One of the hardest parts of selling a company is how opaque and specific the process is. Founders, often navigating the process for the first time, are forced to scramble for advice from investors and other founders in order to effectively manage an incredibly high-stakes process. And because there is no right way to sell a company, relying on the advice of one or two post-exit founders presents its own risks of over-rotating on the path of a different deal.
While not as good as personalized guidance, aggregated lessons from many post-exit founders can start to reveal best practices and common pitfalls during the acquisition process. Those general insights can be a useful jumping-off point to ask more informed questions. So we dove deep with dozens dozen post-exit founders about what they wish they had known when going through the process (given the sensitive nature of acquisitions, identities are protected). Let's go through their answers, stage by stage.
On building early strategic relationships
Official M&A processes are usually built on the back of existing strategic relationships. The stronger that relationship is, the more likely it is that your acquirer will view the company as strategic. There's both an art and a science to building those relationships (see our complete guide), starting with your champion:
“Find the right champion. Acquisitions are made not by companies, but by humans making decisions — typically the CEO at startups or VP/Director of Product at public companies. Never start with CorpDev.” – CEO, Analytics platform (Series Seed)
Once you've found your champion, you might need to paint the vision in more detail than you think you need to:
“Don’t wait for them to come up with the vision of what you can do together. You need to basically write the deal memo for them.” – CEO, Marketplace startup (Series A)
On going through initial diligence
Once the M&A door is open and CorpDev is involved, you’ll be thrown into a round of initial conversations across the business. Your would-be acquirer is trying to determine two things: whether they want to buy your company at all, and if they do, how they’ll value it. During that time, your job is to capture their imagination enough so that they’ll proceed with the acquisition, but also:
“They’ll try to value your company based on people, cost to build or other things. Push back on any valuation metric other than the strategic value you can add to their business” - CEO, HR tech startup (Series A)
If they're able to establish their valuation of your company as anything but strategic value, knowing that if they succeed, the overall numbers will be much lower. Push hard to reframe their thinking.
The goal of initial diligence is to get through it to an LOI. On that topic:
“Drive to getting a first LOI, even if the LOI aren’t at terms you (or your investors) are happy with.” – CEO, Travel tech startup (Series A)
However:
“You don't want to rush to a term sheet like you do in fundraising. Sometimes firms will be happy to sign a non-binding LOI, waste your time for 60 days then pull out at the last minute.” – CEO, HR tech startup (Series A)
While these quotes appear to conflict, in fact both are true. Getting an LOI “tips” the process and is a very important (and sometimes difficult) corner to turn. Therefore, if you have all other parties in your process teed up correctly, getting your first LOI will help the other dominoes to fall. But if you're not ready, getting an LOI can actually be harmful. A promising acquirer could drop out of the process if forced to assign value too early, and rushing others through the LOI phase can increase the risk that the deal falls apart during due diligence. Get to an LOI, but be sure you're ready for it.
On engaging lawyers
At about this time, you’ll also want to spin up your legal team. It's important to address costs up-front to reduce the chance of incredibly costly overruns:
“When interviewing law firms, ask for a quote. Get it broken down into sections. They’ll ho-hum but if they can’t provide a quote, move on to another firm.” – CEO, Undisclosed
But no matter what you do, costs will probably amount to numbers that will surprise you:
"I won't say how much we paid in legal fees, but I will say that you can measure it in Maseratis" – CEO, Fintech startup (Series A)
On negotiating an LOI
How you negotiate an LOI is very specific to the stage of your company, the size of your counterparty and how much leverage you have. However, a few proverbs apply fairly broadly. Those include how to deal with performance-based value:
“Assume everything tied to a performance clause is worth zero, and any time-based incentives after year two are worth zero” - CEO, Marketplace startup (Series A)
And what terms to pull into the term sheet:
“An LOI is not a term sheet, treat those very differently. Pull as many important terms into the LOI as possible” – CEO, EdTech startup (Series A)
“Agree beforehand on the amount of diligence that is going to happen. For small deals, you can and should negotiate this: you can limit diligence, particularly if you are on a timeline and have multiple offers.” – CEO, Travel tech startup (Series A)
Other than that, advice largely reduces to getting good, personalized advice for your situation.
On due diligence and closing
Once an LOI is signed, prepare for an invariably grueling exclusive due diligence period:
"Due diligence is a slog. You'll have to hand over every contract you've ever signed, answer hundreds of questions at least three times each and negotiate excruciatingly nuanced legal points while your deal possibly hangs in the balance." – CEO, Fintech startup (Series A)
But there are a few things you can do to make your life easier:
“Start prepping a data room well ahead of time, as it is very time consuming.” – CEO, Travel tech startup (Series A)
“Think about QSBS early-on. QSBS can have a massive impact on the post-tax return you’ll take home” – CEO, EdTech startup (Series B)
"Avoid optimization, focus on simplifying and closing the deal with a good outcome, but identify and respond when the other side is taking advantage of your good faith" – CEO, Undisclosed
On post-closing
An under-appreciated and often challenging period for most founders comes after the deal has been signed. Founders largely find themselves embedded in an enterprise that isn't theirs, trying to make progress on projects inside a large organization and trying to re-establish a sense of identity after theirs has been upended. Good news awaits on the other side:
"The coolest thing about an exit is that you get to decide who you want to be afterwards. The exit gives you that time and space." – CEO, Energy startup (Bootstrapped)
However, the transition can be challenging. Once the deal is signed, it helps to get as quickly as possible into a new mindset:
“Repeat this mantra: this is not my company. This is not my company. This is not my company.” – CEO, Crypto startup (Series A)
There is no one way to sell a company, and so, so many of your decisions will depend on the perception of your startup within acquirers, how competitive your process is and your prospects should you decide not to sell at all. The best advice is still personalized, but through a process as opaque and high-stakes as this, founders should get all the help they can.
