A 10 Point Checklist To Use When You Sell Your Company. Bookmark It.

So we’ve written a lot over the years in terms of learnings on what to do when your company is acquired, from a deep dive with Ben Chestnut on what he learned from selling Mailchimp for $12 Billion in cash to Intuit, to the secrets of M&A from one of the ex-heads of M&A at Google, to the honest truth of what it’s like to sell for a bit more than $100m … when growth slows.  Those 3 here:

• Everything that Breaks on the Way to $1B ARR with Mailchimp Co-Founder Ben Chestnut
• 9 Things Founders Should Know About Getting Acquired with Brett Goldstein, Former M&A at Google
• What I Learned Selling My Company for $130M with Harry Glaser Founder of Periscope Data and ModelBit

What we haven’t done is condense it all into a checklist.

The other day, David Frankel of Founder Collective did just that.  Founder Collective is quietly one of the top seed funds of all time.  I couldn’t do better so I’m just going to reproduce it here — but with more color.  And we did a live version of the checklist here:

Now to the checklist.

When the time comes that you get an offer, dust this post off.  David’s tweet is a great one and I think this deep dive will help.

#1.   Understand Buyer Motivations: Know whether the acquirer values your tech, team, or revenue to align your pitch. 

If a BigCo goes to buy you, realistically your revenue today is immaterial.  Adobe was doing $4B in ARR when it acquired us — and we were doing $1m a month.  Now that business has gone to grow to $250m+ ARR, but even so, it’s arguably not material.  We were bought in part to help spark the SaaS and Cloud transition in one business unit — Document Cloud.  And it did that.

So the motivation really varies:

• Is the reason revenue?  That’s especially important to Private Equity buyers.  And that’s why PE tends to only get interested after $20m ARR or so.
• Is it tech, because they are behind?  This is the most common from Big Tech Cos.  Because they could build it, but that would take time.
• Or in smaller deals, it’s often the team.  Salesforce bought an online wordprocessor for $750m … just to get its CTO.

#2. Fully Commit to the Process: Selling is highly distracting; don’t proceed unless you’re all in.

Ben Chestnut made this point viscerally in our SaaStr Annual convo below.  Yes, Mailchimp was acquired for $12B by Intuit.  But that was only after another deal fell apart — and completely distracted the entire senior management team.  And the deal all-in took the better part of a year.

I do think you can take first and second meetings without burdening the team.  But once you go down the full diligence process, more than 2 meetings and involve others … it’s a huge distraction.  Don’t go to the next level unless you’re reasonably sure you’d do it.

#3. Manage Team Expectations: Prepare your team for potential deal failures to maintain morale and performance.

Related to the prior point.  Deals die, and often, deals die and then … revive.  In general, it often feels more likely to founders that a deal will happen than it actually is.  The other side is also trying to keep optionality, learn, and maintain momentum — up to a point.   So even if you want to do the deal, be honest with the team it may not happen and that it’s fine if it doesn’t.  Because for reasons you may never even know, it may just die.  And then later, come back seemingly out of nowhere.

#4. Maintain Financial Leverage: Keep at least nine months of runway to avoid losing negotiating power.

This seems like an obvious point and yet founders either miss it or really just ignore it.  M&A teams especially are looking for the lowest price possible, and so they are looking for leverage.  They are all about the leverage.  If you have 3 offers, they know they lose some leverage.  If you are running out of cash, they know they have it.  The more you are running out of cash, the worse offers you’ll get.  Period.

And folks can smell blood.  It really is almost impossible to sell your company if you are about to run out of money.  More on how Google thought about that in M&A here:

#5. Hire an M&A Banker: Their expertise and negotiation skills can prevent costly rookie mistakes.

This was a tough lesson for me.  I’ve always come out ahead, financially, tax-wise, and importantly, stress and relationship-wise when I hired a banker.  Will they get you a dramatically better deal?  Often — No.  They often won’t even get you another real offer.  But they will be a buffer.   So you don’t have to be the bad guy.  And so that someone can push back on the games, the low-ball offers, and some of the dumb stuff.  Hire one 95% of the time.

There is one exception though I’ve learned: a super friendly deal.  Be careful here to not break things.  What do I mean?  This is when the CEO of a Bigger Co that you’ve known for a while reaches out directly to you.  With a fair offer. no games.  I’ve seen founders hire bankers and play lots of games here and see trust … broken. And deals die.  I think when a business friend reaches out to acquire you, you can ask for 20%, 50%, 100% more for sure.  At least once.  But after that, you have to make it easy on them.  That’s why they are reaching out directly.  It’s expecting trust, and trust back.

Not long ago, a start-up I invested in saw growth slow, and a Big Co CEO that was an angel investor reached out and offered to buy them for $80m.  They said no, and asked for more.  The Bigger Co agreed to $120m.  50% more!! They then hired a banker, and way slowed down the process.  And the Big Co CEO just gave up.  He felt taken advantage of.  And bought a smaller competitor for $30m.  And the start-up I invested in?  It’s now worth far, far less.

Still, 95% of the time for a deal of almost any size > $30m, and especially even $100m– hire a banker.

#6. Secure Multiple Bidders: Competition drives better terms, so always aim for more suitors.

This is easier said than done.  You can see in our great deep dive below with HubSpot’s co-founder and chair Brian Halligan that even HubSpot never got one great M&A offer.  Not one great one.  Let almost multiple ones.

This is my experience as well.  True, bona fide, great M&A offers are far rarer than most realize.  However, you don’t quite need that to make competition work in M&A.  A second, soft offer is probably enough.  So meeting with 5-10 more potential acquirers and getting even just 1 more to be seriously interested is often enough to get the real acquirer to not just pay close to the max they are willing — but also to move faster with fewer games.

When we were acquired by Adobe, they needed 90 days to work on getting us a term sheet.  Then when we got a second offer?  They got the term sheet that week … and closed the deal in 30 days.

#7. Prepare a Data Room Early: Detailed documentation is critical for due diligence and speeds up the process.

The more complex and bigger your business, the more important this is.  The reality is you can probably get a term sheet in many cases with just your investor updates and financials.  But after that at least, the diligence can be brutal.  Just brutal.  Like nothing you’ve seen before.  When we were acquired by Adobe, they had 80 people working on diligence. Yes, 80.  That was more than our number of employees.  The demands were endless.

So the more you can put in an organized data room ahead of time, the better.  But IMHO this isn’t super important for getting initial interest or even a term sheet in many cases.  Your existing investor updates, financials, etc. should be enough there.  But if it becomes remotely serious, get that data room going if you can.

#8. Limit Information Sharing: Only involve aligned stakeholders to avoid leaks and disruptions.

This is a bigger deal today than ever.  There’s always someone that wants to leak. This can include your investors.  So you do need to keep the circle as tight as practical.  At a minimum, as much as practical, try not to share the name of the acquirer outside of the tightest inner circle.  Also, small investors outside of your board are big leakers.  Share there as appropriate, but again not the name of the potential acquirer.

#9. Leverage Leaks if They Happen: Use media leaks strategically to spark interest from other potential buyers.

This does work.  Big Tech execs do reach TechCrunch, Bloomberg, etc.  Probably more than we do, in fact.  A leak can’t magically create interest where there is none.  But it often — often — gets a Big Tech Co to reach out when they thought they had more time.  So often, we think we have more time.  Until we don’t.

#10. Anticipate Delays: Corporate priorities can shift; don’t panic if talks temporarily go silent.

This is a key point.  100% of the M&A deals I’ve been part of both as a founder and as an investor have a period where they’ve gone silent.  Sometimes, for a year — or longer.  Sometimes, just for a few weeks.  There are many reasons.  It can take time to digest things.  There are always many stakeholders.  And remember, rarely does an acquirer know you that well.  It’s more risky for them to acquire yous than most founders realize or think about.  So that almost always leads to a pause at some point.  For a moment — or for years sometimes.  Just expect it, and if things go quiet, just thank them for their time and move on.  They will come back when they are ready.

And his #11:

#11: Let it grow: If you’re reasonably happy with your company and team, stick with it. You may be surprised by how hard it is to recreate the spirit of creative collaboration and how much value a thriving team can add in a few years.

This one I both 100% agree with — but also think needs context.  The very best teams and start-ups keep growing and adding value.  But outside of the best? I’ve found they often don’t.  Again, in the session above with Brian Halligan, he cautioned there’s often only one natural acquirer, and that their priorities change, too.

So now today I say if you get a good deal, and it doesn’t feel like what you want to do, if you have a lot more to still do, then say No.  But otherwise, maybe say Yes to a good deal.  I used to tell founders to never sell if they have something good.  That was my experience.  But now I say — never sell if you have something great, and a great team. And be honest if you have both.

More with me and Harry Stebbings on this here:

And again, David’s original tweet here: