
The Founder’s Guide to Selling Your Company - sinak
http://justinkan.com/the-founders-guide-to-selling-your-company
======
tptacek
This is really great, probably required reading.

I wrote some thoughts about the company acquisition process (I've been
involved in 3):

[https://news.ycombinator.com/item?id=6650317](https://news.ycombinator.com/item?id=6650317)

About the only thing I could add to Kan's guide here is, when he talks about
riding the lawyers, to be aware of how much you are going to spend on legal in
a real acquisition. When I meet founders who've sold companies, I usually ask
them how much they had to spend to close the deal, and every answer I've ever
gotten squares with my experience: it's a price you can measure in Maseratis.

I never thought about hitting up VCs for term sheets during the process.
That's clever.

Remember, deals are made to fall through!

~~~
nodesocket
If you contact VCs while in talks of acquisition, do you tell them that you
have an acquisition offer from xyz corp? This could backfire a few ways. If
the acquisition offer from xyz falls through, this signals to the VC very
negatively and probably means they won't do a round now or even in the future.

~~~
birken
Everything depends on your situation, but in general VCs are influenced by
social proof and need a forcing function to make them make a decision. So an
acquisition offer can be both of these things in the right circumstances.

The problem with this line of thinking is that if you are getting either
serious acquisition offers or serious VC interest, then your company is
probably doing very well and you don't really need to sweat it.

But... if you would rather raise VC funding and for whatever reason you are
only getting serious acquisition interest, you should probably talk to VCs
right away and mention it.

------
hard-road
So, Justin and or YC, maybe another guide and or a short post that would be
helpful to entrepreneurs would be...

"What to do when tech companies come knocking at your door?"

For example we are a small start-up on the east coast. We have had oodles of
tech companies reach out to us. One invited us out west to demo, saying would
you let us buy it from you, please come out and demo your tech. Then when we
get there they treat us like dirt, bait us for how we accomplished our tech
and after we tell them they quickly show us the door.

Following that demoralizing event others tech companies reached out asking how
we accomplished X. Well after being squashed by one company, we don't take any
other companies minor advances seriously.

Thus, before spending the thousands of dollars to go out west (filed a
provisional & some travel costs) we wish there was a resource to have helped
us say ... Umm, no do not go out to the valley they have not offered you a
term sheet. We did reach out to our network, it's not too small and those in
our network said, "You should pursue it and or sorry I've never been in that
situation before."

~~~
jmathai
_TL;DR - if a company is just fishing there 's some quick ways to weed them
out_

I think there are ways to vet these opportunities. Some signals for me have
been.

1\. Is the person reaching out to you a decision maker?

2\. Are they willing to sign an mNDA prior to you flying out?

3\. Will they invest sufficient time as an indicator of interest?

\--

#1 is fairly easy by looking people up on linked in. Depending on the
situation you want someone in business development (for a partnership) or
better yet corporate development (for deals or acquisitions). VPs or C-level
folks are good.

#2 is harder as it might put off an interested party. It's a bit of chicken
and egg. But never hesitate to say in a meeting "I'd love to share more once
we've signed an mNDA" \-- if that's truly your position.

#3 do some video conference calls with them and see who shows up on their side
(see #1). The more time (number of people * time) they're investing can
indicate their level of interest. If it's just one lone guy you're always
dealing with and they're not VP or higher it might not be that great of an
opportunity.

~~~
hard-road
These people were highest up the food chain and are all VPs of various
technology departments.

Hard to believe they treat the little guy innovator the way they treated us!
Treated us like dogs!

~~~
jmathai
I've been on both sides of the dialog and unfortunately inside of a big
company it's about extracting the maximum amount of value. You need to
position your company as being the end of that extraction as opposed to a
means.

When I was the smaller company - the conversations went very differently when
we had our incredibly talented BD/sales person on our side included in every
step of the process. It seemed to set expectations that we were there to
discuss partnership or sales than to simply brainstorm about our technology.

------
jacquesm
I spent some time curating a hacker news thread, it's one of the most read
posts I ever put together:

[http://jacquesmattheij.com/How+To+Sell+Your+Company](http://jacquesmattheij.com/How+To+Sell+Your+Company)

It's a bit more nuts-and-bolts than Justin's (excellent) post here, add to
taste for best results.

~~~
lazyjones
That's a much better post on the subject.

What can't be said often enough is that whether the founders will stay or go
makes a huge difference in the valuation usually. If you value your freedom,
you should accept a significantly lower price (think long and hard about it),
as founders leaving will increase the risk for the buyer.

Another thing worth mentioning (happened to us): a change of ownership will
stir up trouble in the company, so expect some people (troublemakers usually)
to leave or cause other problems (we've had downright refusal to do particular
work well within the bounds of their jobs, simply because the previous bosses
had done these things themselves).

In any case, sealing the deal is only half the work, expect a lot more hassle
in the year or so after that.

------
anatari
"As the startup, you have all the leverage before you sign a term sheet. Once
you sign, you have almost no leverage at all."

A breakup fee would help mitigate this. Is that uncommon and difficult to
negotiate for?

~~~
Im_Mr_Manager
We were in acquisition talks which had gone as far as agreeing to a price. We
wanted a small break fee that would help cover legal costs if the deal fell
through. It was a strong no from them and they wouldn't budge. So in our case
yes. With that being said I too would like to know if it is uncommon.

------
icelancer
I sold 40% of my company and I got insanely lucky to find a partner who fit
all the holes that I have in my approach. He's now the CEO and I'm the
President. I was losing hope for a long period of time even though my business
was solidly in the black with large cashflows and zero debt, because it's such
a niche business where no one is interested (sports science).

The guy dropped into my lap and made me a reasonable offer, which now "looks
bad" because he's doubled revenue in six months. Not, obviously, that I'm
complaining....

Luck is a huge part of the whole process. I went months and even almost 2
years resigned to the fact that I would be turning in 80 hour work weeks while
having two kids and a wife to try and please, and that my personal health
would be the sacrifice. I am not sure how I'd survive or if I could even
continue to run the company under those conditions for much longer than I did.

I feel for the sole owner of a startup gaining traction and nearing an
inflection point. I just wish I had more advice.

------
JangoSteve
Having just gone through my first acquisition process from beginning to end,
this was great reading and a lot of it range very true for us.

One thing that it seems people often forget is that, in business, if you're
truly entering in to mutually beneficial agreements (whether it's hiring
someone or being acquired), both sides generally will try to come to some sort
of arrangement that makes sense for both sides. In other words, when it's
understood that an agreement is win-win, then both sides are motivated not
just for themselves but for the other side as well.

Of course, the sentiment is a bit idealist, as the hard part is actually
figuring out when someone is being genuine and knowing exactly what value
you're providing to them and they will provide to you. If a company really
wants to buy you, and they're not trying to pull one over on you (e.g.
intentionally offering much less than your value), then they won't try to
strong-arm you into doing something you don't want to do. I think this is what
the author is getting at when they say that it's okay for you to push back on
things such as offer price, deadlines, etc. The key is to also be genuine and
not try to pull one over on them.

Of course, this sentiment is also a bit idealist, as the hard part is knowing
what your actual value is to the other party, as there's seldom an absolute
value of something; it usually depends on the situation of the environment and
other party, which constantly changes and which you won't have the full story.

This also assumes that genuine parties are wholly genuine and that they're not
being led astray by other parties, whom they absolutely trust but who may not
be genuine or as capable as they have led the primary parties to believe. I've
seen plenty of deals fall through, or almost fall through, because of good
people being influenced by outside factors.

I kind of lost my point in all that. I think it was simply that, while
acquisition talks are stressful and time consuming, they can also be scary.
That fear however, usually comes from doing a deal in which you may feel
you're misrepresenting your value (and thus trying to get more from the other
party than the actual value you're providing), or in trying to do a deal or
negotiation which you feel you absolutely cannot walk away from. Both of these
situations lead to more volatile negotiations which fall apart more easily.
And this can lead to making the wrong concessions or agreements, which gets us
back to one of the points in the article, which is that the best time to
solicit an acquisition is when you don't need it and can easily walk away.

~~~
lsc
>One thing that it seems people often forget is that, in business, if you're
truly entering in to mutually beneficial agreements (whether it's hiring
someone or being acquired), both sides generally will try to come to some sort
of arrangement that makes sense for both sides. In other words, when it's
understood that an agreement is win-win, then both sides are motivated not
just for themselves but for the other side as well.

This has... not been my experience at all. I mean, maybe it's just that I
haven't worked on big enough deals? But my experience is that flexibility
exists at the "handshake deal" size, but once the total deal value surpasses,
say, the value of a nice used honda civic, professionals are _excellent_ at
squeezing as much surplus value (in dollars, of course) from the deal, and
negotiation on things that are not money is largely impossible.

Now, for me? this has been true for every large deal. However, every large
deal I've done has been with someone staggeringly larger than I am. (the
largest was probably a co-lo deal with a staggeringly large co-location
provider... with a total deal value above a quarter million bucks, so I'm
small fry.)

Players that are my size or smaller _are_ willing to be super flexible about
everything, like you describe, but the deal value is usually so small that the
only profit to be had is that it's fun to work with them, or that I get to
learn something from them. And yeah, that's good and important and stuff, and
I do a lot of deals at that level, but I almost think of this more as a social
thing; network building and/or drinking with friends. I could do deals at that
level all day every day and make rent, but there's no way I'd come close to
what I can get as a moderately competent contract linux sysadmin working for a
giant faceless company.

Why is this? Well, small companies, generally speaking, just don't have huge
amounts of cash to throw around. And large companies? for large companies, I
think it has a lot to do with what tptacek said about legal costs. A long time
ago, there was talk of selling my company. I mean, it ended up being that they
wanted to hire me for two years, at 30% more than I could get as a consultant,
plus some performance bonuses that would depend as much on their actions as
mine. But the total deal value would have been almost but not quite twice my
previous largest deal value. Still, small potatoes, by the standards of such
things. They were larger than I was... but still pretty small by industry
standards, so they were willing to be super flexible, though they needed to
keep the deal size super small.

The point I was making was that legal would have eaten all of the difference
between what they wanted to pay for me & the company and what I can get paid
as a contractor. The less standard the deal, the more it costs in legal. I
imagine this is why large companies are so... inflexible on sub-MM deals. They
have standard deals that have been approved by legal, and they don't want to
spend the money to get a new deal approved.

So.. yeah, that's my experience. Deals are either handshake deals, with
amounts of money changing hands that really don't matter (and I've bought
companies at that level; It's common in the hosting industry, when someone is
tired of running their company.) or they are large enough that legal is
involved, in which case, unless it's a truly staggering amount of money, the
giant cost of legal makes the deal way less interesting.

I've seen the same thing in employment. If you wanna work for someone like me
for $15/hr, you can get all kinds of flexibility, no problem.

If you want to work for said faceless company and make decent money? you do it
_their_ way. You conform to their standard deal. I mean, they have a lot of
standard deals you can conform to... and conforming to any of them is just
fine, but pick one and quit fucking around.

(I mean, if you are an incredible person, again, it's probably different. But
if you are a mortal who maxes out somewhere between $70 and $100/hr like most
of us... you conform to their deal structure, or you come work for someone
like me at 1/5th that.)

~~~
JangoSteve
I'm not sure what you're trying to say exactly. If it's not your experience
that both sides usually want to make the deal happen when the deal is
genuinely mutually beneficial, then I'd say you're probably working with the
wrong people (it's amazing how many perverse incentives exist in many
companies and some entire industries). I'm not saying that doesn't happen. I
just prefer to avoid those types of deals if possible. In fact my point was to
the effect that things are quite a bit less scary when you do avoid those
types of deals.

But my experience with both big and small deals, is that there's often much
more flexibility than people assume, and the only way to know how much
flexibility there is, is to push back a little (not for the sake of pushing
back, but if there's something that you genuinely want or that bothers you
about the deal, speak up).

Also, you seem to be saying that when deals get to a size large enough to
warrant participation of legal departments, that there is no flexibility. That
is the opposite of true, as the only reason the legal department would be
involved in the first place is to work out the "custom", or non-standard,
parts of the deal. If there were zero flexibility in the deal, then everyone
would just use the standard documents that already exist for that deal, fill
in the blanks, and sign away.

Why do large deals often result in greater than $50k-$200k or more in legal
costs though? It's because the two legal teams are actually negotiating (i.e.
fleshing out and changing the terms of the deal that need to be changed).

~~~
lsc
>I'm not sure what you're trying to say exactly.

My point here is that unless the deal is large enough to cover legal costs,
you have to fit your deal into the standard, pre-approved deal structures.

This flexibility of which you speak, sure, some flexibility exists within the
blanks on those forms, but the deal structure is fixed, at least at the deal
sizes where I live.

>If it's not your experience that both sides usually want to make the deal
happen when the deal is genuinely mutually beneficial, then I'd say you're
probably working with the wrong people (it's amazing how many perverse
incentives exist in many companies and some entire industries). I'm not saying
that doesn't happen. I just prefer to avoid those types of deals if possible.
In fact my point was to the effect that things are quite a bit less scary when
you do avoid those types of deals.

Sure, they want to make it happen, but they are only willing to negotiate, as
you said, about what to put in the blanks on the form. My theory is that legal
makes non-standard deals not make sense until you get into the multi-million
dollar range.

If you have a $400,000 deal, and you spend $25K on lawyers and so does the
other guy, well, that's more than 10% of the deal value gone. From my
understanding, on a company acquisition of that size, $25K is on the very low
end of what one party might pay for legal help. It could easily be twice that.

The time I had an opportunity to see such a deal? that 10-20% would have been
the profit on the deal.

(Interestingly, the deal _might_ have gone through, if we knew of a standard
deal structure... or trusted oneanother more.)

My theory as to why I don't see the deals you say are the only deals to take,
where there is both significant money and significant flexibility is that I
don't bring enough value to the table to pay for legal.

>Also, you seem to be saying that when deals get to a size large enough to
warrant participation of legal departments, that there is no flexibility. That
is the opposite of true, as the only reason the legal department would be
involved in the first place is to work out the "custom", or non-standard,
parts of the deal. If there were zero flexibility in the deal, then everyone
would just use the standard documents that already exist for that deal, fill
in the blanks, and sign away.

You are confused because I mentioned the really small deals. If I do a deal
with someone I know that is just a few grand, we can do it on a handshake. But
most of those deals are small that while I could pay rent that way, there's no
way I could make as much as a mediocre contract sysadmin.

I understand that enabling non-standard deals is one of the things that
lawyers are for.

I said:

>>The less standard the deal, the more it costs in legal. I imagine this is
why large companies are so... inflexible on sub-MM deals.

so I largely don't think we're in disagreement. You are probably just dealing
in larger deals than I am... that or you are willing and able to do larger
deals than I am on trust.

------
inmygarage
As someone who just went through an acquisition I hope that people will begin
to write more about the acquisition process -- there's so much out there about
raising financing, especially a seed round, and very little about M&A.

Thanks for putting this together, Justin.

~~~
tptacek
How much did legal cost you? :)

~~~
jasonwilk
Legal really will depend on the firm. For my exit, I used a boutique firm that
ended up costing around $75k, but when I spoke to even my friends at the
larger tech legal firms like Orrick, they wouldn't even consider it for under
$250-300k.

It can be pricey.

~~~
tptacek
$75k is the lowest price I've heard for this so far. Congrats, you got a deal!
:)

~~~
larrys
"Congrats, you got a deal! :)"

Well legal is there for a reason so it's hard to say if this was a "deal" or
not.

------
porter
How do you stop a competitor from making a fake offer just to get a look into
how you do things?

~~~
tptacek
You don't.

~~~
angersock
I'll suggest that if your competitive advantage is something so easy to lose
that somebody following you around your office for a day could break your
business, maybe you should reconsider your business model.

This is even more true for "tech" companies...if you hinge on people not
knowing how your special sauce works, you've probably cocked up the business
side of things pretty badly.

------
joeblau
> Like TechCrunch articles, bullshit offers are a vanity metric, not an actual
> measure of success

Justin; Could you touch on some other vanity metrics that you see companies
measuring their success by?

~~~
justin
Press articles, app downloads (instead of active users), M&A "offers",
employeess or FTEs, # of global offices, money raised (instead of cash on
hand), "advisors" (this is a particularly stupid one in my opinion).

Basically anything that isn't active users, revenue or profit.

------
jmathai
> in order for a company to want to buy you, an internal champion will have to
> internalize one of these reasons

Truth. Identify who that person is and focus your energy on making sure they
have everything they need to stay motivated to sell their company on buying
yours.

------
shenoyroopesh
Completely agree - you always get a better deal if you are ready to walk away
from the negotiation table.

This applies not only for selling a company, but even consulting gigs, job
offers, partnerships, etc.

------
emiliobumachar
The whole post is off-white on white in my Android phone, unless I click an
icon which opens a text box over the main text. If I close the box then the
main text gets low-contrast again.

------
applecore
_> Do not enter acquisition talks unless you are ready to sell your company._

Isn't this obvious? If you don't want to sell your company, don't talk about
selling your company.

~~~
tptacek
No, it is the opposite of obvious. When a bigco reaches out and says they're
interested in acquiring, the intuitive response is "we should figure out what
they're talking about, because even if we don't want to sell, it'll be good to
have the optionality".

------
bentoner
I don't get why you say that investment bankers are expensive at 1 to 2%. If
they can't improve the deal by at least 2%, they can't be worth dealing with
at all.

~~~
tptacek
The implication is that they typically _can 't_ add $200,000 of value to a
10MM deal. One possible reason is that the 8-figure deals are pretty
specialized and obscure, and it's hard for a banker to know the right
valuation for the company.

~~~
larrys
"The implication is that they typically can't add $200,000 of value to a 10MM
deal. One possible reason is that the 8-figure deals are pretty specialized
and obscure, and it's hard for a banker to know the right valuation for the
company."

What makes you think that all investment bankers and all negotiators are equal
and it only has to do with "knowing the right valuation"? And that there is
generally no situation where they can provide value for what they charge?

This sounds similar to consumers who assume that a real estate agent getting
paid 5% isn't providing any value at all vs. simply showing a property and
putting it in a MLS. Definitely true in some cases but definitely not true
across the board. Or even close.

~~~
tptacek
I don't think that at all. I just believe Kan when he says that the ones who
are actually worth their fee won't work on a 10MM deal.

~~~
larrys
"I just believe Kan when he says that the ones who are actually worth their
fee won't work on a 10MM deal."

That really sounds a bit like "anyone good works for XYZ" (pick some of the
usual suspects) or "all top lawyers work for big NYC law firms and have made
partner" (or similar .... you get the point). Or the local business man in a
no name town, that nobody has ever heard of, couldn't possibly be as sharp as
a guy operating where all the action is. Why would anyone be in Bentonville if
they can be in NYC or Chicago?

You are making an association between what a top firm does and how they
evaluate opportunities and what an individual who happens to work somewhere
else (for some particular reason perhaps he or she can't move on to "bigger
and better things") and what their actual skill level is which are two
different things.

As a generality of course it can be true and a shortcut. But making an
assumption that someone couldn't possibly provide value (assuming they don't
harm a deal of course) I don't agree with.

------
talltofu
'Like TechCrunch articles, bullshit offers are a vanity metric, not an actual
measure of success'

Thank you for putting techcrunch where it belongs

------
notastartup
well this will never happen to me so I'm just going to close this window and
go back to work.

~~~
xenosapien
Never say never - it happened to me a month ago.

