Eric Bahn is a self described entrepreneur and hustler. He’s also the organizer for Hustle Con, a conference that will provide tactical advice on prototyping, acquiring customers, and establishing your tech startup. The next event takes place at Intuit’s Mountain View headquarters July 9.
As an entrepreneur, he’s experienced the exhilaration of nurturing an idea and running a business. In 2009, he founded Beat The GMAT, on an investment of just $4. His startup went on to become the world’s largest social network for MBA applicants with a seven figure annual run rate.
He also knows the rush of emotions that overcome and often overwhelm business owners when they receive a letter of intent, or LOI, to acquire a company. He sold Beat The GMAT to Hobsons, an education solutions company in 2012. Today, he’s leading the integration of the Beat The GMAT business within Hobsons, and building the strategy for a new line of business for the company.
Throughout the experience, Bahn learned a lot about himself and shares five tips on how to navigate the acquisition process.
1. Numbers aren’t always what they seem
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In an acquisition, a seller typically receives two important pieces of paper: a letter of intent at the beginning of the acquisition process that explains high-level terms for which your company will be acquired; and a definitive purchase agreement comes at the very end of the process that outlines detailed terms for your acquisition.
The LOI usually includes a purchase price. As part of the due diligence process (aka, the deep analysis and research of your company), the buyer may identify some issues, such as past lawsuits, improperly licensed technology and mis-filed paperwork. Often, buyers will use these “weaknesses” to reduce the price of their initial offer.
As the seller, it’s important to work with your team to identify all areas that you think the buyer might flag concerns and be prepared to respond.
2. Get organized
The due diligence process can be time consuming, so organization is critical. Every facet of your company – founding history, lease agreements, sales, legal issues and client satisfaction – must be documented carefully and explained to the buyer.
I’ve heard of other company founders who have written hundreds of pages of documentation to explain in detail how their companies operate. And if you are operating a small startup team, this fact-gathering process can be exhausting.
Even if you’re not looking to be acquired, there’s no better time than now to get your documents in order.
3. Invest to sell
The phrase “It takes money to make money” is especially true for acquisitions.
Here are a few cost considerations as the seller:
- Bankers – Many sellers hire investment bankers. They can be great advocates to help negotiate with prospective buyers and often have large networks to encourage other companies to get interested in you to start a bidding war. Costs can range from hundreds of thousands of dollars to millions for these valuable services.
- Lawyers – Don’t skimp on this investment! A great lawyer can provide mindboggling value for you as the seller, helping you interpret the esoteric language of a definitive purchase agreement. A good lawyer will help you identify what is important to fight for and what isn’t, as well as help develop agreements with your buyer’s legal counsel.
- Accountants – Most acquirers need to review your books in a GAAP-compliant, accrual-based accounting format. Getting to GAAP compliance is a huge challenge if you haven’t been doing this for years, and a good accountant can do this work for you.
4. Don’t let emotions distract you
You’ve put years of your life into your company. You’ve missed date nights and birthdays to launch your business. You’ve most likely endured sleepless nights wondering whether you could make next month’s payroll for your employees.
And now you’re about to sell your company.
The acquisition process can take an emotional toll because starting a company is hard work and something you’ve nurtured since it was a mere idea. It’s a reflection of who you are. Negotiation with a buyer is a dance, and there are times where one party may threaten to walk. Those setbacks can feel like a punch to the gut.
Stay focused on the business aspect of the deal and, if you’re feeling overwhelmed, find outlets to help you reduce stress. I’m a personal fan of exercise.
5. You’re acquired. Now what?
You’ve signed the purchase agreement and now it’s time to integrate your company into the new parent company. But beware: Many acquisitions fail because the seller can’t integrate successfully with the buyer.
Be prepared to work long hours to ensure a smooth transition. Many entrepreneurs quickly become disillusioned after selling their companies when they realize that the work is not over.
If you are selling your business, try to negotiate a little vacation time after the deal closes to recharge your batteries.
Acquisitions vary based on industry and type of deal. If you’ve been acquired, share your thoughts and help us expand the five tips listed here.