Month: March 2019

  • Three Deal Questions

    I recently spoke with a founder who was considering the recapitalization or sale of his business. He knew I was once in a similar position of evaluating the cost / benefit of an inorganically fueled future compared to a continued independent path.

    For a potential partner to be excited to join the journey, regardless of the nature of the deal, it’s obvious that leadership must be able to provide compelling and confident answers to questions about the future prospects of the organization. An investor or acquirer, at any stage, needs to be able to get comfortable at a foundational level or the rest is moot.

    RevZilla had more than one legitimate suitor during my years at the helm, but in the time leading up to our ultimate deal with Cycle Gear and their parent, things had never before been that serious or diligenced to that degree. We’d also not seen the amount of continued inbound interest by outside parties ranging from family offices to PE to a strategic partner or two.

    Like many moments in a growing startup, I was now in an even deeper part of the pool, having to learn to tread different waters. The concept of being out of my depth of experience was not new. That happened all the time due to growth and constant change. The difference this time was what was at stake. Most times messing it up was akin to swallowing some water but still making it safely to the side of the pool. On this occasion, getting it wrong could potentially mean drowning. (So much pool analogy, sorry.)

    I also was never a  “deal guy” and don’t consider it one of my primary strengths (I’ve written about that here). I do, however, have friends who have done lots of deals from both sides of the table. They have invested, raised money, bought companies or sold them. They have all managed to make it through the process of maintaining negotiating leverage while vetting a potential partner and constructing a viable future partnership.

    It’s a dance, it’s nuanced and it’s different on a number of fronts, depending on who’s around the table. My hunch, however, was that like many things, certain patterns repeat.

    Being fully aware of the stakes and my lack of experience in the arena, I used my “ask the audience” and was very thankful that so many people were willing to offer me guidance at different stages. Hopefully, these folks would keep me from drowning.

    They were invaluable. We constructed a deal. I didn’t drown – although my CFO and I were sucking wind at the end of it all. (Thanks again DB, BS, DS, BW, DA, TV, JLM, BM, KD, JK)

    One particular call with my friend Brock stuck with me and yielded nuggets worth sharing here.

    First, Brock is the man. Second, he is a good human on all fronts. Third, he is the 60-years-of-experience executive who’s actually only 46. His view of the foundational elements needed to support getting a deal done were clear, memorable and simple.

    He crystalized his thoughts into the three questions that have to be answered every time – the same three I told the founder I spoke to recently – citing Brock in the bibliography, of course.

    1. Is this business unique? – This is the “moat” question. There may be many businesses in the space all doing well and all competing to capture the market, but what makes this business defensible and uniquely differentiated? Why do customers care today? Why will they care in the future? What’s the cost of switching? What makes it sticky? Why can’t your competitors just knock you off? Warren B would ask you about your durable competitive advantage. You need better than a good answer. “Me too” can be smelled from a mile away and it always stings the nostrils.
    2. What is the compelling future vision? – The story needs to credibly demonstrate the ability to grow top and bottom line via a thoughtful organic, structural or inorganic roadmap. How will you invest, time, resources and capital along the way to drive growth and eventually a path to profitability?  Avoid the hand-wavy stuff and try to focus on natural extensions of your customers, products, services and their associated revenue streams. Insight into levels of investment, risk and potential payback periods are always helpful, as well. Again, no hand-wavy. No BS.
    3. Can they trust you? – A deck is not a dog and pony show. A pitch doesn’t happen atop a soapbox on the boardwalk. You are not the Slapchop guy (thankfully). Whether startup, growth stage or mature business, in most cases the team’s credibility and motivation are as important as everything else. To establish a baseline of trust, call out real challenges. Use reasonable estimates. Show the numbers. Highlight threats and competition who may be executing better than you in certain places. Mention current risks and problems while most importantly offering thoughtful solutions. The great investors, partners and/or buyers are smart. You want them to be smart. Smart is a win on all sides. Don’t hope they miss it; lead with it and address it. Answer it before you make them ask it. Earn the benefit of the doubt. It’s paramount for setting the right expectations for later, but more importantly, it will build the credibility necessary to have a chance at any “later” existing at all.

    These themes are talked about in so many places. There is an obviousness to them. They are simple and easy to remember. I have found it very useful to commit them to memory.

    And while there are always many other things that need to be highlighted in the story, whenever I see a deck, hear a pitch – or build either myself – I’m usually focusing on answering these three questions before anything else.

    #tacos #fettucini #linguine #martini #bikini


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