MBA Mondays - Business 101 for startups by Fred Wilson

M & A Case Studies: WhatCounts Sale Process

Last week we got a primer on the WhatCounts story and events leading up to the decision to sell the company. This week we are going to hear what a sale process looks like.

There are a bunch of great lessons that come out of this story but my two favorites are doing your diligence on the buyer and only doing a deal with someone you have shared values with and getting the deal worked out in the LOI stage. I see so many people make mistakes in these two areas.

As we did last week David Geller and I will be in the comments responding to questions and comments.

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Last week I shared with you some of the history of WhatCounts, the company I started almost ten years ago that was recently acquired. The focus was that Brian Ratzliff, my cofounder, and I had self-funded the business. We didn't refuse VC funding. We simply didn't pursue it with vigor at any time during our tenure running the company.

Today's post isn't about the merits of self-funding or when it's appropriate or wise to seek VC. Instead, it's to share the experience we went through in selling the company. It's a story I would have enjoyed reading myself had it been written just six months ago.

Just to set expectations properly, I'm not going to share financial details about the transaction. I'm bound by an agreement that prevents me from disclosing specific details. My company was engaged in a very competitive market with strong, well-financed players. It would be foolish for me to give our competitors additional ammunition.

Negotiating our deal started in June and ended in December. It took a month to negotiate the letter of intent (LOI) with the rest of the time devoted to performing due diligence and, eventually, negotiating the stock purchase agreement (SPA). The total cost of carrying out the deal was many hundreds of thousands of dollars. Some of that went to pay legal bills, some of it went to fees associated with our M&A firm, some went to paying bonuses tied to the deal.

Let's roll the clock back to June. That's when we received a call from a company named The Mansell Group asking if we would be interested in selling our business. It turns out that we were actually already considering selling our company. The economy appeared to be recovering and the M&A market was rebounding.

We had developed a relationship with The Corum Group, a Seattle M&A firm, and were planning to pursue all the steps necessary to sell WhatCounts. The process can take anywhere from a few months (rare) to as many as 8-12 months or even longer depending upon the size and complexity of the deal.

We were preparing for a long and complex process of attracting buyers for our company when one of them, The Mansell Group of Atlanta, initiated a call to us. At first our position was one of pragmatism. We would continue working toward finding one or more potential acquirers while, at the same time, continuing to nurture the opportunity that had turned up from Mansell.

After our initial call with The Mansell Group we gave a status report to Corum. This was a little strange because, certainly in the beginning of an acquisition process, the M&A firm generally provides updates to the seller. Here we were, essentially, driving the process with one particular, potential buyer.

The rest of June was spent running the business in a normal manner. It included preparing for an important customer summit planned for August and working with our M&A firm.

FINANCIAL AUDIT
It is not uncommon for a company being acquired to go through a full financial audit. While these can certainly be conducted by one of the big accounting firms, we thought a regional accounting firm might serve our needs just as well and be less expensive. A full financial audit for a small company might run $35-50K using a mid-size regional firm. Expect to pay more with a big name firm. To a great degree, though, the timing of the audit, whether it is done before or after you begin looking for an acquirer, or even done at all, depends on your circumstances.