The Ultimate Sale: How a Startup is Acquired
When it comes to startups, the acquisition outcome is often the only thing that’s remembered. When you read about an exit you typically only see the final number but not the actual process. As a founder of an acquired startup, going through the process was super interesting and eye opening.
My last startup was successfully acquired at the end of 2012 and most people heard about it from our TechCrunch article (that’s actually the only time we were in TechCrunch). I want to share the 12-month process that got us to an exit. Firstly, I want to make clear that we were never for sale, we were acquired. We were growing very well and committed to growing our business for the foreseeable future.
Initial Expression of Interest
I hate to say we were lucky in our exit, but there was a bit of luck involved. I’d like to say it was more timing than luck though. The first part of our process was the initial interest from an acquirer. For us, it came naturally out of partnership talks. Throughout the life of our company, we made partnerships with various companies. As we grew, our partnerships got more and more detailed and substantial. Innocently enough, we were in partnership talks with three large companies. We got a call from one of these potential partners and it went like this: “I’d like to discuss something important and I’d like both you and Shaun (co-founder) there. Also, we need to meet in person.” Whenever someone wants to fly in for a meeting to meet only the founders…something’s up. So during that initial meeting, we were asked, “Would you be open to an acquisition.” Of course, we politely said anything is possible and we’d be open to further discussions.
Now, on to the part where luck helped. Within a span of three months two other companies made the same request. We had three companies interested and we did zero outreach. Not a bad situation to be in.
Hiring an Investment Banker
I can’t stress how important it is to have great advisors and board members during the acquisition process. Especially people who have done it before. Michael Hyatt, a good friend, made it clear we should hire or at least talk to an investment banker. I could write a whole article about the importance of a banker, but I’ll skip that here. What I’ll say is that hiring a banker was a great decision for us and an integral part to getting an acquisition deal that maximizes value.
Our banker moved the process into hyperspeed. I hadn’t realized how methodical selling a company was. The process to selling a company is a science. Calculating the purchase price is an art.
What people don’t often tell you is the amount of due diligence that goes into an acquisition. One of the first things our banker did was create a data room. What’s a data room (I didn’t know either at the time)? It’s essentially a highly secure and permission-based system where people can view files. Basically, a fancier, less user friendly version of DropBox. So what do you populate this data room with? EVERYTHING. Remember firing that bad salesperson? Well, you need their employment agreement. Remember all those NDAs you signed without thinking about? You need copies of those. Literally every single document, from accounting, HR, sales, and legal goes in there. It’s an extremely time-consuming process.
That’s the boring part. The fun part is preparing synergy models and forecasts – I’m not joking, I actually like doing that! All of this data is pushed into the data room so that all the interested parties can quickly view it.
Endless Meetings and Dinners
You need to date someone before you get married. Same thing applies during an acquisition. You need to get to know the senior staff at the acquiring company. Whether that’s the CEO or someone else from the executive team, there needs to be a fit. I can’t count how many flights we had for meetings and dinners. We’d discuss potential acquisition plans and roll outs. Issues discussed like a combined sales team or the potential of selling through new channels. Just as importantly, we spend time to see if we like the people we’re about to marry. At some point for us, it went beyond the spreadsheet. Fit was important.
Because we had competing acquisition offers, there was literally a bid date setup. This is where a banker is key. He manages, shuffles and creates competition amongst the bidders to maximize value. In our case, the bidding process is literally one call after the next. Explaining to one party that their bid needs to be increased. Very interesting and stressful because anyone can drop out at anytime. From a founder’s perspective, it’s the final stretch and very nerve-racking.
In our case, the close came literally from the final call I made to the acquiring CEO: “I will deliver you the company if you reach X dollars. No games, this is it.” From a salesperson point of view, it’s the ultimate close. From a founder’s perspective, you don’t know which direction things will go. Extremely nerve-racking. A couple of hours later the confirmation was received and we moved forward with closing the deal. Closing a deal isn’t just signing off on a couple of documents. This is where having a great team of lawyers really helps. Our lawyers, who were with us since day one, literally worked around the clock to get the deal done ASAP. Everything has to be taken care of. Options agreements, payouts, escrow, share restructuring…and that requires a lot of paperwork!
I know I’ve skipped a bunch of details, but this process took about 12 months. Believe it or not, that’s not long. Of course you read about deals happening overnight because a CEO sent a LinkedIn message to a founder. That does happen, but not very often.
Overall, I found the process thrilling. It wasn’t always glamorous, but I learned a lot. As a sales co-founder, getting acquired is the biggest deal you can ever close.
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