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Darold Parken, CEO, DeepMarkit
A frequently overlooked, but often key factor to a successful acquisition lies in a balance sheet item that doesn’t even exist prior to the acquisition – goodwill. The difference between the purchase price and the book value of a company, goodwill is actually created and recognized through the accounting process following an acquisition, and reflects the premium paid for what I consider to be the “personality” of the company.
I would suggest there is a subtle but important distinction between selling a company and successfully getting it acquired. In both cases, it is imperative that the positive characteristics are emphasized and that the negative attributes are minimized. However, whereas selling a company is largely an exercise in documentation, valuation, marketing and process, getting a company acquired is more about evangelizing the personality of your organization.
To state the obvious, every company is unique. Unique characteristics of a company will greatly influence the prospects for acquisition, both positively and negatively. A dominant visionary entrepreneur or powerful sales channel can be tremendous drivers of business success, but can also be significant barriers to the acquisition of that business. The characteristics of a company generally considered to be the most desirable are well documented in hundreds of articles and books on the subject. Go through the checklists, identify which of them you genuinely have, clean up your structure to the best of your ability, create a decent virtual data room and hire a professional. Sounds simple, right? The problem with simple is that, assuming you can find a buyer, there are also a multitude of valuation methods and calculations available which, when applied to your company, will yield an expected price range. Hopefully your company can be acquired within that price range, but I would argue that the “successful” acquisition is one where the price reflects the premium value you’ve already established within your organization. Extracting this premium value is the real key to the successful acquisition and is seldom, if ever, captured in the traditional valuation scenarios.
Before we had limited liability companies, it was the individual entrepreneur who built things and/or performed services. It was all very simple and very tangible – just people and things. Customers had to believe in the capability of the entrepreneur and have faith that he or she would deliver the goods or services as advertised. Customers relied on the personality of the entrepreneur. Around 400 years ago, the limited liability company was created and this notion of belief and faith was extended to the existence of the corporate entity.
I first encountered the legal fiction of the limited liability company in law school. A true appreciation of the fact that a company is a “person” under law, distinct from its shareholders, officers and directors, is the defining characteristic of the limited liability company and, just like the individual entrepreneur, the corporate personality holds the key to its real value.
We all know that to properly evaluate an individual person we don't simply look at what they own, what they wear or how they look – we examine how they behave. In the same sense, to properly evaluate a corporate person, and crucial to getting it successfully acquired, is to understand and demonstrate how it behaves. Essentially, you must showcase the company’s personality.
Exceptional corporate behavior or personality can overcome otherwise serious flaws in the more traditional corporate characteristics such as asset ownership or basic fundamentals like profitability.
Unless your company is primarily its assets, your company’s behavior or personality will be very important to a successful acquisition.
I started practicing corporate law in the early 1980s; this was the pre-information age and businesses were largely asset and product based. They all had intangible assets with employees and processes, but without classic “brand” recognition, they didn’t have much in the way of personality.
As a young lawyer, my advice to a potential acquirer was that, whenever possible, it was preferable to acquire the assets of a business as opposed to the shares representing the company. In many cases, the notion of goodwill in a price negotiation was nothing more than an accounting concept to justify or explain the difference between the calculated or model value and the price at which the deal could be concluded.
However, since then, the world has changed and so would a lawyer's advice to the potential acquirer. The explosion of technology in the information age and the digital consolidation of regional, national and global markets has spawned many companies that are entirely technology based. Even the old-world commodity based industries have embraced technology and social media to develop their corporate personalities.
Many of today's business giants, and the most commonly related stories of fantastic wealth resulting from an acquisition, involve companies based on the exploitation of information technology. Their secret sauce often lies in the way they articulate both why and how they do what they do, and in the talented people they can attract. These are neither tangible nor intangible assets. In the context of an acquisition they are goodwill… the corporate personality. Interestingly, while this is more and more often the coveted “asset” – prior to the acquisition this item of value does not even exist on the balance sheet.
The first company that I successfully had acquired was in the natural resources industry, and its value to the purchaser was entirely focused on its tangible assets. This was in the pre-information age. The goodwill of the company was very limited and of no interest to the purchaser. At that time, the development of corporate personality was primitive and those companies which were recognized as having a personality were confined, to a large extent, to brand names with physical products.
My most recent success in getting a company acquired involved a company with no assets other than software and more than 100 employees. The business had a unique product, a recurring revenue model from a diversified customer base and was profitable. Even with all of these desirable attributes, in order to accomplish the “successful” acquisition, I needed to identify and articulate the personality of my company. That personality was, for the most part, the people and processes they created and administered to produce the business. The company’s reputation as a trusted and capable partner had to be properly advocated. The assets of the company had a much diminished worth when considered in the absence of the team of people whose combined knowledge and ability to work together actually created the value.
The message is quite simple. You need to figure out what the personality of your company is and learn to articulate it in the context of value. Every company has a personality evidenced by its staff, the systems and processes they employ, the habits they display in working together, in conducting the business and delivering the product or service, the reputation the company has developed, its social media presence and any required social licence it may have obtained.
In a successful acquisition, the acquirer will believe in the personality of your company and will have faith that this personality will survive. To successfully get a company acquired you need to make people believe.
All companies have competitors, companies with similar assets, products or services. Your corporate personality is unique – evangelize it.
[Image Courtesy: http://www.thebluediamondgallery.com/a/acquisition.html]
About the Author
Darold Parken serves as the president and CEO of DeepMarkit, a technology company inventing new ways to engage consumers, where he oversees the overall strategy and vision of the company. Parken brings more than 15 years of technology leadership experience to the DeepMarkit team. Prior to DeepMarkit, Parken founded Chartwell Technology, where he also served as CEO from the company’s inception in 1998 to its sale to Amaya Gaming Group in 2011 for nearly $23 million. Before founding Chartwell Technology, Parken spent nearly two decades practicing corporate law, with particular expertise in securities and finance.
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