My wife and I started a niche recruiting site in 2013. We completed sale of the company in 2021 to a corporate for mid-7 figures.
It was a wild ride.
My startup M&A takeaways follow in roughly chronological order.
Note: These takeaways are what worked for us. They may or may not be applicable to you. Use your judgement.
Start early. We started thinking about and preparing for a sale in 2016, 3 years before we made it happen.
Clean up your books. Clean accounting books are essential! After a few bad experiences with internal accountants, we outsourced our accounting to a local accounting firm in 2015. It not only gave us better books, but was actually cheaper than having an internal accountant. We didn't have to worry about them quitting on us either! During the sale process it was super helpful to answer "That's what the accounting company told us to do" when buyers questioned our accounting treatment.
Begin an annual audit. We hired a credentialed firm to audit our books beginning in 2016. The cost was reasonable. Having 2 years of annual audits under our belt brought us huge credibility with buyers. Double benefit was whenever a buyer accounting firm had a question about accounting treatment we could say "Talk to our auditors!"
Hire an advisor. We couldn't have got the deal done without our M&A advisor. He was a hugely valuable intermediary between us and the buyer, great at playing good cop/bad cop. I know many deals are done without advisors but in our case it was essential. Our deal was far too small to use a big professional advisor like Morgan Stanley -- those guys won't even get out of bed for less than a million dollars. The trick is to find a sole practitioner ex-banker who has experience in your space, lots of contacts and is hungry for deals. I found our advisor through a friend. Ask around.
Polish your story and think big. Buyers don't buy your company as it is. They buy your vision for where it's going. You need to paint a picture of a huge market, bright future and why your company will win big. Be prepared to back up your story with market research and numbers.
Prepare to answer "Why are you selling?" If your company is so great and growing so fast, why are you selling it? It's a great question. Everyone asked it. In our case selling fit our family story.
What's your special sauce? Buyers asked many questions about how we differentiated from our competitors. They didn't like my answer "We focus on our nice, hire great people and execute like hell!" I guess they thought it was not a sustainable advantage. Instead, I found it better to focus on proprietary technology and branding. We had developed sophisticated algorithms for our job search, new job email alerts and curated applications. I re-branded those as "proprietary AI algorithms" which buyers seemed to like better lol. I also emphasized our brand recognition which we had built painstakingly through funny videos and songs.
Cast a wide net. We put together a 2 page teaser and a more detailed presentation with a financial projection to share after prospective buyers signed an NDA. The more potential buyers you contact, the better. It's also super important to get your teaser into the hands of the highest person possible in each of your target buyers. That's where the advisor can add real value.
You can't make someone love you. We found the serious buyers were already looking to buy or invest in a company like ours. It was impossible to get other potential buyers to consider us if the opportunity didn't already fit their plans. You will hook immediately or you won’t hook at all.
Screen out the non-serious buyers. We found lots of companies pretended to be interested in order to learn about our business and market for free. They wasted a lot of our time. Eventually we developed a fool-proof system to screen out non-serious buyers. First we'd send the teaser. If they bit, we'd ask them to sign an NDA then send them our detailed presentation with financial history and projections. Usually we'd agree to a short call after that to answer reasonable questions. Then we would give them about 7 days to send us a non-binding, informal email outlining 1) their strategic rationale for buying, 2) names and titles of the deal team and top executive sponsor, and 3) general valuation methodology and price range. We found that serious buyers would complete this step no problem but time-wasters never would. We cut them off immediately and focused on the serious buyers.
It's best to have 2 or more buyers competing for you. You will get the best price if buyers feel like they're competing for you. It makes you look more valuable when someone else is interested and you. Plus you can make "fear of loss" psychology work in your favor.
Don't be attached to a deal. The best time to sell your company is when you don't need to sell. That's the only way you can get the best deal. If you wait until you need to sell for some reason you will lose your will to walk away and all negotiating power. My wife and I wanted to sell, but we were also happy keeping the company if the sale didn't happen. That strengthened our posture in negotiations. At several key points we said "No deal is better than this deal" and meant it. If we had been desperate to sell we would not have been able to do that, and so would not have gotten a good deal.
Your lawyer should write the first draft of the purchase agreement. Always better in every deal, including M&A. If their lawyer writes the first draft you will exhaust yourself trying to roll back all the nasty bits they put in. Far better for you to stake out your territory and make the other side work to move the ball down the field.
Every deal is like a roller coaster. Some days we felt like the sale is going great. Other days we plunged into despair and it seemed impossible. An M&A friend told me that all deals are like this. He was right. Don't get discouraged.
When you're stuck, get everyone in a room. We got stuck negotiating the purchase agreement. We would talk to the buyer’s rep, mark up a draft, send it, then it would come back with our changes all un-done. It was very frustrating. My M&A friend told me that the only way to move forward was to get lawyers and decision-makers on both sides in a room and hammer it out until there's an agreement. He was right again. We told the buyer that we could not continue without the buyer decision-maker traveling to our city to work out the deal. It wasn't a bluff because it was true -- there was no way to go forward without him, and the current process was just a waste of time. It worked. He came to us and we got to an agreement after 2 painful days. Then we got beers.
Be transparent with your team. Our team knew we were talking to buyers because we told them. They would have figured it out anyway. Once the deal was done we gathered the team and told them everything. We gave them time to ask Q&A as well, both publicly and anonymously through a Google form. After that we invited the buyers to join us and our team asked them a LOT of questions. It was a good way to begin the relationship.
There are many more takeaways, but these are some of the biggest ones. Every M&A situation is different.
Yes, well put. Thank you for sharing.