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What We Can Learn From The Sale Of Pepperjam
By Quiet Light
Kristopher Jones lived the classic entrepreneur’s dream. Initially, Kristopher started Pepperjam to sell gourmet food. Later, he converted it into one of the quickest growing Internet marketing, SEO, SEM, and affiliate marketing firms in its space.
He was so successful, he made the Inc 500 list of fastest growing companies. His journey concluded by selling Pepperjam to eBay for millions of dollars.
Experience truly is the best teacher. Fortunately for us, Kristopher penned a piece for Inc Magazine’s Young Entrepreneur’s Council in which he relates 10 lessons he learned from selling Pepperjam. Actually, by my count, there were 12 great takeaways from the article. I won’t repeat all 12 lessons in this blog post (I’ll leave that for you to read on your own), but I do want to point out what I thought were 4 lessons that deserve extra attention, as well as one lesson that I think needs to be clarified.
Lesson: Don’t Be Afraid To Name a Starting Price
When Kris arrived at eBay’s headquarters, he was immediately greeted with a challenge.
Sweaty and nervous, I entered the executive conference room. You could have cut the air with a knife. Michael, surrounded by his C-level executives, sat expressionless on the other side of the vast conference table.
Without hesitating, he looked me straight in the eye and uttered three words.
“What’s your price?”
I was totally flustered. I knew that standard wisdom tells you to never “throw a number out”; this is tantamount to showing your cards in the mergers and acquisitions poker game. And yet, I was tempted. There I was, all by myself, enjoying the undivided attention of my ideal, perfect buyer. I took the leap and simply blurted out my desired price.
Kristopher absolutely made the right move by blurting out his desired price. When you place your business for sale, it may seem like a great strategy to keep your price hidden in order to maximize your value, but in most acquisitions, I believe this is the wrong strategy.
Offering a stated asking price is typically the best way to approach the sale of your business. Advertising the price of your business instantly weeds out buyers who would have no intention of paying what you hope to get, it sets the parameters under which serious conversations should occur, and it gives you instant leverage. When you are trying to maximize the value of your business, you always want to seek out natural points of leverage.
As Kris points out, his decision to name a starting price was right. Rather than spend countless days and hours dancing around the “who goes first” question of naming a price, eBay was able to focus on making the deal work.
Here are 3 other lessons that Kris absolutely nails:
Lesson 10: Keep An Eye On Net Profit
The number all buyers are interested in is your net profit or earnings before interest, taxes, depreciation, and amortization, or EBITDA. The higher the EBITDA, the higher your buyout will be.
Buyer’s don’t invest in your business for philanthropy, they invest with an eye towards a return on their investment. Whether your sale is based in the marketplace or whether it is a strategic sale, buyers are always looking for ROI. Your net profit is, by far, the best and surest indicator of net profit.
The more a buyer has to interpret and estimate the potential return on investment, the less they will be willing to risk in acquiring your website. That is why historical net profits are so crucial: they are concrete and provable returns.
Lesson 6: Hire An M&A Advisor
An M&A adviser will do a lot of the heavy lifting: prepare teaser documents, write executive summaries, present your financials in the best light, and arrange meetings with prospective buyers.
The work of a good advisor should largely go unnoticed. If we do our job correctly, from your perspective, it will look like our job was easy.
There are a lot of subtle movements that happen during the lifespan of an acquisition, and a skilled advisor will be able to sense those subtle movements and adjust as necessary. In addition, because we speak with buyers every day, we know their pain points, what questions they are asking, and what benefits they are truly looking for.
While most clients feel as if the value we offer is a network of buyers (and that shouldn’t be discounted), much of our value comes in knowing how to read the pulse of the market and each individual deal.
Lesson 5: Button Up Your Finances
I was so happy when I read this quote from Kristopher that I nearly packed up my office and went home:
The M&A process is a numbers game. Get your financial controls and systems set up correctly from the beginning.
I only wish every seller understood this point: The M&A process is a numbers game. Perfectly stated and closely related to his Lesson 10. If you hope to sell your business some day, the preparation starts now.
Buyers make offers based on metrics. Usually that metric is driven by profits, but even in the case of strategic acquisitions, there are still metrics behind the offer. Button things up now so that when you want to sell your website in 3 years, you don’t have to wade through jumbled bank statements and co-mingled tax returns.
Lesson 4 Was Close, But Not Quite There
As with any marketing task, the first question you need to answer is, “Who is going to buy?” Create a shortlist of all your potential acquirers. Include the obvious companies (i.e., businesses that do what you do), but don’t forget the less obvious companies (i.e., companies who aren’t in your line of business but could benefit from what you do).
This is great advice if you are targeting a strategic sale. But most sales are not completed as strategic sales, they are completed as marketplace based sales. In most acquisitions, a company (or individual) wants to acquire your business simply because it is a sound investment, or it offers a new way for them to make a living, or it adds nicely to an existing portfolio of sites. Strategic sales can be highly beneficial, and they can often result in significantly higher values, but this isn’t always the case.
More importantly, strategic sales have very low success rates because you limit the pool of potential buyers to whoever fits as an answer to the question “Who is going to buy?”. I discussed the advantages/disadvantages of a strategic sale in detail here. To be fair, however, Kristopher’s lesson on this point is still valid. If you are comfortable with your competitors knowing that your business is for sale, why not approach them?
There is a lot to take away from Kristopher’s lessons and experience. Each day his lessons play out in deals we work for our clients. But the number one lesson that Kristopher identified was that a deal should start with synergy and trust.
For as much as offers are made on metrics, deals are closed when a buyer and seller trust each other enough to exchange valuable assets. Without a minimum level of trust there simply isn’t a way to do a good deal.
What are your thoughts on his commentary? Are there any lessons you would add?