Tag: Buying a business

Learnings

Build something a small number of people want a large amount

Chris Labs

Think of it this way. If something is wanted a large amount by a large number of people, it exists already. So you’re left with 3 options. Imagine the graph below: Large Number of PeopleWant Little Large Number of PeopleWant a lot Small Number of PeopleWant Little Small Number of PeopleWant a lot So the upper right corner is in red because it exists already. Now the bottom left (Small number of people wants little) is not worth pursuing so it’s in red also. You’re left with the top left and bottom right. Paul Graham says you should always go … Continue reading Build something a small number of people want a large amount

Learnings

Each deal depends on building trust with a single controlling entity.

Chris Labs

Looking back at the acquisitions of Pixar, Marvel and Lucasfilm, the personal component of each of these deals was going to make or break them, and authenticity was crucial. Steve had to believe my promise that we would respect the essence of Pixar. Ike needed to know that the Marvel team would be valued and given the chance to thrive in their new company. And George had to trust that his legacy, his “baby”, would be in good hands at Disney. The Ride of Lifetime, p.188 Continue reading Each deal depends on building trust with a single controlling entity.

Learnings

Even in the best circumstances, the merger process is delicate.

Chris Labs

You can’t just force assimilation. Even if it isn’t purposeful, the buyer often destroys the culture of the company it’s buying, and that destroys value. In most cases, you are acquiring the people (they are the ones who made this business successful), not so much the physical assets, manufacturing assets or IP. -The Ride of a Lifetime, p.142 Continue reading Even in the best circumstances, the merger process is delicate.

Glossary

Cap in Escrow & Setoffs

Chris Labs

Represented as a percentage of the purchase price, the maximum amount that the buyer can claim back from the seller. Usually, the cap amount is equal to the escrow account or setoff amount. Sometimes, however, the seller is willing to agree to a larger indemnification cap than the size of the escrow account, particularly for certain classes of claims. Sellers almost always get some cap on their indemnification. -Buying a small business, p.266 Continue reading Cap in Escrow & Setoffs

Glossary

Basket in Escrow & Setoffs

Chris Labs

The mininum claim amount that is necessary for you (as the buyer) to be entitled to funds from the escrow account. The basket’s purpose is to eliminate disputes over very small claim amounts. As a buyer, however, you want it to be as small as possible so that you can have flexibility on the kinds of claims that come out of the escrow. On a 5M$ acquisition, the basket might be 25k or 50k. *When the total claims exceed that threshold, then the escrow account pays from the first dollar of claims. -Buying a small business, p.266 Continue reading Basket in Escrow & Setoffs