As a first-time entrepreneur, many of the issues I face with my startup are “for the first time.” Acquisitions definitely fit into that bucket. While I don’t have first-hand experience, I recently received some advice that resonated strongly and am sharing it here.
This information and my takeaways/perspectives come (mostly) via an excellent dinner panel discussion this week hosted by Ignition Partners’ Chris Howard and Estately‘s Galen Ward (who just closed a second round of funding). The panel featured David Liu of Jefferies Investment Bank and a distinguished group of 5 entrepreneurs representing companies that had recently gone through the M+A process – TellMe/iLike, Picnik, A Place for Mom, Oversee.net and Jambool (aka SocialGold).
Two of these companies recently sold to Google (Jambool and Social Gold), two had taken private equity rounds to provide cash to founders and early employees/investors and two had other large acquisitions (TellMe to Microsoft for $800 million and iLike to MySpace for ~$20 million). In addition, David himself has been part of hundreds of M+A transactions over the past 20 years with Jefferies.
#1: Personal Relationships Make the Sale
Every panelist noted that their personal relationships with executives, M&A directors or CEOs at the acquiring company or P/E firm had a huge impact on getting the deal done. In one case, the founder noted that despite being rejected entirely by the M&A team, a morning jog with the CEO re-sparked interest and ultimately led to a very successful outcome. The big lesson is – form relationships early and often. In most cases, the relationship started years before the acquisition, and often had little to do with a purchase (at least, initially).
As a founder, my responsibilities are far-ranging and disparate, but relationship building with the right kinds of companies as far up the management chain as possible likely needs to go on that list.
#2: Interest Comes in Waves
Although I might have predicted that relationships would be critical to an M&A process, I was very surprised by the pervasiveness of the “interest in waves” trend.
Virtually all of the founders on the panel noted that at certain key inflection points along their company path, a number of potential buyers would get in touch to discuss business development or partnership deals as a precursor to an offer. My preconceived notions were that a particular strategic partner or acquirer might reach out to begin talks, followed by scrambling on the part of the startup to find other entities potentially interested in bidding. But, apparently, at least for this group, acquisition interest came almost exclusively in waves.
The inflection points themselves were interesting as well – it seems that a combination of growth rate (revenue, customer and reach) and press/media awareness were the driving factors. For startups seeking an exit, this suggests that press, reputation and public relations may be just as important as sales figures and profitability.
#3: To Get the Right Price, You Need to Walk Away from the Deal
Every founder, as well as David himself (the investment banker) warned that you need to not only be willing to walk away from the table, you have to actually do it (possibly several times).
In the M&A deals discussed by the panelists, there were at least one and in several cases a few “walk aways” from acquisition talks, even after term sheets had been signed and due diligence was in process. While I’d have expected some threats to be a normal part of the negotiation, I was shocked by the seriousness with which these were described. One story in particular featured a deal where the founders walked away mid-talks and didn’t hear from the acquirer for weeks before they got back in touch, re-negotiated, agreed to terms and moved forward.
#4: A Team of Legal & Finance Folks Will Try to Nickel & Dime You Throughout the Process
A savvy businessperson might expect this, but it did surprise me to hear how even the “little things” in every contract and provision were harshly argued in the M&A process. Some of the founders felt this was actually a test of resolve – that if the team could push them on the little things, they felt they could extend that leverage to price and terms.
Their advice was universally – bargain hard, don’t back down, and you’ll earn the respect of the lawyers and MBAs (even if they curse you out publicly). If you give in, anticipate more, not less conflict moving forward.
According to David, these teams live on the concessions they get, even of the tiniest variety, and thus it’s their incentive to “nickel and dime” on every issue (otherwise, they’d be out of a job).
#5: Prepare & Maintain Critical Documents for Due Diligence
One excellent and very specific piece of advice came via Hadi Partovi (of iLike and TellMe). He noted that due diligence can be horrifically painful or relatively easy – if you want the latter case, prepare now by maintaining all of the requisite data requested in due diligence. His specific recommendations are to keep:
Files/documents (best kept in a shared dropbox folder, file them digitally in a shared folder that you, your lawyers, cfo/comptroller, and HR/office-manager have access to)
• All docs about corporate structure, governance, bylaws, local business license, etc. (your lawyers typically have these)
• Corporate history – ie dates of formation and all significant rounds of financing, etc
• All docs from any round of financing
• All historical Board minutes
• All docs about cap table, all holders of shares or options (your lawyers typically keep these up to date)
• Every contract signed with other companies – not just partnerships, but office lease, NDAs, etc
• All historical QuickBooks / financials
• All historical site usage data (easy if you use Google Analytics, may be harder if you’re an iPhone app or FB app)
• Detailed org chart
• Every single employee-agreement, every single consultant/contractor agreement, including NDAs
• Every “termination letter” for departed employee/consultant/contractors
• All payroll data for FTEs and consultants
• Details of all health benefits
• Any docs detailing other employee benefits, employee handbook, etc
• Details on all company insurance policies
• Complete details of any legal disputes or claims, no matter how frivolous (including all legal communications with 3rd parties)
Lists (best built collaboratively in a Google Spreadsheet or Doc, outsourced to your entire product/engineering team)
• A list of every open-source module the engineers ever used in the product/service
• A detailed list of all the hardware assets in the datacenter, if any
• A list of every patent, trademark, or other technological invention/innovation
• Overall architecture whitepaper/diagram of how everything works
• A list of all domain names you own
#6: Keep it Quiet
The panelists and David were very forward in their advice that potential deals must, at all costs, be kept secret or would risk falling apart. Many founders recommended conducting meetings only off-site and never at the office (to avoid rumors leaking via employees). As few people as possible should be told about the potential acquisition and when possible, no names should be discussed. This process can last for months – the “fast” acquisitions took between 3-4 months, the longer ones 6-9. You need to be prepared for long-term secrecy, which requires planning and dedication.
Though I’m excited to have learned so much about the topic, I still feel largely uneducated and unprepared should the day come when a sale is imminent. I’m not ready to part with SEOmoz and I think our revenue and growth have tons of potential ahead. To my mind, we still have at minimum 18-24 months ahead before an “inflection point” is reached.
Hearing that many of the hardest details and tough negotiations can be helped along by bankers and investors was some relief, but I suspect I’ll be researching this topic more and will try to share what I discover.