the years, we’ve been approached by several parties interested in acquiring our company. I learned a lot from those discussions, even though none of the deals happened. And then I found out how little I knew. Microsoft acquired the assets of our Teamprise division in November 2009. Taking a deal all the way to closing was, er, very educational. I obviously can’t share any specifics about our deal, but I learned a lot about M&A that I think may be of interest to others looking to sell a small software firm to a big company.
Bio – Eric is the author of Eric Sink on the Business of Software. He is the founder of SourceGear, a source control system vendor. He also founded the AbiWord project, and lead the team that built the SpyGlass browser, now known as “Internet Explorer”. He’s the first to have coined the term “Micro-ISV”.
Eric and co-founder Corey sold to Microsoft. Eric and Corey were founder, no outside debt, there were two of them. That was it.
Microsoft org chart looked like this:
The field of battle.
All big companies buy companies in the same way:
- You are really outnumbered
- Many of them have indistinguishable job functions
- People you speak to across a table are:
- Never allowed to do anything
- Are acting for someone else
- Primary Point of contact is a trained negotiator in the M&A team, not a product team person
Make sure you attorney is expensive enough!
- Somebody who has done private acquisition deals.
- Preferably in the software field.
- Intellectual property is a BIG, BIG issue for big companies.
- Make sure your lawyer gets associates involved. Eric’s lawyer was also negotiating sales of Chicago Sun Times. You really don’t want to be in position of having your attorney hold stuff up.
- Try to use a lawyer that has used both real, and virtual, data rooms – that means they have been doing it for a while…
The Data Room!
- Eric is obviously a geek so is really impressed by the concept of the data room.
- A Virtual Data Room is basically an FTP site with a log file.
- They charge $35k for the service.
- Happen all the damn time
- During Preliminary Due Diligence
- During Discussions
- During Due Diligence
- Be super-careful
- Legal assignements from EVERYBODY who has BREATHED on the code
- Be super-careful
- Contractors used for code review
- Be super-careful
- University Hardware creates an issue – one contractor may have used a university computer to write some of his code thus potentially leaving rights to code to university
- Be super-careful
The obligation to disclose
- Do they really need this information or are they using this to help their negotiating position?
- Get your attorney’s involved early. They know about this shit.
A deal is more than a number.
- Every detail is negotiated
- Eric’s contract ran to more than 100 pages
- relocation and staff transitions
- Tax treatment
- Ongoing involvement of founders
- Don’t bottle up your emotions
- But, know when to STFU
- Ask yourself, am I just saying this to make myself feel better?
- Will saying this move the deal discussion in the direction we want?
- Express them in a healthy manner.
- Memo to self, ‘Man up, Nancy’
Eric felt this was an aggressive negotiation but there didn’t feel like there was any really nasty stuff. A year later, he still has bad feelings about the point guy from Microsoft but other stuff feels a lot better.
CORRECTION & CLARIFICATION
[Eric dropped over to the blog and commented that:
“But I think the point I was explicitly trying to make was that I do NOT have hard feelings against “Fred”.
There were a lot of emotional ups and downs during the deal process, but the passing of a year’s time brings a lot of perspective. In all honesty, I look back now with a positive view toward everyone with whom we collaborated on that deal.
Even “Fred”.” Eric Sink
Of course I am happy to make the correction and delighted that Eric points it out. One of the great things that came out of Eric’s story was the incredible emotional journey that he had been on in selling the business. Eric, I think is one of life’s gentlemen and does not strike me as the kind of person that would hold anything bad against anyone in actual fact – though it was pretty clear that he found the process far more emotionally exhausting than he might have anticipated. He may have felt differently about ‘Fred’ when the deal was going on…
The memories of the times that he took calls from his lawyer in church, the weeks of midnight finishes, the crushed life and the strained relationships start to become good anecdotes rather than just painful memories.
For you, this is a life-changing, one off-deal. For the M&A guy, this is just one of three deals he is working on at the moment.
“In negotiation, the one thing that really strengthens your positions is the ability to walk away from the deal.” Eric in 2006.
Experience meant he discovered that wasn’t true.
“You do actually have to walk away. At that point the deal is dead.” Eric in 2010
But sometimes the deal will come back. If you don’t walk away and kill the deal once, you will probably have sold too low.
Closing – the biggest anticlimax ever
- Lawyer to lawyer.
- Never met in person.
- Can’t tell anybody.
- Now what? the announcement won’t be for a couple of weeks.
Two calls from the bank
- Confirming the transfer
- Complaining that the bank branch had been sent too much money for them to handle
- Did you use advisers? We didn’t use corporate finance advice as we didn’t want to pay someone a percentage of the deal. We might have considered it if they had operated in a time basis. Didn’t feel the need. We probably should have got lawyers involved soon enough but don’t think that this effected the actual outcome.
- This is not usually the advice that people give when they have used advisers by the way – ML. Most people that have used them find that they bring the experience that the deal guy on the other guy has. Of course that has a market rate.
- How has it changed your life? I bought a few things I wouldn’t otherwise bought – like an $8,000 guitar.
- What advice would you share with others? Be honest and make sure you get your own support system in place to help you emotionally.
- How did you come up with a price? Painfully. We came up with the first number.
- What was the number? I think we are done here! Huge applause.