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Comment by tmcz26 | Hacker News Reader

We sold our 8-year-old startup last year, and boy do a lot of these bullet points ring true. We were very lucky that one of the founders was skilled at the M&A game, or we would have underpriced it dramatically.

If you’re thinking about selling, I’d recommend hiring an advisor firm. They charge a 2-8% fee, but they are worth it. You get better valuations and help with the tricky clauses.

The one about losing leverage after term sheet, it depends. Our acquirer was a public company, so they had to announce the signing to the market. It would look really bad if the acquisition didn’t go through (stock jumped when TS was announced), so I’d say we had even more leverage then.

Edit: typo

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> If you’re thinking about selling, I’d recommend hiring an advisor firm. They charge a 2-8% fee, but they are worth it. You get better valuations and help with the tricky clauses.

I agree but: you also have to do due diligence on your advisor firm, they are definitely not all created equal, I've seen some of these blow up perfectly good deals and like any other broker their incentives may seem aligned but on closer inspection they really are not. Get them to run the process, but keep them out of the decision making loop other than as a conduit to create breathing room. Never have a quorum of shareholders at the table during negotiations or you're going to get skinned. Get offers, go back to the shareholders / founders and discuss, then counteroffer.

jacques and I both work in M&A so we see a lot of these deals. trust what he says above.

to add a few things from the questions in the threads here:

- Lawyers IMO are much more important for deal dynamics than investment bankers. investment bankers will find you the buyer, help price the deal, and manage the process, but lawyers are the ones who make sure your terms are right. Kirkland Ellis, DLA, Troutman, Weil, Morgan Lewis etc.

- re: Investment bankers ("advisor firm"). The best firm for SaaS I've seen is William Blair - the companies they represent are consistently top tier and well prepared when we review them on the buy side. If you take this list: https://firsthand.co/best-companies-to-work-for/banking/most... my general advice is to stay away from the retail bank names (BoA, Citi, DB, etc.) and the big four (EY, PwC, etc.). But pretty much everyone else is solid.

Happy to answer any other questions. I've sat through 300+ transactions (mostly on the tech advisory side) and went through my own sale recently.

Any advice on finding the right advisor firm for a sale in the high $xx million range? We're a team of builders and have no experience in M&A, and little experience in finance/negotiation.

I’m worried that a broker will be incentivized to close a deal at an undervalued price, similar to brokers in real estate.

Oftentimes a banker would include an incentive fee for higher valuation - 2% of value up to $50M then 3% on anything above $50M. You can negotiate all these things up front.

In all honesty, my concrete advice would be reaching out to other local founders privately and asked what worked for them and what didn't. Note there usually is a lot to these stories that aren't told in public for many reasons.

On top, one thing I regret is not having joined a network of founders and entrepreneurs earlier. These days, I would just ask them and get 2-3 spot-on recommendations with warm intros in a day. We hackers and builders usually scoff at these kind of "elite" networks until we realize building and selling a company is fundamentally a people business, where connections and trust are paramount. Reach out to me on LinkedIn for an intro to the organization I'm in (it's global).

As for the original advice: +100 from my side. Especially if the whole founder round is not experienced, you really want to have a cold blooded veteran on your side. Someone who commands respect by founders, is hired by you guys and is incentivized by getting home a part of the deal. Not only do these brokers have the know-how, they usually have a vast network of interested parties to bring to the table at any time to get a bidding war started and are experienced in navigating the delicate timing of the funnel that is crucial for a success. The differences in outcome I've personally witnessed with and without brokers are night and day, even though I have my own cultural issues with them.

> In all honesty, my concrete advice would be reaching out to other local founders privately and asked what worked for them and what didn't. Note there usually is a lot to these stories that aren't told in public for many reasons.

This is the best advice. You won't be able to 'interview them' and make a good judgment, the people that have already gone through a process with them know better what they are like. And even then you have to be aware that plenty of these places have 'A' and 'B' teams and that you need to make sure you are comparing apples-to-apples.

Interview several firms that have done deals in your space/vertical, and where this will be a meaningful transaction to the firm/md - and ask them for valuation guidance (e.g. what they think they think they can sell your company for) you’ll generally find they’ll be in a similar range (e.g. 4-5x ARR) that should set expectations for the sale process.

Deal structure can be worth ~20%+ of purchase price so don’t be myopic on focusing on price only. Trying to get the last dollar usually leads to broken deals and unhappy people on both sides, but you want to make sure that you’re getting a good market read on value for your business.

Make sure you trust the team/have chemistry, you’ll go through quite a bit together. Also make sure you have M&A counsel - don’t let your commercial counsel handle this (you wouldn’t let your internist perform open heart surgery on you…)

> Deal structure can be worth ~20%+ of purchase price so don’t be myopic on focusing on price only.

This. Asset sale vs. merger is a great example. If you do an asset sale you'll need to wind down the company, pay corporate taxes, pay out everyone, etc. I've done it once and it was just about the most stressful thing I've ever been through. It's also a huge millstone if you are simultaneously working at the acquirer.

Interview them. That is what we did and it worked great. Where are you located? I used ours twice and both times was happy.

You can incentivise them to push for higher prices with the terms you offer them. The ones I worked with were highly motivated and skilled at pushing higher.

Pick any of the big four; PwC, EY, Deloitte, KPMG.

Typically they'll do a valuation and put a bonus threshold. x% under, x+n% if over.

Since these firms charge a % of the deal they have an incentive to get higher valuations. It also looks good on their resume. But you can just look at their portfolio and see the exists they worked on, the valuation, who the acquirer was, etc. You can try and reach out to some founders to check if they liked working with the advisor too.

We sold our company to VMware in 2014 with help from GrowthPoint Partners. Some learnings about the deal.

* Find multiple firms and interview them carefully. They have to sync well with your board because you'll need a high level of trust to get the deal done. Check references.

* Good advisors have done a lot of deals and have a lot of connections in the vertical you are in. They should be able to list possible acquirers off the cuff and why you are a fit. If they can't do that, move on.

* You want somebody who can run the deal process - which is really time intensive - while you run the business. It's really hard to do both.

* Good advisors will guide you through every step of the process from developing the pitch deck to acquirers to due diligence at the end. You'll quickly realize how little you know about any of these things if it's your first time through. If they aren't hands-on, again, move on.

The fees may seem high if you've never done a deal. They are justified by the potentially huge swing in price if you get somebody good. You can be looking at a 2x difference in price if you get multiple bidders. Comp the advisors on outcome and give them unlimited upside for a great result. It's just like comp'ing sales if you've done that.

Just my $0.02.

I echo this strongly:

> * Good advisors have done a lot of deals and have a lot of connections in the vertical you are in. They should be able to list possible acquirers off the cuff and why you are a fit. If they can't do that, move on.

… as well as someone else's comment that the terms in the engagement letter are negotiable. If a banker claims that their interests are aligned with yours, then turns around and delivers an engagement letter with a huge fixed fee and little or no variable fee based on outcome, either negotiate or move on.

We used Cascadia Capital when Papertrail was acquired and I was very satisfied (https://www.cascadiacapital.com/case-study/papertrail/, https://www.cascadiacapital.com/story/cascadia-capital-advis...). Since we were entirely bootstrapped, their fee came directly out of our proceeds, and it was completely worthwhile. (If any founders read this, have a serious opportunity at a $20+ million offer, and want a sounding board, feel free to contact me.)

Same offer as Troy. Contact me for more info. Our deal size was similar and we were also essentially bootstrapped. My email is in About.

p.s., Yay Papertrail. We know you guys from ClickHouse. Great to get the backstory on the outcome. ;)

How long did the process take for you? From getting the word out until sale? Once you had an offer, how long did due diligence take?

I've sold 4 startups. Median time from starting the process to close was 6 months, with the quickest transaction taking 2.5 months and the slowest almost 9 months.

Diligence ranged from 3 weeks to 7 weeks.

Fastest transactions were private company acquisitions. Slowest were public company deals.

Curious: were there any takeaways for the question "what to build for what outcome"?

As in, was there an association with time building + time in market = greater sales price? Did Higher Free Cash Flow or Higher Growth lead to a better ratio (cash v stock) for offers?

Very curious -- four successes is quite the batting average

Ironically (or perhaps interestingly), none were built for the actual outcome. The first, third, and fourth were all built with the dream of IPO in mind. The second was built as a lifestyle business.

Yeah... the batting average is why I've never done a fifth. I wanted to pull a Sandy Koufax and go out on top.

Wow that seems relatively quick. If you're comfortable, can you share the size of these sales and their geography?

All were less than $250M, all were US companies being sold to US-headquartered companies.

From the time we decided it was time to sell (for real, not just theoretically) until the money was in the bank, almost 18 months. It took us 2 months to find an advisor, then another 3-4 months building the deck and investor material (cashflows, projections, etc). We put up a bid, so we had some 8 companies interested at first and we narrowed that down to 3. That process was LONG, but that is what gets better valuation - competition. After we signed the term sheet it was another 6 months due to regulation and legal quirks, due to the acquirer being a public company. Those were the longest 6 months of our lives :)

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