Lessons from a Failed Business Deal: the Backblaze Breakup

If you’ve ever wondered what selling your human-owned business would be like, have I got a post for you. No, it’s not this post. Instead, you need to read what Gleb Budman, the CEO of Backblaze, Inc. (a human-owned technology company), has to say about a deal for the sale of his company that didn’t work out. I’m not spoiling anything by leading with the fact that the Backblaze deal didn’t close—Gleb’s post is “Backblaze online backup almost acquired - Breaking down the breakup.” Like other good stories that begin with the ending, learning how and why the deal came about and then crashed is what makes the story compelling.

I am particularly grateful for Gleb’s post because he helped me address a year-long dilemma. Ever since I started No Funny Lawyers, I wanted to write about the ups and downs, ins and outs, of a business transaction as my client and I experienced it, but I could never quite figure out how to do it without undue risk to confidentiality and the interests of my client. Anyway, Gleb’s candid account of his experience will resonate better with you than my story-telling. At the end of the day, the lawyer’s experience is about his or her job; for the human-owned business owner, it’s about his or her life.

As you read the post, be sure to take in the five lessons of many learned in the sales process that Gleb chose to highlight in his blog. My favorite (aside from “Find great advisors”) is “Know your wants and walkaways up front:”

Unless you’re desperate, you probably do not just want to be acquired. What do you consider being fairly compensated for the company you have built? Do you want to stay and run the company or does everyone want to sell the technology and leave? Where will you be physically located? Will you be able to continue executing on your vision or will the technology simply be repurposed? What about your existing customers and partners? Figure out what is important to the team up front and write it down - it easier to stay true to it throughout the process and for the internal decisions to be less emotional.

I should point out that I have no connection with Backblaze or its failed deal, but I’ve seen other deals crash before, and as Gleb surmises, it is not as infrequent as one might think. Take advantage of his generous and public “That really sucks, but I wanted to know that you’re not alone…” to think about how you might approach your own transaction, including finding your own great advisors.

Thank again to Brian Gryth, a reader who has now given me two leads on stories to share here. For that I’m going to buy him lunch. Your tips are appreciated, too.

What's Next for Business Owners? Focus on Key Employees

Double dip or bumping-along-the-bottom to slow growth? The debate about the economy continues and I have no ability to predict the future, but I know a couple things that were true before the Great Recession that will certainly be true after: Demographics is one; entrepreneurs are usually terrible delegators is the other.

In spite of economic news, talk about getting-by has stopped; my clients and connections are back to more traditional commercial conversations about getting ahead. Those of us still standing realize that we have got to get moving again, and I’m grateful; it’s a heck of a lot more fun to help folks working toward a goal—often a fabulous retirement, even if delayed a few years—than staving-off disaster, but the lawyer-mind keeps looking for trouble.

The pig-in-the-python effect of the baby boomers, which has affected society in so many ways for decades, was going to be a significant challenge for the exit plans of business owners even before the recession. The number of human-owned businesses changing hands as the boomers retire will be unprecedented. The first boomers reach age 65 in 2011, and that supply bubble, with its corresponding pressure on prices, has only been growing as the sale of businesses came to an almost complete stop in the recession. Even now continuing credit challenges for potential buyers and, in many cases, depressed valuations of many potential sellers continue to delay the normal cycle of small to mid-sized business transitions.

Business owners thinking ahead to eventual exits have to contend not only with the erosion of investments and savings we all have suffered; their ability to sell at a price that will fully enable that fabulous retirement, at least during the great boomer exodus, is at risk, too. Changing that fact requires changing that other fact mentioned in my lead. A business owner who delegates to, and builds the capabilities of, key employees increases both the current and future value of the business. 

"He couldn't wear all the hats" of being president, chief executive, chief financial officer and even secretary (his signature is on the board minutes) as the company grew”, he said. "Being the classic entrepreneur, he was trying to do everything," Driscoll said. "It's physically impossible to run every aspect of the business. We reached the stage where we had to delegate and elevate people. It's a classic learning stage we went through."

Sound like you? Well, if so, then you’re in good company, for that classic entrepreneur, described in this last Sunday Denver Post, was Denver Mayor, and Democratic gubernatorial candidate, John Hickenlooper. Business owners typically try to do too much, and in this crisis many have had no other choice, but as they begin to peer out of their recession bunkers, my strongest recommendation to my clients is to build (or rebuild) a key employee group.

Key employees make a business a business. Without key employees, clients who might otherwise be making buckets of money are often disappointed to find that they have little to sell when it is time to exit. The boomer bubble will only intensify that disappointment.

The human-owned business that builds on its key people builds a win-win-win scenario. Win one: the owner who delegates (eventually) reduces stress, gets more time away from the business, and makes more money. Win two: buyers are more likely to be interested, and more likely to pay a bigger purchase price, for a business that runs itself (instead of depending on you). Win three: those key employees will be happier employees after you empower them, and they can also be the buyers.

What’s in it for me, the lawyer, if you start focusing on your key employees? Well, I get to work on the various contracts that go with such a plan, like employment agreements, non-competes and incentive plans aligning the goals of the key employees with the goals of the owner. Legal contracts, I should point out, can’t be the beginning and end of your key employee investment, as my friend Tom Downey pointed out in an article about motivating young employees, but it works for other employees, too: 

The best technique for motivating Millennials is to layer a social contract on top of the monetary contract. The social contract says if they give more to the company, the company will give them more in return: job satisfaction, responsibility, a sense of purpose, advancement potential, real communication and an enjoyable workplace. 

Do that and I’ll also get to work with you on the host of opportunities (and obstacles) that come the way of growing businesses, and eventually we’ll conclude your exit plan. Your business will be a standout among the masses vying for buyer attention. Even if a third-party sale isn’t for you, you’ll have a company that you can transfer to key employees or family, and they will already know how to run it without you.

Business Confidentiality: Gmail Ads Concern My Client

Confidentiality concerns are ever-present in my job. The protection of client information is fundamental in my duties as a lawyer. My work in M&A, mergers & acquisitions—the buying and selling of businesses—only intensifies the emphasis on secrecy.

Even a hint of a possible sale surfacing before a deal is ready to close can be bad news for most businesses. Public companies have securities law issues to worry about, but confidentiality matters to human-owned businesses, too. Employees, customers and suppliers are all potentially interested in the sale of a business. How and when they learn of a sale can be critical. Disclosure can be done well, and minimize anxiety and potential disruptions to the business, or the news can leak out in any number of ways resulting in rampant rumors and damage control problems. (Read to the end of the post for my two favorite stories of unintended deal announcements.)

But sometimes a disclosure isn’t really a disclosure.

My client called me, surprised and upset by ads on his Gmail messages. This client is considering selling part of his business to another company. The terms of that sale have been discussed via email. This client uses Gmail from Google to make email sent to his office account available to him anywhere in the world. Now the emails he receives via Gmail contain ads for the potential buyer.

His confidentiality was blown, my client surmised. Not so, I tried to assure him. Yes, a Google computer scanned his email, recognized the name of the potential buyer as a Google advertiser, and decided he was a good target for an ad for their customer/his potential buyer. The Google computer also scanned his messages to determine if they were spam or contained viruses, just as my law firm and your business’s mail service does. No human being outside of a small group bound by professional ethics or non-disclosure agreements knew his company was considering this advertiser as a potential buyer--at least that is Google’s promise.

Confidential emails are handled and processed by a number of machines and programs without us most of us giving it a second thought. Disclosure risks can be limited with a combination of good procedures and encryption technology, but in my experience few businesses not involved in critically sensitive matters do so consistently. For most of my clients, misfiled or thoughtlessly forwarded emails pose a much greater risk of blown secrets than cyber-snoops.

In the end, this client decided to change nothing about his communication methods. To give him a taste of real confidentiality problems, I shared with him, and now you, my favorite stories about confidentiality breaches--favorite now that they are years behind us and no lasting damage occurred.

In one case, my client had shared his plan to sell his company with his father. Understandable enough, but he failed to adequately impress upon his father the need for secrecy. The father, as fathers and mothers are prone to do, bragged about his very successful son over drinks with an acquaintance that unbeknownst to the father had connections to a competitor to the son’s company. When the competitor started telling my client’s customers about the sale, the carefully-laid plans for announcing the deal went out the window and the company went into crisis management mode.

In my other story, a telephone service company hired by a potential buyer to assess the costs of upgrading service to my client’s multiple locations created havoc. Their technician, upon visiting one location, explained to the manager that the business was being sold and that the new owner wanted to make some changes. You can imagine how quickly the manager grapevine spread that tidbit.