For entrepreneurs, selling their startups can be an important affirmation that all their hard work led to the creation of something with lasting value. But it can also be a treacherous process in which founders end up losing control and putting their own interests at risk. I learned the lesson firsthand starting in February 2017, when I set out to vet investment bankers to assist BestReviews (which I co-founded in 2014 with two others) as we considered selling to a strategic partner. Below, I share some of the lessons I learned during the M&A process.
Don’t let bankers, lawyers, or other advisors run the show. Some people think that the bankers are going to create a perfect outcome, and we were fortunate to work with a great team from Lazard. Never forget you hired them as advisors, and that is exactly what they will offer: advice. When it came to setting a purchase price, our bankers and accounting advisors had one opinion, the sellers had a very different opinion, and we ourselves had yet another opinion that fell somewhere between the two and that we firmly believed was fair to all parties. This is what guided our decisions and led to an outcome we could live with. If you allow advisors to become decision makers, then realize the outcome may not be what you want, and you will be the one living with it.
Recognize the limits of non-disclosure agreements. It’s important to understand that an NDA prohibits people from sharing information, not from using it themselves. That’s why we were super careful about disclosing information around our organic search tactics, technology stack, and operational processes — all elements of our “secret sauce” — even to people inside the NDA. And yet, not surprisingly, before our sale process was even over we saw potential buyers who had read our Confidential Investment Memorandum replicating key aspects of our business. An NDA only means so much.
Invest in building trust with potential buyers. If you are not traveling to build in-person relationships with these key partners, you are probably missing out on potential; phone calls alone are rarely adequate. We drew up a list of potential strategic buyers early on (some of whom were already partners or had shown interest in buying us) and regularly engaged with them to build authentic relationships; we heard from a couple of them that our efforts on this front were the critical factor in their decision to bid on BestReviews. Remember that a business or corporate development leader may be putting his career on the line in bidding for your company. Trust matters.
Hire board members carefully. We had a chance to bring on an A+ independent director/advisor to our board — a highly seasoned investment banker — but didn’t move forward because we were worried about equity dilution and lack of value creation. This is a mistake that a lot of founders make. Had we hired this person, he’d have brought not just experience but valuable relationships with influential people in the companies that were contemplating bidding. When considering someone for the board, ask yourself: Is the person knowledgeable about the business and industry itself? Do they have insights or relationships that can create value? And most importantly do they have the inclination, passion, and time to use these assets to create value for your company? If the answer is yes to all of these questions, then they are probably worth hiring.
Finally, remember that the M&A process is a marathon, not a sprint. In our case, it lasted about a year. In that time, there were multiple deals that fell apart at the last moment. You have got to keep running the business during this emotional roller coaster; in fact, you need to do even better since your most recent results will likely determine the price someone will pay — or if they bid at all. Hire extra talent to help if needed; there will be plenty of work to go around under most circumstances. Remember to take care of yourself.