Yeah, I'm not suggesting that everyone should optimize right out of the gate for acquisition, I even thought about making a more detailed set of points on that, but decided it was overkill.
I think it's like this:
- There's a base level of prep for acquisition that just falls under the category of "good operational cadence for a company". This is the basic level of keeping the books clean, organizing your papers, etc.
- Then there's a level of prep that it makes sense to do when you think you are getting close to a term sheet, or planning to start to actively seek acquisition. This is the much more detailed indexing of contracts, covenants, tracking down old shareholders, etc. Hopefully if you did the above point, this is made easier, since you're at least storing everything in one place
- Then in the DD phase, there's going to be requests that you just can't prepare for, because they're out of left-field. If you've done #1 and #2, you can invest most of your efforts on those.
But to your point:
> If a deal is worth doing, it's probably not going to live or die based on how many tens of thousands of dollars you can whittle off closing costs.
It's almost never a matter of closing costs. It's a matter of momentum and risk. Yes, if a company is 100% convinced that they absolutely must have your technology/customers/IP/whatever, they'll overlook many many flaws.
But, if you go into the due diligence process and things are overly messy, it throws up red flags and creates delays, neither of which are in the entrepreneurs favor.
The DD folks and legal counsel for the acquirer are there to be a voice of reason and caution - the messier things are, the more likely they are to start cautioning the acquirer. Typically, the corp dev guys are raring at the bit, since this is what they're there to do. Legal is meant to act as the countervailing weight to that.
Risk is unlikely to kill the deal outright, but it could delay things and create uncertainty in the acquirer. All of a sudden they start talking about putting an extra 10-15% in escrow, or doing an earn-out instead of a straight acquisition, as a hedge. Or they decide they want to interview a few more customers before they pull the trigger.
Which is where delay comes in - the longer the interval between term sheet and deal signing, the worse off for the startup. Not because of the legal costs, but because:
- it's disruptive to the business - your whole life becomes dealing with due diligence, not to mention the stress level
- it gives the acquirer the chance to rethink their decision or consider another route
- business conditions could change - your biggest competitor goes up for sale at a bargain basement price
So, in the end, you're not optimizing for cost, and prepping for DD is definitely not worth doing pre-product or at the expense of building your business. But it does reduce risk and improve the likelihood of deal close once you get to that point.