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aquiring-startupsLast month we completed the acquisition of CultureMap and the process was harder and took longer than I ever imagined. I thought it might make sense to outline the steps of an acquisition.

  • Step One: Determine whether or not you want to grow your business organically or through acquisition. Spend a lot of time answering this question. Acquisitions really are disruptive and sometimes detrimental to your business.
  • Step Two: Find a target. Most targets are private companies and reveal very little about themselves publicly so it takes a lot of work to find an acceptable target. You can use a broker or investment bank to help you, but usually you’ll uncover the best opportunities in your own space on your own.
  • Step Three: Approach management and/or the investors of the target to determine if they are interested in selling. More often than not most targets will be VERY reluctant to admit they would be interested in selling even if they really are. More often than not it is best to take a soft approach indicating you might be interested in making an investment or some sort of partnership (ironically, these two options might be a better idea than the acquisition). This process will likely take a few weeks.
  • Step Four: Meet the target. Once you’ve managed to pique the interest of the target’s management team and/or investors it is time to meet. Your goal is to get the target almost as excited about you as you are about them. You’re building confidence that a) you can get a deal done, b) the transaction will be lucrative and c) it is worth their time to work with you. Expect this process to take a week or two.
  • Step Five: Execute an NDA. You’re going to ask for some basic financial and business information for use in the crafting of your offer. Usually an NDA will also include a confidentiality agreement that precludes you from talking to anyone about the fact that you’re in preliminary talks to buy the company.
  • Step Six: Determine the value of the target and its value to you. You will likely have to pay some number in between these two values.
  • Step Seven: Secure financing. Unless you’re going to use your stock as a currency or you’re flush with cash you’re going to need to raise debt or equity to fund your purchase. Expect to spend two or three weeks putting together a deal.
  • Step Eight: Deliver draft Letter Of Intent (LOI) to the target. This letter will serve as your term sheet outlining what you’re willing to buy and how much you’re willing to pay.
  • Step Nine: Negotiate the LOI price and other terms. More often than not your target will have a lawyer and his job is to markup the document. Additionally the target will likely want you to pay more than you’ve offered. It should take a week or two to negotiate the LOI.
  • Step Ten: Execute the LOI. You need to set a deadline and stick to it.
  • Step Eleven: Begin financial and legal diligence. This can take a lot longer than you might think. Expect at least a month depending on deal size. You’re going to need to budget a few thousand dollars for the legal diligence. The real costs come in when you begin drafting the Purchase Agreement.
  • Step Twelve: Retrade the deal. In all likelihood you’ll uncover things you didn’t know when you made your original offer. Take the new information into account and determine if you should lower your offer. The target is NOT going to like this process. Don’t be greedy. The retrade will likely take a week.
  • Step Thirteen: Begin drafting the Purchase Agreement. You’re going to start incurring a lot of legal expenses here – around $20K depending on the size of the target. The deal points should be settled before you meet with your lawyer. Your lawyer should be able to finish the PA in a couple of days.
  • Step Fourteen: Deliver and Negotiate the Purchase Agreement. Once you deliver the Purchase Agreement to the target his lawyer will want to negotiate the language, but hopefully not the terms. This process could take a a week or two so be prepared for the delay.
  • Step Fifteen: Complete the various schedules to the Purchase Agreement. This process could take a couple of weeks.
  • Step Sixteen: Execute the Purchase Agreement.
  • Step Seventeen: Fund and Close.

In my experience it will take about four months from your first conversation to close. Of course it isn’t unusual for a deal to fall apart for a number of reasons at various stages of the process. Remember a deal is never done until it’s done. There is no such thing as ‘late stage negotiations’ – either there is or isn’t a deal.