It didn’t take long for the meeting to get confusing. Bart (not his real name) started talking about ideas unrelated to the business he wanted to sell. Bart is an accomplished business owner, but years of living on the entrepreneurial edge are taking their toll. “I’m worn out,” he told me during our meeting in his conference room. The large table in the middle of the room was full of gadgets and stuff, from balls to flashlights to coffee cup warmers. “We have ideas right here worth millions of dollars,” Bart said nodding toward the table, “but this old boy is out of energy to see them come together. Whoever buys all these ideas will make a fortune.”
In 2012, Bart sold a company in which he had one-third ownership. He took a few months off to try quasi-retirement, but as an inveterate tinkerer, he had to get back in the game. He started a new company in 2014 based on development of military-themed toys. One of the products he invented was a cool toy for young boys; almost a throwback to the kinds of things I used to play with as a kid. Bart put together a decent sales team and distribution channel, and started to make money in 2017, not a lot, but finally in the black. I told Bart it was not the best time to sell the company because he had just started being profitable. Given his reasonable growth projection, Bart was likely to see his business value increase significantly if he stayed with it a couple of more years.
“I hear you,” Bart said. “I know this product has not reached maturity but that’s why I wanted to show you these other ideas, this is where the company’s real value is.”
I could tell Bart was excited about these innovative products; in fact, he showed more interest in these than the product that was beginning to make money. I had to deliver the bad news that it is tough to sell ideas, especially when those ideas have no intellectual property rights. In Bart’s mind, some of the prototypes on the table represented big money, but I had to tell him that translating those ideas into sellable assets is hard, very hard, and maybe impossible.
But Bart was not dissuaded by my bad news. I asked him what he wanted for his company, and he said, “not a penny less than $6 million.” Next, I asked him how he came to that number, and I heard exactly what I expected to hear (because this is a frequent response): “that’s how much I have invested, and I need to get my money back out.”
So, here’s the problem. Bart is an innovative guy, and he’s come up with several cool products. Right now, only one of those products is working, yet he wants to sell the company for a valuation that is well beyond what the financials for that one product justifies. Simply said, he wants to be paid for his ideas. While I generally don’t believe in absolutes, I’m pretty firm in my belief that Bart cannot sell his ideas for cash. Even if we found a buyer who might be able to monetize Bart’s ideas, the payment would likely be based on future earnings, not cash today.
There are several ways to structure a future-earnings deal. Bart might retain ownership of the products ideas but license them to a third party, or he could just sell them outright and be paid royalties on future sales. The latter is my recommended approach for Bart because it is obvious he wants to be done with all aspects of running a business: the creative side, HR, managing the manufacturing, the financial aspects, etc. If Bart could find a buyer willing to take on all that responsibility, then pay him a royalty, Bart could make a lot of money, and maybe even live like royalty from those royalties during his second retirement. But cash today in exchange for ideas for tomorrow, ah, no, not gonna happen.
{NOTE: this story was initially published in 2018, but the lesson is unfortunately still relevant. I hear something like this several times a year.}
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