Anyone who has sold a business will tell you that it’s an eye-opening experience. The process of selling a business is something of a mystery until you go through it from start to finish. But what you really discover is a whole new way of looking at business in general, and your business in particular.
For many owners it may be the first time that anyone has told you things about your business that you’d rather not hear, or forced you to answer the really hard questions. Like “why aren’t your margins higher…why don’t you gather more customer data…where is your sales department?” Some owners are prepared for this kind of reckoning, while others decide to take the business off the market and hit the reset button.
Lest you think this scenario only happens at the mom-and-pop level of small business, nothing could be further from the truth. Earlier this year I wrote a blog post about Basecamp’s (formerly 37Signals) announcement back in February that it was putting their CRM product — Highrise — up for sale. The company was quite transparent about their plans to find the right home for their number-two product, and promised to keep everyone posted on the outcome. As both a customer and a deal professional I was more than interested in what would happen next.
About six months after the initial announcement, the company made a second one. It appeared the original strategy of selling to an outside buyer had turned into something else entirely.
Buyers weigh in on the Highrise opportunity
After getting inundated with interest in the Highrise opportunity, Basecamp narrowed the field to about a dozen suitors who were asked to submit their bids. Sounds like a normal M&A auction process up to this point. Then all or most of the buyers appear to have said the same thing: Not surprisingly, they wanted the Highrise team to come with the acquisition. Basecamp, on the other hand, wanted (or needed) their people — who worked on both Highrise and Basecamp — to stay and work on their flagship product, and wouldn’t let them go.
“And for that reason, I’m out” as the Sharks would say. No deal was to be had.
Time for Plan B.
Common reasons to hit the reset button
We don’t have much detail about the Highrise deal, although I for one am grateful that Bascamp shared what they did. However, it seems clear that management and employees became a major sticking point. Here are some common reasons why businesses fail to sell after going to market:
- No leadership in place to run the business post-sale
- High customer concentration
- Cyclical industry with volatile sales
- Unreliable financials and supporting documentation
- Too much debt on the balance sheet
- Too little growth ahead at the company and/or in the industry
- Disappointing valuation
So, what did Basecamp decide to do?
Once the option to sell was officially off the table, Basecamp decided to divest Highrise through a spin-off. Here’s how they worded it back in August:
Highrise is now its own company (legally it’s a subsidiary of Basecamp). Highrise will run as its own company with its own leadership, its own team, its own board, and its own budget (fully funded by customer revenues). During the transition period, Highrise will lease some infrastructure from Basecamp, but ultimately it’ll be completely self-sufficient.
While Basecamp said that valuation was not an issue when it came to selling Highrise, it’s already clear from this snippet that the spun-off entity will have much more value as a standalone company. Highrise management will also now be free to pursue its own strategies for building value in the coming years. I’m not aware of their long-term goal, but it sounds like efforts are underway to reposition Highrise as a highly sellable business that will be much more attractive to buyers in the future.
Putting your business on the market and inviting buyer scrutiny can be a painful process, but it can also give you invaluable insights into what your business is worth and how a sale will be structured. If you’ve had a similar first time to the altar experience, then take heart: You’re in good company. Something tells me that Highrise will be back on the market again someday, and it will be worth a lot more the second time around.