Selling Your Startup

Crafting the Perfect Exit, Selling Your Business, and Everything Else Entrepreneurs Need to Know

Alejandro Cremades

• Publisher: Wiley
• Year: 2021
• ISBN:
  9781119798040
• Edition: 1
• Topic: Business
• Subtopic: Mergers & Acquisitions
• Index: Business

Learn how to sell your startup from an acquisition expert

Many entrepreneurs dream of the day their company is acquired and they secure a perfect exit. But information about the process of getting your business acquired usually comes from expensive investment bankers who typically advise late-stage startups.

In Selling Your Startup, serial entrepreneur Alejandro Cremades delivers an accessible guide on how to sell your startup. With first-hand experience as a fully exited entrepreneur, investment banker, and lawyer, Cremades describes the tips and tricks startup founders need to sell their early-stage to growth-stage business.

In this book, you'll discover:

• The role that investment bankers play in the acquisition process, how they add value, and how to break down their fees
• Preparing your company for sale, including compiling a pitch book, putting its finances in order, and building a target list of potential acquirers
• How to get to a Letter of Intent, perform due diligence, and reach a purchase agreement

Perfect for entrepreneurs of all kinds, Selling Your Startup is a must-have roadmap to the practical realities of company acquisition and contains proven guidance on crafting your perfect exit.

1
Seeding What Would Grow into Panthera Advisors

I first dipped my toes into the acquisition world while running my previous company, Onevest, which was backed by 14 different venture capital firms.

Building Onevest was a wild ride—full of terrible lows and exceptionally steep highs—but it became one of the largest communities of entrepreneurs, supporting over 500,000 founders in 234 countries.

Onevest and its portfolio of companies provided services such as cofounder matching, accelerator programs, a vibrant Q&A discussion board, key workshops on everything related to building and scaling businesses, and a platform where investors could meet and invest in startups.

It was a dynamic and deeply loyal community.

Accelerated Growth through Acquisitions

On the journey of building and scaling Onevest, part of its growth was organic, which we absolutely lucked out on, but the other part of its growth was attained through acquiring major competitors in the space.

In total, we acquired three of our direct competitors, which was bold and certainly risky, but it turned out to be a strategic move in the end. Two of those transactions, CoFoundersLab and FounderDating, were purchased in the millions of dollars and were a bit complex, given all the stakeholders who had a hand in the pot.

In one of those deals, we inherited investors who were not very sophisticated in these sorts of deals. A ton of back-and-forth negotiating ultimately shot the billable lawyer hours through the roof.

As newbie investors, they would either get stuck on standard terms or they would request things different from what was generally accepted in the market. That proved to be a painful but valuable lesson I will never forget. This specific experience is the reason I typically warn entrepreneurs to stay clear of non-sophisticated investors.

These kinds of investors can literally blow up a good deal, or at least significantly complicate things. Believe me, it can be frustrating and complete nonsense when you experience it firsthand. It's almost as if someone is throwing stones at their own glass house—but what can you do?

Yet those specific deals each came with important lessons that really helped me to understand how startup acquisitions work from an operator's perspective.

Acquisitions, to my surprise, were one hundred times harder than rounds of financing. And there's dealing with all types of emotions and egos, so mastering psychology is key.

Inbound Interest and a Path Forward

About eight years into building the business, Onevest started to receive inbound interest from companies that were drawn to our distribution capabilities, data, subscription structure, and access to the venture world.

The offers to buy the company couldn't have come at a better time. I had spent nearly a decade building Onevest with my wife, Tanya Prive, and at that time, she was pregnant with our second and third child (yes, identical twins!). But we soon found out the pregnancy held other surprises for us.

At six months, Tanya was diagnosed with twin-to-twin transfusion syndrome, a rare condition affecting the placenta in identical twin pregnancies where blood is transfused disproportionately from one twin (donor) to the other (recipient), causing the donor to have decreased blood volume and the recipient to be overloaded with blood, which often results in the death of one or both babies. With that diagnosis, Tanya was rushed into the hospital for an emergency C-section.

Our twin daughters were born at 28 weeks gestation, weighing in at 2.4 pounds and 1.7 pounds, respectively, which catapulted us into weeks, and then months, where our baby girls fought for their lives in the hospital. After 129 and 180 days, respectively, at the neonatal intensive care unit (NICU) at Mount Sinai in New York City's Upper East Side, they were finally discharged and able to come home. Our lives had changed, and I knew that stepping back from the daily grind was the right thing to do for myself and Tanya.

Before our girls came home, our four-month-old daughter, Alya, had to undergo heart surgery. As she was wheeled into the operating room, I was preparing the agenda for a board meeting on the four acquisition offers the company had received. I wanted to be near my daughter that day, but the offers left us no choice.

One of the acquisition offers had a 24-hour expiration date. It was December 19 and the members on our board were about to check out for their holiday vacations. It was literally the only time we could get everyone together.

I was a wreck thinking about all the things that could potentially go wrong with Alya's surgery, but I had to sidebar my thoughts to get our board aligned. We unanimously agreed that pursuing an acquisition was in the best interest of our stakeholders. But how did we get to these four acquisition offers in the first place? It all began with me finding Mike Seversen.

Choosing My Wingman

I instinctively knew it wasn't wise for me to tread the transaction path alone, so I began searching for a master banker who would help me navigate any merger and acquisition (M&A) landmines and optimize my chances at a successful exit. To have the best outcome, the deal needed to be viewed not solely as a financial acquisition (all based on revenues and EBITDA) but more as a strategic acquisition.

But in meeting after meeting, I was greeted by more or less the same person: a suit-and-tie Wall Street guy with little to no operating experience. After speaking with tons of potential M&A advisors, I was getting desperate. I knew the kind of person I needed to make the deal a success, and I felt as though I was looking for a needle in a haystack.

Finally, after endless research and asking around, I had a major breakthrough. I connected with Mike Seversen. He was in every sense of the word a true rock star. Sure, he had all the bells and whistles you would expect: Stanford undergrad, MBA Harvard graduate, and a 26-year career in the mergers and acquisitions space, but that wasn't what sold me.

Mike had a rare, heightened emotional intelligence, as well as the operational experience from running his own entrepreneurial ventures. I knew that if anyone could pull off this transaction, it was going to be Mike working with me as a team. I was strong on the business development side and relationship building, and Mike was a wizard of operations, numbers, and creative strategies. He was also keenly skilled in navigating big egos.

Once Mike and I were on the same page, we presented the plan to the board. As soon as the plan received board approval, we immediately got to work.

Our M&A Journey

We ended up with four letters of interest (LOIs) to buy our company. LOIs are the formal way acquirers tell you they are interested in buying your company and at what price, pending a due diligence process. (I'll explain these in more detail later in the book.)

So how did we generate these letters of interest?

First, we went ahead and prepared a list of all the companies we thought could show potential interest in acquiring Onevest. (We're talking here about a list with 300 leads.) We tried to cover every strategic angle we could think of that could trigger interest.

We wanted to target CEOs as opposed to your typical head of corporate development, who usually leads this type of initiative, because the path to a yes is far less risky when a deal comes through the CEO. We knew that if we penetrated the company via the CEO and were handed over to the corporate development team, the team wouldn't hesitate to report back to the CEO if it saw a good fit.

Once we populated our target list with outreach data, we went ahead and reached out to all of the CEOs. In parallel to reaching out to potential acquirers, we also put in motion the formal discussions with the firms that had already expressed direct interest in doing something strategic, which typically means an acquisition.

In essence, this ended up being a four- to six-month process from the start to narrowing down the seriously interested parties.

Out of the 300 leads, we had active conversations with at least 60 of them via phone calls and in-person meetings. From there, we had 25 companies that requested access to the acquisition memorandum (which is the document that lays out the story of your company and what's possible).

Ultimately, it was this process that led us to receive the four letters of interest. In partnership with our board, we ended up taking the LOI that we thought had the best terms and offered the greatest level of alignment with the acquiring management team.

From there, we went into due diligence for three months following the signing of the LOI, and we ultimately closed the deal, which was worth millions. But I can't tell you how many times the transaction nearly blew up.

When all was said and done on the due diligence side, we signed the legal paperwork, got approval from the shareholders, and made the announcement to the world.

Mike and I saw the entire process like a tennis match. He would volley the ball to me when I had to tal...