What does the selling process consist of? This seems to be one of the most common questions I get when I talk to other Founders. This article is designed for them, and shares insights I’ve collected over the years.
The selling process is comprised of five distinct phases – Courting, Terms, Due Diligence, Signing, and Closing. Every phase has a very distinct experience, and a sphere of power exists in each.
The insights I share in this article are personal observations and are not representative of any one entity, but a collection of thoughts based on over a dozen or so different entities I have been a part of, or assisted through the process.
Every process has a power dynamic.
Power should not be perceived in a derogatory way, but in terms of having the upper hand. Negotiation are a game of chess, there is a strategy and pieces are being moved at all times. Throughout the game, someone has the upper hand. Is it you?
Simplified Example: When you initiate the engagement looking for an acquisition, the power is in the buyers hands. They know you want, or need them. When the strategic engages you, you have the power. They want something you have, or need it.
Power comes in the form of who has the ability to dictate terms, who is moving the ball down the field, and who has the ability to set favorable options. Sometimes it’s the buyer, sometimes it’s the seller.
Power is not the same through the entire process. Starting with power doesn’t mean you end with power. Power flows freely through every engagement.
The smartest buyers and sellers know when to concede the battle to win the war.
Phase I – Courting
Courting doesn’t always happen. In my last article, Preparing for an Exit, I referenced a friend who got a call from Google one day offering them 100’s of millions and they had never spoken. As amazing as that is, that’s not the norm.
For most, there is a courting period even if you realize it or not. Courting periods can start by a simple partnership. A strategic that is looking to partner is naturally curious about providing a specific service to their audience. Will it catch? Can we integrate? What would the economics look like? Does it solve a problem for our customers?
Courting materializes in a number of other ways as well. Regardless of how it starts, it’s the honeymoon phase where everyone is getting to know each other. Every engagement is an opportunity to learn a little something more about how one party does business, and slowly everyone starts thinking if there is something viable in this relationship.
The power in this phase is typically found in the one that isn’t pursuing. If a strategic is knocking on your door, the power is in your hands. If you are engaging the strategic, the power is in their hands. Power can also be found in the one telling the compelling story, helping to connect the dots, the ones painting this utopian picture of what could be.
The dating phase is what helps figure out if there is a potential for marriage, and what eventually leads to Terms, or an LOI.
Phase 2 – Terms
Once every one is done realizing how much they love each other, it will get serious really quick with a document known as the Term Sheet. Depending on the organization, it might also be the Letter of Intent (LOI).
These documents are clearly stating a parties interest to acquire the other. This is one of the more critical points in the process that is often overlooked.
This comes at the tail end of the courting phase so you’re most likely excited and ready to get going. You establish some arbitrary terms and say, “We’ll figure this out during the due diligence. It’ll be fine.”
This one document, however, does something very important for both parties. The buyer gets exclusivity. The seller can get guardrails, but often don’t capitalize on this opportunity.
The buyer wants to get you locked in as quick as possible, they don’t want a bidding war. Exclusivity helps provide this. For a buyer the trick is to get the seller into the term quickly before others smell the blood in the water. The exclusivity can go anywhere between 30 – 60 days, depending on the organization.
The seller should absolutely keep their options open. If you are going to entertain one buyer, you might as well entertain others. As kumbaya as it might feel with one buyer, you have a fiscal responsibility to yourself and your team. When you do sign the terms, aim for a low exclusivity period, within reason. If more time is needed, and it’s progressing as you like, an extension is easy to file.
This is one of the last times that the power has the potential to be in the hands of the seller. It’s why it’s so critical for the seller to spend more time. on this phase. How much a company wants you determines how much power a seller actually has. If you are selling because you have to sell, or feel you need to, the power is going to be in the buyers hands. If you do not have to sell, but are naturally curious about the process, you have exponential power at this phase.
Terms can be as shallow or deep as you want them to be. For those with power, I encourage you to bolster the terms to be more descriptive of things like value, warranties, earn-out periods, expected deliverables, and people. This will help introduce guardrails, these guardrails will prove invaluable when you’re negotiating the actual deal (next phase).
Tip: It’s impossible to know what will surface during the due diligence process, and the specifics of any contract but you should have a basic understanding of the basic structure. Have in your mind the three to five things that are critical to you, and your team. These things will function as your light-tower when it’s dark and foggy and you can’t make head from tail.
Phase 3 – Due Diligence
Many have undoubtedly read or heard horror stories about what this process is like. It can be as bad as you envisioned, better, or worse. It really depends on how prepared you are as a company.
The due diligence will have little to do with understanding the product fit and market opportunity, and everything to do with the artifacts expected of a business. What really exasperates the situation are the multiple work streams happening, and the various teams you will end up working with. This is especially true if the buyer is exponentially larger and you are what I consider a rounding error in revenue and team size to them (e.g., seller makes $1m a year in ARR, buyer makes $1B a year in ARR -> This is a rounding error).
You will assume that the buyer should have a playbook for how these goes, and some do, but many more don’t. You might find yourself at the head of their new acquisition playbook development process.
Either way, the invasiveness of the process is really dependent on the entity. What you can expect is for a document to be thrown over the fence. They will ask you for artifacts that you have never heard of, or maybe read in a business book. The best advice here is to get comfortable with this statement, “Sorry, we don’t have this.” Realize that for many, they will be going off a check list and just doing their job. There will be little emotion to the process, so don’t let it get into yours.
Do not, under any circumstances turn this into an artifact creation process. On that note, understand that not having specific artifacts (e.g., financials, architecture diagrams, etc..) can be used to revisit valuations.
Tucked into this process is the actual negotiations and associated documents. Probably the most important piece, but sometimes lost in the chaos of the noise. Having a deep term sheet will help provide a much needed rudder for this process.
The power in this phase undoubtedly shifts firmly into the hands of whomever is asking the questions and writing the contract, typically the buyer.
By design, attorney’s have their entities best interest in the forefront of their mind. It doesn’t mean they are malicious in the process, but unconscious bias applies. Be prepared for double-negatives, run on sentences, and paragraphs for explanations that require one sentence. This is where your attorney is worth their weight in gold.
I don’t think there is really a way around this process. Mitigate potential risk later by ensuring the terms are structured in a way that they offer you the appropriate guard rails later. You want to come out on the other as close to what you were hoping when you entered the process.
Tip: There is not a definitive way things are done. Every organization is different, but every organization does have a preferred way. That is what they mean, when they say, “This is how it’s done.” Leverage your naiveness in the process to ask questions, and challenge the status quo. The biggest limitation to any contract is typically your own creativity. Listen to every word carefully because through the process, they are implicitly describing the things that matter most. It is on you to find them.
Phase 4 – Signing
I considered consolidating phase 4 and 5, but I separated them intentionally. They are not always one and the same.
You don’t necessarily close when you sign, but you can sign and close at the same time.
There is often a grace period between the time you sign and close, and that grace period itself is the power.
The grace period is used to for a number of different reasons. It can deliver insight into something that was identified during the due diligence phase. It can also be used to get confirmation of a specific contract, maybe legal, or tax, clarification on a specific subject.
General rule of thumb is to keep it as short as possible. You don’t actually get your money, or start the clock until the actual close.
The last thing you want is a 30 day grace period where everyone has a new boss, but you haven’t technically received anything. Long grace periods are typically reserved for very large deals, while most smaller deals are typically within 2 weeks.
Phase 5 – Close
The close is when you are actually done. The money has been wired, you’re eyeing your first ridiculous purchase. The documents are signed. Your company is now owned by someone else.
Funny enough, you will actually sign the closing documents days prior, and everyone’s signatures will be in escrow. You will likely get together with the company on the day of and wait for the call from all the attorney’s that everything is kosher, and that’s it. Once the thumbs up is given, you’re done. Let the fun begin.
You might find yourself thinking, “that’s it?”
Depending on the company, there might be some fan fare. They might make some public announcements, share with the teams. There will be a stream of congratulations coming your way, but all this will subside in 24 / 48 hours and the normal hum of integrations will commence.
Now you will update your social profiles with Former, and ask yourself, was it worth it? For many, you won’t really know the answer for years to come. For some, you’ll know right away.
Navigating a Deal is Not for the Feint of Heart
Through this entire journey you will be running multiple streams for the process itself, while also trying to run the company.
This will create exponential distractions. These distractions will manifest themselves physically in exhaustion, depression, anxiety, and frustrations, while also having a material impact on the business itself.
If there is one thing to remember through the entire process, this is a business transaction. Do not allow yourself to be distracted, or consumed, by niceties. As nice and friendly as things might appear, everyone is doing a job. Every one gets frustrated through the process.
These damn founders! These damn corporate types!
When you start feeling as if something is a personal attack, take a moment to disconnect, consult a friend to get a different perspective, and most importantly, pick up the phone. Email, chat and text are the worst when it comes to these types of engagements.
Going through a process is one of the toughest and loneliest things you’ll likely experience as an entrepreneur. It can also be one of the most rewarding. I share these experiences, and insights, because these are the things I wish I would have known when going through the process. Some were things I experienced, others are things I have seen, and some more are things I have helped others navigate.
Tip: Up the point that you close, you technically have the ability to walk away from the deal. This is the ultimate power that any seller has through the entire process, but it’s only as powerful as your willingness to leverage it.
Lastly, go into the deal with eyes wide open. If you have a small business being purchased by a big business you are about to enter a very different world. Your executive sponsor might not be there in 12 months, the team you report to might not be the same in 6 months, the companies strategy might change dramatically in 3 months. In other words, there is no stupid question through this process and don’t be ashamed, or embarrassed, to ask for assurances and protections.
Wish you all the best.