Getting Acquired (3 of 4): Diligence through Announcement

In my first two posts I covered how to engage Corp Dev and how to create a bidding war to get the best price for your company.  While I share some tips about getting acquired, I’m also sharing part of our story at VendorHawk as we considered the pros and cons of raising more money or taking the early exit.

Disclaimer: Views I share in this post are my own and do not represent the views or positions of ServiceNow, Inc. (the company who acquired VendorHawk). I am speaking about my experience alone. Also, since this is not legal or tax advice, please consult with your experts in those respective fields.

Now that you’ve secured an LOI (letter of intent) and signed it, you’re likely also in a no-shop situation where you cannot talk with other potential acquirers. I will not attempt to walk you through all the legalese or critical negotiating points of diligence, but I hope to give you some pointers of how the process roughly works and what to do to be prepared.

I’m assuming these things are true about your situation:

• You have decided that selling the company at the agreed upon price is better than continuing to build it yourself or with more investor capital.
• Your business is still doing well enough that you could walk from the acquisition conversation and still have just enough time to raise more capital.
• You like the company you’ve signed the LOI with and are interested in the better together future they’ve already described.

Getting your ducks and docs in a row

If you’re working with your deal guy (woman or man, we worked with a man), he should be giving you a list of things to prepare even in pre-diligence, but especially now that you’re in diligence. Once the LOI is signed, you should get a massive excel file from the acquirer itemizing all kinds of diligence requests. I highly recommend this to be a shareable spreadsheet and so you are not managing many versions of an .xls doc when the 20-50 extra people get involved. Also, as much as possible, fill in details and quick answers to the requests that are made of you. It helps reduce the time needed for someone doing diligence from the acquiring company to give their sign-off.

Regular check-ins

Depending on how fast you’re moving towards an announce and close date, it’s key to have regular check-ins not just with the deal team of the acquiring company, but also with your deal team. For our internal sync, we had our board member, two lead founders (CEO/CTO), our lawyer and deal guy. These were immensely helpful in getting real-time feedback on tough decisions as we marched through each stage of the negotiations.

Taking breaks

Reaching a successful close of an acquisition often requires lots of back and forth, updating versions of documents and financials, etc, so it’s critical that you are 100% focused on all the tasks at hand. Getting support from your family and friends to “stay focused on some important projects happening at work” is helpful to describe to them (some might have the inside scoop).

It’s also healthy to take breaks (like whole days off on the weekend) and reset your focus throughout the process. I’d even encourage scheduling a vacation so you and your spouse/significant other have something to look forward to. But make sure the actual date is somewhat tentative and at least 6-8 weeks out past the close date, as you’ll have plenty of fun “integration tasks” to deal with following the close. It’s makes an emotional difference to have rest to look forward to, especially for your spouse, kids, family or friends who have missed you.

Notifying your team

This topic could almost be it’s own blog post in and of itself. Many serial entrepreneurs had advised us it’s better to not tell your team about the imminent acquisition until the announcement day itself – when it becomes public knowledge. Having been involved in a few scenarios like that at my last company (PE firm taking ownership via merger) I can say that hearing on the announcement day was very clean and clear for me to deal with because it all happens at once. The decision might be harder if some from your team do not want to work for a big company.

In a 10-person startup, it may be harder to look like life is going normal when you’re taking all sorts of “weird, secret meetings” and calls – even flying places to meet the potential acquirers. If you cannot continue to run the business as usual and are allowed to share with some or all your team, I would recommend to wait until the latest possible time to do so. Your patience will pay off, leaving less questions about the business and product impacts, but also personal questions from your team like, “What will my next job title be? What happens to all my stock options and salary? Do we have to move? Will this affect my spouse’s career? How will my commute change? Will I even like the next company? What kind of tech stack will we be working with?”

If you tell them about the imminent change too early, there is always the chance that the deal falls through, or turns out worse than you thought it would be. The team will be much more distracted than normal, possibly more skeptical about their future with your startup, and likely bringing home more stress and unanswered questions to their spouse or significant other and family. Nonetheless, it is helpful to ask them to hold onto these questions until a weekly meeting where you as CEO give a brief update on how things are progressing.

These are all the reasons why it’s better to avoid sharing the details outsiding your founding team and live in the tension of running plan A while doing plan B at the same time.

Notifying your investors

Some investors have key M&A experience that you’ll want to lean on during the process and to coach you early on before you get the deal guy involved.

If you have a broad group of investors (including lots of checks from angel investors), telling all of them everything is not a wise call. They, like your employees, will also be thinking about a bunch of questions about their potential return, asking why you’re not building the 30X or 100X return you might have sold to them, and many other questions.

Fighting for the best deal for everyone

As CEO, you are the fiduciary who is charged with creating the best outcome for your investors, your team (founders and employees) and your customers. You’ve gotta fight for the highest price on the cap table, which is what your investors will benefit from. If it’s an early sale like ours was, the incentives are often skewed toward retaining the team instead of paying out investors now.

For us, we worked with our deal guy at each step of the way to ensure we got the best price at each point of negotiating. But keep in mind that diligence itself can be cause for the acquirer to come back and lower the amount they’re willing to offer for the company. That’s why it’s important to be as accurate as you can about the revenue, product capabilities, customer churn, anything you think could meaningfully affect the acquirers perception of your business, so the initial offer is made in full view and there are no surprises later on during diligence.

Everything falling apart

Things certainly do come up in diligence – even things you didn’t realize were things. Our board member shared this with us and it was very helpful, so I’m sharing it with you as well:

“There are going to be at least two or three times during diligence when something will happen and you will think the whole deal is off because of it (either perceived or in reality). Just ready yourself for those moments, knowing they are part of the process, and stay focused on getting through them with a level head.”

These words really helped us through some highs and lows.

Announcement day & deal closing

Here were are in the final week or days approaching the signing of the definitive agreement and announcement day. If your acquirer does a lot of acquisitions, they hopefully have a good process in place for an announcement strategy.

A few key things to think about for the announcement day:

• How will you notify your investors? (especially if you need some or many of them to sign off on the deal as a closing condition)
• What does the announcement day “minute-by-minute” schedule look like? (the acquiring company should be leading on this)
• Who from the acquiring company should be on-site with your team? HR is also very helpful in answering all the questions your team might have about offers, benefits, etc.
• What is the talk track for your current customers? Draft up an email to send out to all of them or one by one if it’s feasible. Then follow-up with calls where appropriate.
• How will you share this with prospects and partners as well?
• How is this being shared with the media? Are you getting your local news outlets an early embargoed tip, or an email when it’s announced?

Communicating the outcome for investors

As you tell your investors about the context for deciding to be acquired and the upcoming close, make sure to give buffer time on their expectations for seeing the wire come through, so they’re not worried, or bugging you about it. Also, make sure to communicate what the total return was and what the initial amount they should expect to see (total less the escrow amount). Setting the right expectations helps create happier investors and repeat investors.

The last mile

What’s the longest race you’ve ever run? For me, it was a 12K (7.5 miles) when I finished at 49:30, which was a 6:36 pace. I’ve always tried to finish the last mile and especially the last 200 meters, sprinting my guts out. When you finish with the closing call and the papers are released and the wires are also released, it’s like you’re crossing that finish line (maybe even stumbling over it).

When I hung up that call, I turned to my co-founder and CTO who was with me, we looked at each other in that office and gave a each other a strong hi-five and a hung. By God’s grace, as first time founders, we had just accomplished something great.

As we finished that day, we moved offices and said goodbye to neighboring companies in the co-working space and headed to the new office, and the next chapter of our careers.

 

Read the last post on life post-acquisition at the acquiring company.