Recently, I pointed all of the difficulties of the Entrepreneur’s Holy Grail – the IPO [cue angels] …
… for all these reasons – and more – I didn’t IPO my businesses … but, I found something almost as good:
7million7years Patented Instant IPO
It works like this:
Make sure that your company is profitable and has a reasonable track record of growing profits. This should value your company at 3 to 5 times earnings (i.e. annual net profit after tax)
Find a Public Company in a related industry that is trading at least 12+ times its earnings after tax – the more the better, for you!
Sell your company to that company and negotiate a mutually agreeable split of the difference between your ‘private value’ and their ‘public value’!
Basically, what you are doing is using the public company’s stock to “IPO” your own company:
You see, when you are on the outside, your company is worth only 3 to 5 times its profit to a buyer, but as soon as the other company buys you and ‘absorbs’ your profit into their profit stream, that profit is suddenly (well, after a relatively short ‘disruption’ period where the market has to get used to the sudden change in profitability of the public company) ‘worth’ 12+ times itself.
[Hint: The smaller you are relative to the size of the acquiring company the smaller the disruption … on the other hand, the smaller you are, the less attractive your cashflow may be to them, so it helps if you also have some ‘secret sauce’ – i.e. Intellectual Property – to make you look that much more attractive to the ‘big end of town’]
The company that has acquired you has just made a huge windfall by using the difference between how private companies are valued and how they – the public company – are valued to their advantage … in fact, there are plenty of public companies that do this as a matter of course. Sometimes, it even need only be only an ideal coincidence that your company actually adds any other business synergy to theirs!
But, when you sell to them, you will find – if you are a smart negotiator – that they have gone to all the expense and trouble of the IPO process for you 🙂
Let’s look at an example: say that your company produces $1,000,000 net profit each year, and you have found a likely candidate public company. You have evaluated the market and believe that your business would sell for $4 million in the private sale market.
But, you realize that your widgets complement those of Acme Widgets Inc. very nicely. Acme’s stock is currently trading at a P/E of 12.
You approach the CEO of Acme Widgets Inc. [AJC: actually, if you’re VERY smart, you’ll engineer it so that he approaches YOU 😉 ], but play reasonably ‘hard to get’.
The CEO realizes that:
a) Your widgets do indeed fill a hole in his product range that will cost his capital (and, short term profits) to fill in house, and
b) Your $1 mill. profit adds $12 Mill. to his company’s value (i.e. his stock price will eventually go up by about $12 mill. when the value of all the stock out there is totaled), and
c) He happens to hold a nice bundle of stock and options set to vest in 18 months or so.
So, what is worth $4 million to you, is worth $12 million to him … how much would you sell for?