Kickstarter Lesson #229: When a Company Wants to Acquire You

26 June 2017

I’m writing this article now because the timing should leave no room for confusion: To my knowledge, Stonemaier Games is currently not being pursued for acquisition.

However, there was a time in the past year that a company expressed interest in buying my company. It wasn’t something I was seeking or interested in, but I dipped my toes in the waters of that process to learn what I could from it. I was curious.

While the potential for an acquisition is much higher for you after you’ve successfully crowdfunded a project–a position some readers may not be in yet–it’s also possible that a company could approach you before or during a campaign. They might be looking to acquire your company or to just buy out the rights for one specific product. Either way, you might find some helpful information below.

***

Before I get into the core considerations, I thought I’d describe the process I encountered. This may be vastly different than other acquisition attempts.

I first heard from an intermediary, not the actual buyer. They asked if I would be willing to chat with the buyer. I looked into the company and talked to my team about it, and we decided it couldn’t hurt to chat.

I had a conference call with the company. They spent most of the call talking about the value they could add to Stonemaier, and they talked a little about what the acquisition would look like. I had sent them some questions in advance, and they answered those questions. It’s notable that they wanted me to continue to run Stonemaier Games, which was good to hear–I love what I do.

I was open to continuing the discussion, but before our next call, I did a few things: One, I talked to the founders of another company that the buyer had previously acquired. Two, I talked to a few other game company owners about acquisitions. Three, I put together a detailed financial document about Stonemaier Games. Even though I was 99% sure the acquisition wouldn’t happen, all of these things were helpful for me as an entrepreneur.

I then had a follow-up call with the buyer so they could better understand the financial document. At that point I had made it clear that I had a baseline price for negotiations to continue. Soon after the call I heard from the intermediary that the buyer couldn’t match that price.

***

The following is a list of questions for the buyer, other companies previously acquired by the buyer, and for yourself.

Questions for the Buyer

  • Are they looking to retain you as an employee or simply buy out your intellectual property?
  • What range of multipliers are they considering on EBITDA (earnings before interest, tax, depreciation and amortization) for the valuation?
  • What are some non-financial assets they offer to enhance your company? If they approached you, remember that they’re selling to you, not the other way around. Get a feel for if their strengths match your weaknesses (or the things you simply don’t like to do).
  • Do they require exclusive negotiations, or are they open to you entertaining other offers? It’s good to put yourself in the position of having multiple offers if possible (watch Shark Tank to see what I’m talking about).
  • What are their core philosophies? If you have certain philosophies that are important to you, now is the time to see if they align. For example, are they interested in squeezing every cent from a product, even if that involves lower-quality components or overinflated prices? Is using Kickstarter important to them? Do they care about where you manufacturer the product? How will they respect the brand you’ve built for your stakeholders?
  • What do they want to know about you?
  • Do they want to invest in your company or buy the entire company?
  • Could you visit the company and meet the people you’ll be working with?
  • Have they acquired other companies? If so, do they mind if you speak with those companies?

Questions for Previously Acquired Companies

  • How much autonomy did you retain?
  • What were your concerns pre-acquisition and how did they turn out?
  • How was the transition process?
  • Were you able to keep your office in the current location? If so, how often do you travel to the parent company?
  • How often do you have to check in with the parent company? Do you mind it?
  • How has the parent company made your brand more successful?
  • Do they have any regrets?

Questions for Yourself

  • Are you happy with the way things are? Just because a company is interested in buying you–even at a fair price–doesn’t mean it’s a good fit for you. But it’s also a good opportunity to take a step back and consider if you enjoy running a company or if you’d rather just do one specific thing and let a team of other people handle everything else.
  • Will the deal let me do more of what brings me joy with no regrets? (thanks to Luke in the comments for this question)
  • How much of a say do you have in the decision? I own 90% of Stonemaier Games, so while I include the other owners in important decisions, the final decision is mine to make. You might be in a very different position based on your ownership level. Another way to look at this (suggested by Luke) is “Do I owe it to my investors to take this deal?”
  • Do you mind answering to someone else?
  • How secure do you feel about your future? If you receive an offer today, there is a certainty in it that can’t be matched by an unknown future if you don’t take the deal. There’s value in certainty. The future is both exciting and risky.
  • How much control do you want?
  • Does this deal protect the products and people I care about? (credit again to Luke)
  • How much is your company worth? This is a tough one to answer because your company is worth what someone else is willing to pay for it. There is no standard valuation formula that applies to every industry. However, this may be a reason to enter the fray of the acquisition process, as you could walk away from it with a much clearer view of how other companies perceive the value of you and your IP.
  • What’s the minimum offer you would consider? For me, this is the big question if you aren’t actively seeking to sell your company. It’s okay if it’s high. You’re in the driver’s seat. I think it’s worth figuring out this price early on in negotiations so you don’t waste their time and they don’t waste yours.
  • Do you want to continue to run your company, or are you ready to focus on something else?
  • How will your existing fans perceive the acquisition? I’ve had a few people tell me, “I sure hope you don’t sell out to Company X.” I’m always intrigued to hear that, and I’ve tried to dig deeper when possible to better understand what they’re saying. At the very least, it’s a good reminder to me that the way people perceive your company can change based on if you’re acquired and who acquires you.

***

Have you ever been approached about an acquisition? What are some additional questions you think are worth asking? And when a company is acquired in an industry you follow, how does your perception of them change?

28 Comments on “Kickstarter Lesson #229: When a Company Wants to Acquire You

  1. “A million dollars isn’t cool. You know what’s cool? A billion dollars” Sean Parker

    My opinion of Stonemaier Games continues to be the same from the beginning when you first entered the industry. You have the foundation in place to become one of the major players in the industry. You have built a brand and a culture that is resonating with the market. Very hard to put a price on that.

    Keep up the good work.

    1. Thanks, Richard! It’s always interesting to hear you say that, because my goal isn’t to be a major player. I see and respect companies who appear to be striving to do that, like Renegade and TMG–they have a lot of high-quality releases coming out every year. My approach has always been more of a Days of Wonder strategy–release 1-2 new games a year, 2-3 expansions, and reprint evergreen games. I think Ticket to Ride helped them become a major player, though a very different kind of major player than the Fantasy Flights and CMONs of the world. :)

      1. Jamey,

        From the very beginning, you have focused on data and driving your business decision based on information and not on hunches or guesses.

        This is what sets you apart in the industry. Your use of Days of Wonder is a great example. Many of their decisions were based on the collection of data.

        Stonemaier Games makes great games, and will continue to make great games…but it is your direct connection to your customers that gives you a tremendous advantage. And it is your ability to stay focused and committed once you have made that decision.

        Fantasy Flight became a major player because they were a venture-funded company building a brand with a planned exit strategy, not because they were making money selling board games.

        CMON took over a decade of building a following of fans and then monetizing that network by understanding exactly what their customers wanted.

        Few companies have the patience to stay the course, whether they are driven by market conditions, financial stress, or personality of leadership. That continues to be the strength and advantage of Stonemaier games…you have data to inform your decisions and patience to see those decisions through.

        1. Richard: Ah, now I see. :) I really like the idea that being a “major player” can take different forms and definitions. The data definition is great, though if I had a choice, I’d like to be a major player in creating joyful moments and experiences for gamers worldwide. I’ll continue to strive to achieve that goal (and I’m sure data will help quite a bit along the way!).

  2. Hello friends – I emailed with Jamey privately, and he encouraged me to post most of the conversation here, so here we go. For context, my background before design/development is in finance and trading, with a focus on options and equity valuation.

    I’m SUPER interested in what the EBITDA multiple is for our industry. My guess is that it’s based almost entirely on specific sales projects for specific games. Like, Plaid Hat was sold because Dead of Winter was at the beginning of what was obviously a 3-5 year product cycle, with a ton of room left for additional branded content. I’d guess that’s a multiplier of about 5-8x on projected sales.

    Compared to a mature product like Carcassonne (probably well beyond its inflection point in popularity/sales growth, even with expansions), which I would assume would have a lower multiplier, maybe 2-3x.

    Also, there’s some part of it that is “how much of your future design/creative CAN you value, and how much do you want to divulge?”.

    Also – I think you covered it in, “do they want to invest or buy the whole thing”, but there’s a whole world of gray area that really matters to small publishers. Co-branding/parenting (like Renegade and Foxtrot, or IDW and Pandasaurus) leverages creative assets (Lanterns, Machi Koro) with economies of scale and existing distribution channels, which can create huge returns for both companies. And I think it’s worth mentioning that it can happen on an individual product or for an entire company.

    That situation is much more likely to be presented to a design studio or somebody in the middle of a KS (I’ve arranged for about 5 of those deals).

    For any small business owner, it’s likely that customer service, shipping, warehousing, and replacement parts are biggest time sinks and areas for scaled improvements… and of course, the cash flow impacts of print runs (and the unit cost in general, for anything less than 20k units) are super important to the deal as well.

    I suppose there’s a question of dilution also – that gets into the valuation and investment discussion, but will the parent company have the capacity to dilute your equity position? Will you be included as a decision-maker in the parent company, and/or can you be voted out of a leadership role, or even fired?

    In thinking about it a little more today, there’s a question I’m surprised you didn’t list:

    “How well will the new company take care of my stakeholders?”

    My backers, the people who have believed in me from the start, my production partners (graphic designer, Morton, etc), and how well will they represent my brand (because your personal brand is tied to Stonemaier, whether it’s owned by F2Z, ANA, or anybody else) after the honeymoon phase is over?

    1. I have been directly or indirectly involved in quite a few industry purchases. For established business, a 5 year free cash flow with a 15% NPV is a fine starting point (most end up there). However, there are some big differences. When WotC bought TSR, there was an inherent brand value that had to be decided (D&D is worth something more than free cash). When my company Sabertooth was purchased by Games Workshop we were at the start of a hockey-stick growth that was easy for us to defend. But most end up at that formula above.

      The most important 3 things for a seller to ask is “do I owe it to my investors to take this deal” (your investors made your company possible), “will the deal let me do more of what brings me joy with no regrets” (is the deal “fair” is wrapped up in that regret thing), and “does the deal protect the products and people that I care about” (legacy and personal relationships).

      We are also entering a phase where individual products are being purchased more than ever. I expect quite a few of those to be announced shortly. There is likely a new business model of “make a game a hit, then sell the game to a big company that make it a legacy product.”

  3. I don’t understand how you even thought about selling 90% of Biddy and Walter to a probably catless rich man.

    Joke aside, you worked hard, established a name/brand/status, left your other job AND work 80h/week. I know it was meant only as info, but you knew they assumed your price would be high, eh?

  4. I’ve helped large corporations work through challenges of acquisitions. Acquisitions can take one of two forms – the first is similar to the Borg from Star Trek: “You will be assimilated.” In those acquisitions, all sense of identityis completely lost as the purchasing company absorbs you into their juggernaut leaving little to no essence of the original company. The other approach recognizes the unique value a brand can bring. In those cases, the acquiring company seeks to retain as much of the essence of the acquired company as possible. In those cases, the acquirer provides expertise and economies of scale while capitalizing (and profiting) from the culture and brand that made the acquired company so attractive to employees and customers in the first place. I always prefer the second approach when assisting with acquisitions, but it is by far the minority of cases…

    With that said, I’m thrilled to hear Stonemaier Games remains independent. Jamey, your passion for games and generosity to the gaming and crowdfunding community have made you an icon that many of us aspiring designers/publishers use as a lighthouse… thank you for keeping that light shining brightly for the rest of us!!!

    Jason Brooks
    Brookspun Games

    1. Jason: Thanks for sharing these insights! I’m wondering if it’s more common in the game industry to have the second kind of acquisition. All of the ones I’ve heard about have been that kind (though I’m sure there are plenty I haven’t heard about).

      While I cherish our independence, if we are ever acquired, my hope would be to still be able to share all of those elements via Stonemaier Games! :)

  5. This is a fantastic discussion on the business side of the industry. I’m sure a lot of new publishers think they want to be the next Asmodee, but in reality for those that make it I think getting to TMG, or even Stronhold levels would be high aspirations indeed. I tend to align with Jamey on this one. We don’t want to be huge, we just want to release great games that make enough to allow us to continue to do that full time.

    These insights though are great regardless of your market size aspirations.

  6. Interesting stuff. I am curious, you said, “Get a feel for if their strengths match your weaknesses.” As a avid fan, perhaps I am blinded a bit, what do you consider to be your weaknesses?

    1. Paul: Oh, I have many weaknesses or things I’m simply not experienced/skilled in. That’s why I outsource things to people like artists, graphic designers, lawyers, etc.

      But there are certain things that I currently feel I need to do even though I’m not good at them. When I had this discussion with the potential buyer, the two big things that came to mind were bookkeeping (I love spreadsheets but I don’t like the tedious nature of bookkeeping, and I’m not good at accounting [though I have an accountant for that]) and convention presence (I’m an introvert, and I generally prefer to stay in my office, not spend time traveling).

  7. My wife works for a big corporation which often acquires smaller companies. What’s interesting is when her corporation gobbles up these smaller entities, they don’t often make a lot of noise or even have their mark on the products. The reason: branding and perception. They want to keep the brand and the perception of a smaller, authentic company intact…there’s a huge following/trending toward smaller, more authentic companies. And so, in most cases, the companies just keeps running as they have been. The only significant change is an increase in resources which allow them to reach more people and markets.

    Here’s an interesting question Jamey, what about Stonemaier Games acquiring other smaller companies at some point?

    1. Denny: That’s really interesting (and encouraging) to hear that the big corporation wants to keep the smaller, authentic brands intact after they acquire them. I like that.

      As for Stonemaier acquiring other companies, it’s something I’ve thought about a little bit in terms of expanding our portfolio to include games and colleagues I like and respect. If it ever happens, it might look more like a merger. For example, Greater Than Games and Dice Hate Me Games merged a few years ago, instantly diversifying both of their portfolios.

  8. Thanks for the very interesting perspective Jamey. I work in M&A for a small manufacturing company so it is interesting to hear your perspective as an entrepreneur.

    One of the most important things that we evaluate when looking at a transaction are the synergies that it will produce. Synergies are typically cost reductions or opportunities to expand your business that you otherwise aren’t available to you. When you sell a business it is important to consider what synergies the buyer can realize with the addition of your business because it helps determine what your business is worth. For example if a business normally sells for an average multiple but has substantial synergies then the buyer will likely be willing to pay more because their purchase multiple will be reduced after the sale once they realize those synergies.

    For a business like Stonemaier there could be substantial synergies such as reducing fees for accountants and lawyers, logistics savings and manufacturing efficiencies, especially if the company is vertically integrated. From a commercial perspective if you were being purchased by a much larger business there might be better marketing support or access to a broader distribution base.

    I did a little digging into the industry to see if I could find what valuations are for the industry. Unfortunately most of the recent transactions by Asmodee are private (though I’m sure the right investment banker could provide this information).

    Here are the valuations that I could find, some are more relevant than others!

    – Asmodee was purchased by Eurazeo Capital for 7.9x EBITDA, this was announced in 2013 and closed in 2014. Valuations have increased since then so I am not sure how relevant this data point is for 2017

    – CMON went public in December of 2016 and is now trading on the Hong Kong exchange. The company’s enterprise value is $41 million (USD) with a multiple of 10.9x Last 12 Months EBITDA

    – Games Workshop is publicly traded in London, the company’s enterprise value is $377 million (GBP) with a multiple of 13.8x Last 12 Months EBITDA

    – Mattel is publicly traded in New York, the company’s enterprise value is $9 billion (USD) with a multiple of 12.6x Last 12 Months EBITDA

    – Hasbro is publicly traded in New York, the company’s enterprise value is $14 billion (USD) with a multiple of 14.1x Last 12 Months EBITDA

    It seems like a great time to be a tabletop publisher and good luck with any future discussions.

  9. Hey Jamey!

    Thanks so much for sharing. I’m a new game designer who just jumped ship from 12 years of corporate finance and M&A, so this article had me salivating when I read the title :)

    The companies I worked for did up to double digit acquisitions annually, which means I’ve probably looked at over 1,000 companies. I just preface this cause I want to give you the likely perspective from the buyers point of view, much of which Rob already hit on with the cost synergies.

    The question here is what is the value of Stonemaier Games? There is no patented technology, no secret sauce around processes, no big customers where you have significant design-ins on a long cycle product where it would cost your customer a ton of money to redesign and re-qualify a competitor. The value of your company is your brand.. and truly YOU are the brand! The long term value of Stonemaier is nearly worthless without you. So, if I’m a buyer I am putting you on as long of a retention as I can – 3 years minimum. I assume if you got far enough in the discussions that was already on the table? If I’m a smart buyer, I am also wanting to keep you happy and independent as possible. Oh.. and make sure you’re eating right so you live forever! :)

    So, the question you have to ask yourself is: Will the acquirer be a great fit for Stonemaier and a place I would love to work? Simply because you’re going to be contractually obligated to stick around for quite a while! Kudos to you for going out and doing your research. Also glad to see you stay independent!

    Hope this helps give you a little different perspective. I’d be happy to offer advice or valuation tools if you ever consider going that route in the future.

    Cheers,
    Joe Barron
    Gray Matters Games

    1. Thanks for sharing this, Joe! While I’d like to think I add value to the Stonemaier brand, I also try to keep in mind that our IP is of significant value as well. I figure most companies consider the “hit by a bus” scenario: If Company X wants to buy Company Y, and a big part of Company Y’s value is related to their CEO, is it still valuable if the CEO gets hit by a bus tomorrow? I think the answer is yes for Stonemaier.

      Either way, no, we didn’t get far enough along in the discussion to get into those details. The only thing that was brought up was that they wanted me to continue to run Stonemaier Games.

      I like the question you mentioned! That’s a great addition to my list.

  10. […] Acquisition disorder Jamey Stegmaier of Stonemaier Games talks buy-outs.  His personal experience exploring that route and a guide to other companies when approached by a larger publisher. Source: https://stonemaiergames.com/kickstarter-lesson-229-when-a-company-wants-to-acquire-you/ […]

  11. Jamey I thought this was an interesting topic for a blog. I was discussing your situation with another industry insider recently and we were both wondering if you knew that you could cash out for a sizable seven-digit number right now.

    I have been involved in several transactions in the gaming industry including a couple of the big ones – Wizards buying TSR and Hasbro buying Wizards. At Wizards I did a couple additional deals and looked at about a dozen. Subsequently I’ve looked at and advised various parties in several transactions down through the years some of which closed and some of which didn’t.

    Almost invariably nobody really looks at EBITDA multiples in this business for deals that close. You get one of two scenarios – the buyer is interested in IP for the portfolio and has their own internal projections on how their system will amp up sales of your stuff once the deal is done, and the goal is to do a deal at some discount to the 5-year expected return on the cost of the transaction, or someone wants to run a “let’s consolidate a sector of the industry quickly”.

    Based solely on the fact that you’ve sold more than 100,000 copies of Scythe, I suspect there are companies that would entertain deals in the $5 million+ range just to take ownership of Scythe and Charterstone (they’ll be gambling that Charterstone will be another Scythe). Games that sell more than 100,000 units in this industry are very few and far between and they have 20+ year evergreen lifespans. Someone will be selling some version of Scythe in 2037, I have no doubt whatsoever. I don’t know, but I expect that you have tremendous upside in Europe and Asia with the brand, and if you ever decided to go back to Kickstarter with a Scythe followup I think you could do $5+ million and play in the CMON range. Any potential buyer would believe they could replicate that experience.

    That’s the upside. The downside is that I have also seen how quickly a success ages into something that doesn’t command a stratospheric valuation. Two, three years from now if Scythe is selling a respectable 10k+ units a year and if Charterstone is a tens-of-thousands of units game in it’s first year and not a hundred-thousand-plus unit game, the bloom comes off the rose and the people with the money to do large value acquisitions will have pivoted to the new hotness. Of course if you’re continuing to grow Scythe and Charterstone is another out of the gate success, your valuation just goes up…

    One last thing – the bigger the buyer, the bigger the check. To get the biggest checks you have to sell to the biggest buyers. Today that’s Hasbro, Mattel or Asmodee (because Games Workshop essentially doesn’t make acquisitions outside the GW family, the Pokemon company doesn’t buy anything, and Upper Deck seems to still be a mess). Those are also the companies least likely to care about culture, your ideas, or the value in the Stonemaier brand (although all of them will have a good job for you because hiring you in a transaction would be obviously to their benefits because you’re awesome and this industry recognizes that excellence).

    1. Ryan: Thanks so much for sharing your insights! It’s interesting to hear that the IP and consolidation are motivators, but human assets are not (that wasn’t the case in the discussions we had, but the company clearly expressed other motivations).

      That’s a great point about timing. If games are still at the beginning of a 3-5 year lifespan, the valuation could be very different than if they’re winding down.

      So far, all of our games have sold at least 30,000 units. Viticulture will cross the 50,000 unit line in 2017, and Charterstone’s first printing alone (most of which is already pre-sold or committed to distributors and international partners) is 56,000 units. We’re on track for $5 million in revenue this year after last year’s $3.5 million. So even though buyers may not look at revenue and EBITDA all that much, I can’t help but factor in those numbers when considering offers (this is my not-so-subtle way of saying that a $5 million deal is considerably less than what I would consider…we’ll see if I end up eating those words! :) ).

      1. Yeah, I am just spitballing based on the sales of Scythe and my sense of the momentum for Charterstone. Of course I have no real sense of your financials.

        There is always a tension in any deal. The buyer cannot pay max price (or they get no residual value). The seller always has remorse, thinking about the gap between what they got and max price. But in order for a deal to close there has to be value on both sides. From transactions I’ve observed up close, that number is usually between 1.5 and 3 times total revenue but the size of that range is enormous and it’s driven by all the intangible factors you can imagine.

        Let’s just imagine a scenario filled with assumptions for illustrative purposes. Let’s say you sell Stonemaier for $5 million (and then in a second transaction you buy back all the games Stonemaier publishes except Scythe and Charterstone, and access to your mailing list, etc. for $1) [in other words, this is a transaction structured for the buyer to get Scythe and Charterstone and for you to pay long-term capital gains taxes instead of ordinary income tax.]

        Stonemaier’s shareholders net $4 million after tax.

        Assume you own 75% of the company, so you get $3 million after tax. You can invest $2 million conservatively in a diverse portfolio of stocks, bonds, etc. and earn 5% annually effectively forever. You have in income stream of $100k for life.

        You also have $1 million in cash. And your other games. And you’re Jamey Stegmaier – beloved of the gaming community, and you live in a world where Jamey Stegmaier can make games profitably as a small operation with limited staff.

        You could keep doing what you’re doing now (with a guaranteed upper-middle-class income for life). If you succeed again, you can sell – again. And you’re a good enough businessperson that you won’t get yourself into a situation where you take enough risk to jeopardize your nest egg.

        You could decide to explore something else that you’re passionate about.

        You could take a few years off after a stretch of super-hard and intense work and contemplate your options.

        You could take a high-five, low-six figure job with one of the larger game companies for a few years, learn how they operate, see more of how the industry works, and think about how to leverage that new knowledge while earning a nice paycheck with benefits.

        You live in a unique time in the history of the industry. Never before has the “sell out at the top” option really existed for companies of Stonemaier’s size. There was never enough capital concentration to enable a buyer to do a multi-million dollar deal without making it a bet-the-company proposition that required an almost insurmountable amount of risk. All the folks who came before you when they were where you are at didn’t have any good or likely options to just cash out. Their choices were to learn to operate successfully for the long term (i.e. Steve Jackson), find an investment partner who would insist on an ever increasing rate of return (i.e. Christian Peterson), take enormous personal financial risk and go for the golden ring (i.e. Peter Adkison), or fade away when the business reverted to the mean (almost everyone else).

        It’s super cool to have so many options.

        1. Ryan: This is fascinating–thank you for sharing your perspective and experience here. That’s a clever loophole you mentioned!

          I own 90% of Stonemaier, though your calculations still make sense.

          I love to work (operations and designing games), I love board games, and I love our fans (and just people in general in the gaming industry). So as you mentioned, with all of that in hand–wanting to continue to do those things–I still posed the question to a few people of what is a “set for life” amount of money. Your number was a bit lower than other suggestions, but the general idea is the same. Plus, it’s a fun question to consider: What would you do if you didn’t have to worry about money on a daily/monthly basis?

          I think you also allude to a great point that I shouldn’t take this position for granted.

          Thanks again!

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