Offer to buy my business – what to do?
Hi everyone,
I've been selling my product for 3 months, and a large company in the space has offered to buy the IP from me, so they become the sole owners.
Fair to say, it's an exciting conversation to be having, but one I've not had before, so I hoped I could find some wisdom in the crowd.
I'm most interested in how to structure the commercial deal via an exclusive distribution partnership rather than an outright purchase.
See context below.
Industry: Tutoring
Offer
Company A wants to purchase my online course, so they can white-label it and sell it to their clients, who are parents and students looking for additional tutoring.
They have been in the space for multiple decades, and wanted to create an e-learning platform like mine. Their aim is to increase their market share, as this would be a big differentiator for them.
Instead of developing one themselves – something they were planning on doing – they can buy this and start selling. They would then pay me a retainer for new content and product maintenance.
My Thoughts
Instead of buying the IP, I would rather give them exclusive-rights to sell the IP and white-label it for them.
This would give them exclusive rights to sell it in the tutoring space.
I can then continue to sell to schools, which they said is not an area of conflict for them. They end up with a product that get stronger with time, and I can make more revenue.
I don't have experience structuring deals like this, but the current draft I have in mind is:
- Upfront lump sum payment
- Retainer cost (allows them to keep exclusivity, access new content, and maintenance)
- Guaranteed for 5 years, at which point we renegotiate the terms
My Questions
- Is there a name for deals like this that I can read for reference?
- How would you structure it?
- Do you have any guidance on the terms?
First, be aware that there's a high risk they dick you around for three months, waste your time, figure out why your product is working better than theirs, and then tighten the terms until you feel like you're getting screwed since now they're happy to replicate it themselves if the deal falls through. This will probably cost you $10k-50k in legal fees while sapping your attention and destroying your morale.
Has happened to me, has happened to a lot of other people. It's shockingly common for big companies to act super badly in this situation. But they're incentivized to promise the world during the early stages since that gets you to share everything.
I like your approach of just treating them as a special type of customer since it prevents them from being able to run all over you.
When I was in YC, PG used to tell us to ignore any inbound acquisition requests since they were 90% a time-waster trying to spy on the inside of your product and metrics. He said that the only time you should sell is when you've already decided you want to sell and are actively looking for the best buyer. (There are exceptions of course, but we ignored his advice and got screwed, so I guess it's a good enough approximation.)
That being said, lots of other people have done it successfully... so I'd read a bunch of posts (and post-mortems) about what goes into a micro-acquisition (or micro-PE it's sometimes called) and make an informed call. Patrick McKenzie (@patio11) has written a lot about it, so has @robwalling and various others. Acquisition is a high-cost conversation to get involved in, so definitely get informed on the good and the bad.
Thanks for taking the time to write. You've hit on lots of things my instincts were telling me, which is helpful validation. It's good to know my instincts were more rationally grounded than me simply being paranoid.
I've opting for putting the ball in their court to see that they are serious about a commercial agreement, such as pausing all discussions until we have an mNDA in place.
If I don't hear back, that's fine. I'm not taking my foot off the sales and product pedal, which means the company will simply be more valuable. It also means we'll be working with their competitors, which weakens their marketshare, so it should strengthen the incentive to get us exclusively.
I'll read through the materials by those two individuals, as I'm still unclear on how to balance transparency with protecting our secret formula.
The shift to them being our exclusive white-label partner in tutoring is a step towards that, as it wouldn't be the same level of nudity required for an M&A, which they could simply walk away from and use the information gathered to build their own solution.
UPDATE:
COVID killed their cashflow, so the deal fell through, which is fine.
I assumed it would and, per the tip from the community here, wasted little time on it :)
On track to recoup my cash outlay on the business by the end of the month, and now working on the next part of the company.
Plus, the meetings revealed a lot of their weak points, there rhyme well with the strengths of the venture I'm putting together, so the time spent negotiating wasn't wasted in that regard.
UPDATE:
Instead of opening with a number, I pitched them on the vision of working with us to facilitate their digital transformation. So far we've secured buy-in without much effort on our end, and they would now like a rough price for an exclusive licence of our IP for a 1-3 year period.
Anyone familiar with IP licence agreements? Recommend any lawyers? Any templates?
UPDATE 2:
I've shared a commercial proposal for a white-label exclusivity deal, and made a point to not let it consume a lot of time, so I can focus on building the product and getting it into the hands of customers.
My proposal was bold, but I definitely think we're adding a lot of value. The success will depend on timing, their cashflow, and their risk appetite: the commercial structure has a fixed and variable component.
They haven't laughed me out of the room, and we have a call next week to discuss the figures, so fingers-crossed that we come to a structure that works for both of us.
Congratulations. Not able to give you any guidance but would be great if you update everyone on how it goes.
No worries. I'm kinda new here. What's the standard way of keeping people updated? Do I edit the OP? Reply to it?