
Ask HN: Selling my first company - need help with the process - user2newyork
I built a product which company x is willing to acquire/license. From my estimations, they will be adding at least $<i></i>*M to their bottom line. Company x also agreed that my estimations are reasonable and accurate. It is really glad that most arduous initial part of the initiation/demo are all done and both of us are completely upbeat about the deal. For a lot of reasons, I prefer selling out instead of releasing it to market myself - unless deal falls apart. I haven't raised any money so far.<p>Now, I need help in some best practices going forward. Things like, 
1. how do I come up with price tag for my product(I don't want to have them low ball or I don't want to ask really high number either). 
2. what is involved wrt legal paper work.<p>anything else i should watch out for in this time frame<p>thanks<p>PS: I am a regular user and contributor - I am using throwaway login just to be anonymous.
======
gojomo
Get a good business laywer. A lawyer can help with both negotiating strategy
and structuring the deal. If for company X your product will really make them
$Y million/year (Y>1) then the size of the deal is large enough to make
getting professional help worthwhile, ASAP.

Two key factors influencing their willingness to pay:

\- the net-present-value (NPV) of all expected future profits from your
program. If they've already accepted a estimate of $Y million/year for N years
then assume a 'discount rate' and the NPV formula pops out a number. (Note
that the 'discount rate' assumed for evaluating risky investments will be
larger -- perhaps much larger -- than the similarly-named 'discount rate' used
between banks.)

\- their best-alternative to a negotiated agreement -- aka their "BATNA" -- be
it some competitor's software, or an in-house development effort, or whatever.

Neither of these alone consider risks -- upside or downside. (What if it's way
more than $Y million in subsequent years? What if a few years in a much better
and cheaper competitive offering becomes available? What if they think they
can develop it for $Z but it winds up costing 10X more?) But they provide a
vague window for possible prices.

These of course work in exact reverse as they analyze what price you'd be
willing to sell for. How much would you make in the alternative? What are your
other options (such as other bidders)?

~~~
retube
> their best-alternative to a negotiated agreement -- aka their "BATNA" -- be
> it some competitor's software, or an in-house development effort, or
> whatever.

This one is important. Just because your product may earn/save a million bucks
a year doesn't mean it's worth that. If they can build it themselves for a
100k then it's worth a 100k.

------
SkyMarshal
Read Fischer & Ury's _Getting to Yes_ if you have time. Great little book on
negotiating. One of their main pieces of advice is, before entering any
negotiation, work out your BATNA - Best Alternative to a Negotiated Agreement.

A BATNA is not the lowest price you're willing to accept in a negotiation, but
rather what you would do if the negotiation never occurred in the first place.
Bootstrap your product, try to gain traction, profit? Raise angel/VC money,
work towards an exit strategy? Apply to YC?

Once you have that figured out, you can enter into a negotiation with a much
better idea of the value of your product to you. If there is overlap with that
and what the other company is willing to offer for it, then you can make a
win/win deal.

It also helps to have some idea of the value of your product to the other
company, as you do.

Good luck, and congrats.

------
Maro
Assuming your product is software:

Per your description you haven't marketed your product yet, just built it.
Since you seem to be on your own, I assume this is a 1-2 manyear effort. You'd
be lucky if a company were to pay multi-million dollars for it, as they could
just have somebody code it up for a tenth of the price. The exception is if
you have some IP which they feel they need to purchase (unlikely) or time-to-
market matters that much (I'd guess this is unlikely, because they'll usually
need to integrate your stuff with their existing stuff, which takes extra time
with outside codebase).

I'm saying be cautious, don't block your progress on this deal, and don't get
your hopes up too high. _There are no miracles, there is no free money._

I once spent months hammering out the details of a deal with a client (much
smaller deal in the $10-100K range), both sides wrote several versions of
contracts, they extensively tested the software, etc, and once everything was
hammered out, negiotiations were over and everybody seemed happy (all that was
missing were our signatures on the finalized contract) it turned out that the
whole deal wasn't that important to them, and the deal died off for lack of
interest on their part.

------
drewcrawford
I've never been in your shoes, but one small tidbit I've learned about
business in general is that the first person to say a number loses. If you
can, try to get an offer out of them, and start negotiations there.

The other rule of thumb I've seen acquirers use is (yearly revenue) * X, where
X is some indicator of the risk of the business evaporating. Values of 0.9-1.6
for X seem pretty common for a product with little history.

~~~
kirse
_the first person to say a number loses_

This is really just a myth. If you present a buyer with well-justified and
thought-out reasons for your number, it's going to be hard for them to
counter-offer with something ridiculous, unless they're just being an ass. Not
to mention you should always have your base number in mind, at which point you
just walk away. The OP also said the company has agreed with most of his
initial estimations, so he's clearly in a better position with regards to the
number he can ask.

In my deals, I usually take $Well-Justified-Price and then tack on $Extra to
swing the deal far in my favor. Usually $Extra brings the price close to where
I think the buyer would walk away. Then it's up to the buyer to do their due
diligence and we can talk about the facts behind the number and do our
negotiating there. Usually it comes down, but that's the point of inflating
your own value first.

Regardless, I've done this for selling my Facebook apps, vehicles, negotiating
job salary, etc. If a buyer is pulling lowball crap, you basically tell them
to cut the BS, reiterate the facts behind the number and make a call-to-action
(i.e. "Buyer, you know everything behind this number is legit, now let's come
to agreement"). If not, you walk away, simple as that.

Sometimes the buyer does have legitimate sticking points though, and that's
usually where you just have to listen and go into "understanding" mode to get
to the root of their concerns. Once you hear them out, you cut them a little
slack on the price and then again reiterate all the facts behind what you're
giving them (ABC - Always Be Closing)... When you present someone with solid
facts, they can't help but agree with you, so it helps to get that final "Yes"
when you ask them to close with you.

For the OP, you really need to do your research and come up with a solid
justification for a number you have in your head. Drew gave one example of
revenue * X, which is what I used when I sold one of my Facebook apps. If
you're adding $$$ to their bottom line, then use that to make your argument
also. This is a flexible process and depends greatly on industry. For websites
it can often just be Drew's formula. Regardless, make sure there's at least
some "science" behind your wild-ass-guess, and that way it'll at least look
like you put in the work to come up with a legitimate price.

To be honest though, that's the fun of deals... it's really a flexible process
and there's a ton of learning involved, so have fun with it. Don't be afraid
to ask for something inflated though, so long as it's well justified and not
pulled from your rear. After that it's the buyer's responsibility to negotiate
down.

~~~
inboulder
"This is really just a myth. If you present a buyer with well-justified and
thought-out reasons for your number, it's going to be hard for them to
counter-offer with something ridiculous, unless they're just being an ass"

Wrong, you're missing the point entirely, I'd like to buy a business from
you...

The point is that if you offer a price first, this is the HIGHTEST the buyer
will pay, he might have valued the business at more, in this case you have
left money on the table.

~~~
kirse
_In my deals, I usually take $Well-Justified-Price and then tack on $Extra to
swing the deal far in my favor. Usually $Extra brings the price close to where
I think the buyer would walk away._

You must have missed this. If a buyer is willing to pay my seriously inflated
price, then I think I'm making off like a bandit and the buyer thinks they're
getting a discount (assuming they were going to offer more than my inflated
price). Easiest deal ever.

At some point you at least need a price in your head where you say "yea, I'd
be happy exiting for $X and $Y would be icing on the cake"

Everyone's happy with the terms, sign the papers, deal's done, go pop the
champagne.

~~~
dkersten
If you won't be happy with $Well-Justified-Price + $Extra because you feel
they may have offered higher, then either your $Well-Justified-Price or your
$Extra is too low, since you obviously wouldn't be happy with that amount
anyway. If you feel the _real_ $Well-Justified-Price + $Extra is higher than
what they'd pay, then obviously you're not going to be happy with any outcome,
so why are you wasting your time on this deal? The whole point of $Well-
Justified-Priceis that its a good amount that you would happily walk away with
and $Extra is exactly that - an added bonus. If they would have paid higher,
good for them, they've got a discount, but you just walked away with an amount
you decided would make you happy PLUS an added bonus.

Don't worry that they _might_ have offered more. Be happy. If you can't be
happy with that amount, you did the _find a price you'd be happy with_ part
wrong.

(Obviously not directed at parent, but rather agreeing with parent)

------
joelhaus
First off, congrats on getting this far! Regarding your questions...

1) _Price tag_ \- There are three approaches you should consider:

    
    
      a) Income - knowing the bottom line revenue 
      add should be very helpful. If they are a public 
      company, you should also be able to determine 
      their weighted average cost of capital (if not 
      public, you could try estimating it). Using these 
      two figures, you should be able to come up with a 
      fairly solid price using DCFs.
    
      b) Replacement - what would it cost them 
      (time + money) to build this from scratch?
    
      c) Comparable - is your product unique or do 
      they have the possibility of shopping around 
      for a competitor at a lower price.
    

2) _Legal requirements_ \- Find an attorney that specializes in contract law
and IP. If you can't afford one, you might be able to find someone willing to
work on contingency.

3) _Other considerations_ \- see #2 above and do this before anything else.
Grellas, a contributor on here, probably isn't a bad place to start. It also
wouldn't be a bad idea to have a fall-back plan if the deal falls apart;
you'll alleviate a lot of the pressure during negotiations.

Good luck!

------
inboulder
From reading a lot of VC blogs, the thing that affects their valuation the
most is competition. I think the most important thing you can do for your deal
is get a competing bid of some kind, any kind, any outside interest at all
will do more for the price than you can do within the confines of the deal
with company x. This may sound difficult and it is, but I think it's
absolutely critical.

~~~
chengas123
Yep, the two most basic things to do in any negotiation are start high since
the price will only be negotiated down and develop your BATNA (best
alternative offer).

------
adammichaelc
Two quick thoughts:

1\. The _best_ way to have leverage during negotiations is to have another
option. So another potential acquirer, or whatever.

2\. I would talk to somebody who has been through an exit. There's this list
[http://spreadsheets.google.com/ccc?key=tgPKuNIdWWOPUpj2ZnF8N...](http://spreadsheets.google.com/ccc?key=tgPKuNIdWWOPUpj2ZnF8N4A#gid=0)
(was created on HN a while ago). It's a list of entrepreneurs and others who
are willing to mentor HN startups. Find one who's been through an exit, and
see if they're willing to help.

Good luck!

------
zackola
Regarding pricing have you explored whether or not companies W, Y or Z might
be interested in buying your product? Until you explore other buyers you are
limiting the range of offers you may be able to get. By only entertaining what
company X might buy this for you have already agreed to a price range which is
$some amount of money that's an obscene deal for company X to $the maximum
company X might be willing to pay. The max may or may not be a good deal for
you though. It may be a bit too late in your case to pursue other options - or
you may feel like company X has the resources to give you the kind of deal you
are looking for in which case +1 to drewcrawford's answer.

A friend and I sold an app (all IP, etc) several years ago and I've sometimes
regretted not exploring other options, and also not iterating for a few more
months to see if we could have made the product more valuable. At the same
time though, the offer came out of the blue and both of us were more than
happy to get some dough for something we had been hacking on in our spare
time.

Regarding #2, get a freaking lawyer and a CPA ASAP. When you are talking about
$*M, you should have no trouble ponying up now so you don't get screwed later.

~~~
tlrobinson
Lawyers are important and well worth their cost... if the transaction goes
through. You don't want to be in a situation where the deal fell through and
the lawyer fees you owe are going to bankrupt you.

Assume the deal will fall through and plan accordingly, whether that's through
a provision in the term sheet (like a cap on lawyer fees or a penalty for
walking away from the deal), or working something out with your lawyer.

Related: deals do fall through.

------
keeptrying
This is the best video series I've seen on the subject. The guy even wrote a
book on exits.

<http://www.angelblog.net/Selling_a_Business_Guide.html>

Hope this helps. Best of luck!

------
jambo
Get advice from a CPA on how to structure the sale to minimize your tax bill.

------
dropkick
A few years ago, I wrote a commercial plugin for a product and later sold the
IP to the developer of the product I plugged in to. I'm intentionally being as
vague as possible to remain anonymous.

My plugin was on the market for about 9months. In that time, my revenue was in
the $60k range. The sale price was around 6x the revenue. However, it was
spread out over a few years of me being employed by the purchaser. Of course,
I got a nice salary in addition to the purchase price.

One thing that made my situation interesting is that a competitor of the
product I plugged in to was interested in me doing the same thing for their
product. Once they got wind of the negotiations, they immediately made me an
offer. It turned into a bidding war for my IP/company.

My observations from what you've described:

you will almost certainly be expected to work for the purchaser since it
sounds like you are the sole developer. They are essentially buying your
services and the IP. So don't give them a reason to be wary of you working for
them.

On what to ask for: Unless you have revenue, there is no way to objectively
quantify at least a minimum value of your IP. There is an art to negotiation
that is beyond this post but you've already got them to admit that you will
make them millions. I think that is an excellent start. The best negotiators
are willing to walk away from the deal. Determine a minimum you want ahead of
time and then be prepared to walk away if you don't get it.

If you just want out then act accordingly. Give them a price that you know
will keep them interested.

In my case, it took several months between the initial exchange of interest
and serious negotiations to begin. They first contacted me in January, An
email with an offer price arrived out of nowhere in May.

What I would do differently:

I would have asked for an earn-out instead of a flat price. I didn't know
about this until I talked to a few other entrepreneurs. Basically, you give up
guaranteed money for a cut of the action from your IP. You're assuming part of
the risk. Big company with big marketing budget drives your product to success
and you get a cut. It's a very common thing in product acquisitions.

When the competitor made an offer, I disclosed the other company's offer. I
should have let them make me an independent offer. Even though there was a
bidding war, the price stayed pretty close to the initial offer by the first
company.

~~~
user2newyork
Thanks for the details. Pretty awesome. Yes I am a sole developer just like
you.

------
arethuza
Be very careful if it is a paper transaction (i.e. you get stock rather than
cash) - especially if they are a private company. If they are public, check
how liquid their stock is - some small cap stocks are anything but.

A cash transaction, even with an earn out or something similar, has a lot
going for it.

------
jacquesm
Decide on how much you want out of it, start off at twice that much and allow
yourself to be negotiated down reluctantly.

Be prepared to walk away if you don't get what you want out of it.

Make sure you are indemnified, that the sale is final and that there is no
obligation on your part that survives the contract.

Make very sure that you have all the IP that you sell sewn up tight.

Make sure you keep all correspondence, prefer email and such above
conversations about pre-contractual stuff.

Put a person that is not emotionally involved in the deal between yourself and
the other party during the actual negotiations, unless you are very good at
distancing yourself from this.

Never agree on the spot to any deal, _always_ think it over for a night.

Agree that both parties will carry their own costs up to the point of sale.

Get a professional that you can afford in on the deal, someone that is _only_
beholden to you.

Find a person near you that has gone through this process that you can trust
and get their feedback on the process as it goes forward.

Do not transfer any assets prior to the actual sale date, even if it looks
like everything is 100% a-ok (I know that sounds like an open door, but that
sort of mistake is actually fairly common).

Talk to grellas here.

------
aquaphile
1\. Retain a _good_ securities and corporate lawyer.

2\. If you want to have an "independent" valuation done, use a local boutique
investment banker. Your lawyer or accountant should be able to recommend
someone to help with a "fair value opinion." This may be overkill, but since
we don't know large the potential deal is, I thought I'd mention it.

3\. Be aware that if they buy/license your product, the proceeds will be
recognized as income by both the federal and state tax authorities at both the
corporate and personal levels. You could end up giving the government as much
as 50% of the gross proceeds (35% corporate plus 15% CA personal income tax).
If you are a single product company, it is much more preferable to sell 100%
of your stock to them. An acquisition of 100% of your corporate stock means
that you should only end up paying 15% long-term capital gains taxes.

------
jaxn
I have been in your shoes and priced myself out of the deal.

I am looking forward to seeing the experience of others.

~~~
sdesol
Care to share your experience. It would probably help others.

~~~
jaxn
We had an application that was getting interest from a company that wanted to
license the tech and add the product to their portfolio. I felt their
licensing deal was convoluted and left too much room for us to get screwed. I
then picked what I thought was a best-case kind of number and it ended up
being so much higher than they were thinking that they didn't even want to
counter.

It is hard to recover from that.

So I guess the lesson is that just like it is hard to raise your first price,
it can also be hard to lower it.

In hindsight we would have taken 1/5 of what our number was and been happy. A
win is better than nothing.

~~~
matwood
It sounds like they may not have really wanted you to begin with and used your
high number as their out. If they really wanted your tech/app/whatever they
would have come back with something closer to what they wanted to pay.

~~~
jaxn
That could be. I think it was more along the lines of they wanted us if they
could get us cheap.

------
samratjp
I'd say you could use a little refreshing on a thing called price anchoring -
<http://www.mint.com/blog/how-to/price-anchoring/> I hope that helps you set
your price of your product.

------
malahoo
Since you and buyer already agree on bottom line impact (i.e. profit, not
revenue), I would recommend estimating the intrinsic value of the business
using discounted cash flow analysis as a baseline. Make a reasonable
assumption about the product's lifetime - let's say 5 years - project out
those 5 years of profit, discount each year using a reasonable rate of return
for a similarly risky investment (maybe 5-10%), and add up all discounted cash
flows. The negotiation then becomes "how much of the business value should
each of us retain?" instead of "how much are you going to give me?"

<http://www.investopedia.com/terms/d/dcf.asp>

------
gojomo
Be sure to read this VentureHacks note, with an anecdote from Steve Blank
about 'flinch pricing':

<http://venturehacks.com/articles/pricing>

------
donw
Is the product currently generating revenue? If so, at what percentage of the
amount that the buyer thinks it will add to their bottom line?

~~~
user2newyork
No I haven't released the product yet. Buyer has the revenue with a product
which my product complements.

~~~
SkyMarshal
Can your product make money on its own, or only in conjunction with the
company's complementary one?

~~~
user2newyork
Yes. it can make money on its own.

------
staunch
Name a price that you're happy with + 75%. Justify it as best you can (good
arguments will be repeated internally). Let them talk you down a bit, if they
want. Be prepared to _truly_ walk away. If they offer your price + something
then take it and be happy -- sign on the dotted line.

------
canterburry
One of the strongest tools you can ever posses in your negotiation toolbox is
the ability/preparedness to walk away from a deal. If you are unable/unwilling
to walk away when things go below your minimum price, you have no negotiation
power.

------
jkeera
because of the early stage of your product without proven cash flows, it might
be helpful to look at comparable transactions in your space or how the buyer
(or its competitors) have bought other similar companies like yours. You might
even want to look into hiring an investment banker that has represented
companies like yours that have sold to larger companies, since they will
probably have most relevant valuation figures.

Lastly, cash is king. Try to always get as much cash as you want, unless it is
a really stable stock, i.e. Google/Apple.

In the end, get good counsel and it should be a market pricing sort of deal.

------
istari
Here's some negotiation tips by a professional:
<http://www.rdawson.com/articles.html>

Good to read to get into the right frame of mind.

------
swah
Just enough to live the rest of your life from it.

------
isnoteasy
If company X is a big company, they know better than you the price there can
pay for your product. So you need someone than can estimate that number, that
is not what is the value of your product but what is the highest price they
would pay for your product.

If you can't contact anybody to make this estimate, you should do it yourself
but that requires to know a lot about the company that is going to buy your
product.

