Tips for selling a studio

It's been an interesting stretch for mergers and acquisitions in the games industry, as Agnitio Capital founder Shum Singh explained to start off a Megamigs panel he moderated last month.

The consolidation roller coaster kicked off in 2020 as the pandemic made gaming one of the few remaining growth industries, and activity ramped up to record levels in 2021. The early days of 2022 suggested that trajectory could continue, but as Singh explained, the Russian invasion of Ukraine, a tanking economy, rising inflation, and other headwinds have cooled off the sector a bit.

"That's not to say buyers aren't still interested in doing M&A," Singh said. "In fact, I probably get just as many calls from large buyers, investors, etc, asking which studios I'm advising or which companies I'm working with… There's still lots of capital out there and a lot of interest, but a lot of buyers want to conduct those deals at much lower valuations since they know the market has come down significantly, the share prices of most publicly listed game companies have gone down from their highs anywhere from 50% to 85%."

"There's still lots of capital out there and a lot of interest, but a lot of buyers want to conduct those deals at much lower valuations... Shum Singh

And if the deals are going to be less compelling, it would serve independent studios founders well to know how to make the most out of any agreement they make. To that end, the Megamigs session spotlighted the insights and experiences of two studio heads who have sold operations to acquiring companies, and a third preparing to do the same.

First, there was Beamdog founder Trent Oster, whose company was acquired by Aspyr Media earlier this year. Oster was also a co-founder at BioWare and went through the acquisitions process twice there, first when it was sold to Elevation Partners and then again when Elevation sold it to Electronic Arts.

Next on the panel was Kabam Montreal general manager Johan Eile, who in 2019 sold his midcore mobile studio Riposte Games to the Marvel Contest of Champions company.

The final panelist was Norsfell CEO Julian Maroda. While the Tribes of Midgard developer has not finalized a deal yet, Maroda said it has recently been going through the M&A process.

Thinking like a businessperson

"One of the biggest challenges off the start is I spent the majority of my career thinking like a game developer and not a businessperson," Oster said. "First and foremost, anybody who's in the game business is running a business. Secondarily, you're making games. When you sell something, you're not selling the game, you're selling the company. And that's really where the value is."

He advised any developer running a company to learn the terms and concepts of business so that they can actually communicate with the people who spend their time thinking like businesspeople.

"Anybody who's in the game business is running a business. Secondarily, you're making games" Trent Oster

"You make games and you crunch along and know how to make games but suddenly you're going to spend a year doing biz shit you have no idea how to do," Oster said. "So you're going to get this speed MBA-lite on how to do this as you prepare for selling your business. And then you're going to get engaged in a process and find partners who some want one thing and some want the other, and there are all sorts of different flavors in there. And meanwhile you're trying to suss out their culture and their values, how they fell about talent and value. It's a lot of work.

"Meanwhile, hopefully you've got your company structured so it can run without you paying attention because your attention is totally fixated somewhere else."

In looking back at the acquisitions he's been a part of, Oster said one key learning is to keep things simple.

"From a corporate structure standpoint, from a share standpoint, from a partnership standpoint, from an investor standpoint, the cleaner and lighter you can keep it, the less complicated those term sheets are going to be," Oster said. "Because they're going to get complicated. Every buyer has their own magic stew of bullshit they want to put in there, and it can be shocking."

Similar to game contracts, Oster said going through the terms companies insist upon was like looking back at bad break-up notes of every relationship they've ever had and finding out all the ways they've been burned in the past. It's similar with M&A deals, he says, where the acquiring company is going to be protecting lots of things the developer may not care about. The simpler the studio's corporate structure and business are, the stronger it's going to be in negotiations around those points.

A "long and arduous process"

For Eile, the first big takeaway of his acquisition experience was just how much focus it required, and for how long.

"It ended up consuming our business for a long period of time," he said. "It only showed afterwards that I'd really been taxing on the progress and the development of the company. That's one of the reasons you want to make sure you have a resource, or are working with someone who can help you."

Beyond consuming time, Eile said the process also consumed the relationship with the company that was acquiring the studio.

"We retained control around who we hire and so on, almost like a walled garden. And over time, that actually becomes a problem" Johan Eile

"We are still literally today referring back to conversations we had during this process, and sometimes it's not that positive," he said. "Because you're basically battling for space, trying to make as good of a deal as you can for yourself and your team, and they're doing the same."

Sometimes, battling for that space may not even be the best thing for the studio.

"For good or for bad, we retained things like creative control," Eile said. "We retained control around who we hire and so on, almost like a walled garden. And over time, that actually becomes a problem. Because you're still continuing on your track, but the big company continues to be a big company. So you want to find a way where you at least initially maintain your space, and then over time find a way to meet and actually [consummate the marriage] in a good way.

"The way we talk about it is needing to evolve our culture rather than keeping our culture. It's about moving it forward. That's probably one of the hardest things when joining forces with a big company."

One point Maroda wanted to emphasize is that timing is key, and as the past few years' events made clear, there's a lot of relevant world news that is outside any founder's control. But he said it's important to keep in mind that most game developers have "an up-and-down curve" of revenues that's very different to a company that makes paper clips, so timing M&A talks properly can be critical.

"I would advise to try to get a deal secured either before you launch or right after if you really think it's going to be successful," Maroda said.

The whole process takes at least four months he said, and usually closer to nine months or a full year.

"It's a long and arduous process," he said. "Even in our case where we're just exploring opportunities, it takes a toll on the company and the decision makers. It is time consuming. It is also stressful. That company is your baby, it's normal to be stressed about giving your baby away, in a sense. Is that a nice foster family for my kid so it can grow into its fullest potential?"

"Even in our case where we're just exploring opportunities, it takes a toll on the company and the decision makers"Julian Maroda

Beyond that, Maroda suggested having an intermediary to help make negotiations a little less personal, which is a significant concern considering people will still need to work together after a deal.

"When you're in that process, it's a heavy negotiation," he said. "You're giving each other blows, you're trying to maintain the relationship. And that's why sometimes having someone in between who can act a bit more as a representative can create an efficient buffer where you're not dealing the blows directly."

Regardless of the negotiation tactics, Eile said it's crucial these days to have a fundamentally solid business at the heart of the studio.

"For two or three years, you could almost just sell a Powerpoint, and that's gone," he said. "And the companies that did that are sitting with these massive cap tables they're not going to do anything with, or they've raised money at crazy valuations and it's no longer attractive… Focus on the fundamentals of building a good company and all these things we're talking about will follow suit."

Oster had much the same message.

"If it's not a good business, they're not going to want to take it off your hands," Oster said. "If they're not excited by the opportunity of the products in your future plans, it doesn't make sense. And it's almost impossible to obscure that. So we started almost a year before, just nailing down what our business was. And it was a good, clarifying process because it forced us to look at it very acutely as a business, and a business that produced products."