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The Founder’s Guide to Selling Your Company (justinkan.com)
442 points by sinak on Nov 10, 2014 | hide | past | web | favorite | 54 comments



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

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!


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.


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.


I still remember the Twitpic fiasco.


Yup: "You are probably thinking about selling your startup as you are experiencing a lack of traction, tough competition, or difficult time fundraising... this is a bad time to sell your startup"


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."


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.


My experience is that bizdev people don't have a hard time getting a couple people with multi-word titles into a room for a meeting. Also: those bizdev people who Kan says go around the valley soliciting BS acquisition discussions are also in the room for real acquisitions, so this is a tricky signal to read.


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!


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.


Hey we knew there was a slim chance they'd buy us, but at least treat the little guy innovator with respect.

Not prevent us from demoing our technology when we flew all the way out there to do so. Further, once we tell you how we accomplished something you've didnt figure out yet show us the door and say "The race is on."


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

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


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.


Thanks for your post! It strikes me as an authoritative guide on the subject. Plenty of gems to take away. The section on negotiation tactics could also stand on its own, since those are useful in many other situations as well.


This was a very good read.


"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?


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.


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.


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.


>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.)


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).


>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.


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.


How much did legal cost you? :)


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.


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


"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.


We also just went through an acquisition and had legal costs in the same range. One thing that really helped us on that front was that both our attorneys and the acquiring company's attorneys were really forthright about not just the negotiations and modifications to the agreements, but with our motivations and reasoning for such changes, so that each side was actually able to help the other side figure out what changes should be made. This also helped us identify very early which changes were immaterial which allowed us to move along quickly without getting bogged down in semantics.


Brand name firm, ugly legal bill: ~2% of the deal size - but initial offer through diligence to closing was like most of a year back and forth.


or I should say: yes, a countable number of Maseratis.


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


You tell them that due to the competitive nature of both of the businesses, they should "make an offer based on competitive intelligence and public information".

I cannot find a good link on it, but I think Novell used this technique when being approached by Microsoft.


My understanding is that this is what a breakup fee is for. If they back out, at least they're paying for it.


You don't.


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.


> 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?


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.


> 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.


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.


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.


> 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.


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".


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.


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.


I have never done or participated in an acquisition that large, but my intuition was also that 1-2% on an 8-figure deal is cheap. Because, I reasoned, that might be a 6-figure deal with a different group of people. I think the problem is that you state "$200,000 of value to a 10MM deal". But "10MM deal" isn't what an acquisition starts out as. It could be a $2M acquihire or $10M deal or $100M package by a competitor who is scared s$%#less of your disruption paying in stock that they fear will lose 60% of its value (along with the rest of their company, worth billions) if they don't turn the tides soon on this disruption, by buying an innovative upstart. They could fear they're facing a very binary scenario and don't see any other way forward.

These deals are not "$2M deals", "$10M deals", and "$100M deals" deals respectively, until they happen, and 5-10% either way probably matters a lot less than which of these scenarios you end up living in.

This is similar to why it's not expensive to pay a CTO 50% equity of your "$2M business". Because it's not really a "$2M business" it's a "$2M business" or "$0 business" or "$5M business" or "12M business" (or the sky is the limit) and the CTO will be quite crucial in determining which one happens.

This is counterintuitive. Put another way, Sergey Brin and Larry Page didn't each pay the other guy $30 billion to do what the other guy did in 1998. (Based on their respective net worth today, and the fact that they had to give up half their company to the other guy in 1998 instead of keeping it all.)

Because if they hadn't had the other guy, each of them who is now worth $30B wouldn't be worth $60B, but rather most probably $0.

So saying "2% of a 10MM deal" is like saying "50% of a $374B company."

It doesn't work that way. I certainly wouldn't mind giving 15% to someone who had closed a few $100M deals and wanted to help me close mine. And it would be a steal.


"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.


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.


Having spent a couple of years in M&A and capital markets, I can attest that this is absolutely true.

In most cases, most top M&A buldge bracket firms and even top M&A boutiques, will look to work on sell-side deals that are $500mm+. Probability of a successful close is so low and opportunity cost is high (process is long and it's a ton of work), it rarely makes sense to look at something unless the fee opportunity is in millions.

Simply put, $10mm deal doesn't move the needle for top firms. There are exceptions, of course, primarily for relationships and future business potential, for example when spinning off a smaller division of a larger business or when dealing with financial sponsors.


"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.


1 to 2% is pretty damn cheap compared to the % you'll have to give away to Uncle Sam!


Yeah this is another problem. When you're dealing in big figures it's easy to forget that $100,000 is ONE HUNDRED THOUSAND FREAKING DOLLARS, and so it's easy to be victimized for amounts of money that would be unthinkable outside the context of an acquisition.


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

Thank you for putting techcrunch where it belongs


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


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




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