This article originally ran in Forbes on 4/7/2022 and is written by Jodie Cook.
When you’re selling your startup, there are few moments more exciting than when you have a term sheet in hand. At this point, you have selected your dance partner and you’re moving forward into your future with the makings of a successful deal.
Mark Achler and Mert Iseri, co-authors of the book Exit Right, know this feeling firsthand. An early Apple employee and the former head of innovation at Redbox, Achler has been creating and investing in tech startups since 1986. Today, he’s a founding partner of MATH Venture Partners, an early to growth-stage VC fund focused on technology companies. Iseri co-founded SwipeSense, a healthtech company acquired by SC Johnson in 2020, and Design for America, which became a part of the IBM Watson Foundation in 2021.
“A term sheet means there is a real commitment on both sides, but there is still a long way to go,” Achler said. “Throughout this process from a signed term sheet to money in the bank, there are still many ways to either drive greater value or screw things up.”
Once you have signed a term sheet, all parties should try to close the deal and build momentum towards completing the transaction. So, what steps should you take to successfully close your acquisition deal? Iseri puts forward six of the most important.
1. DECIDE IF YOU WANT TO OUTSOURCE YOUR NEGOTIATIONS
Achler and Iseri recommend that the CEO lead the negotiations, but they also realize that not every CEO is a master negotiator. It’s certainly valid to have someone else lead the process if negotiating is not your strength or if you want to have someone else take charge on a particularly difficult conversation, but the duo recommends caution if you go this route.
“If you outsource your negotiations to an investment banker, you might maximize your return, but you also will limit trust-building, which may inhibit a successful close,” Achler said.
Iseri explained that the largest determinant of whether or not to use a banker is related to the size of the deal. If the deal you are negotiating falls below $100 million, it’s likely not going to warrant using investment bankers. At that size, the potential payout for the bankers won’t be large enough to attract the interest of A-level players.
“At that point, less than stellar talent can hurt rather than help the negotiations,” Iseri said. If your transaction is large enough to warrant using a banker, Achler said it’s still up to you as a CEO to manage them, the process and the final negotiating points. The more you understand where your hard lines are, the easier it will be to give directions to your banker.
2. HIRE AN EXPERIENCED LEGAL TEAM
When you are selling your company, Achler and Iseri recommend hiring experienced M&A attorneys. While one hour of their time will be expensive, their insights and wisdom can cut straight to the point and save you both time and serious money over the long run. So, Iseri concluded, work with the most senior attorney you can on key strategic questions.
“Talk with your senior attorney ahead of time about prioritizing issues and risks,” Achler added. “Your attorneys’ job is to manage risk and to save you from yourself.”
However, Achler pointed out, not all risks are created equal. Some attorneys will fight equally as hard for the minor points as the major ones. It is critically important to work out a process with your attorney ahead of time, and a framework for decision making to help classify and understand the level of risk on any particular item. “Know what is worth fighting for and material, and what isn’t,” Iseri said.
3. TAKE INITIATIVE RATHER THAN SITTING BACK AND WAITING
Most CEOs sit back and wait for the acquiring company to tell them why they are interested, but Achler and Iseri disagree with this common course of action. As they pointed out, there is a fundamental information asymmetry between the larger acquiring company and you.
“Your job is to fix that,” Achler said. “You both must learn everything you possibly can about the other’s company, but you must go one step further by helping build the rationale for why this investment makes sense to the acquiring company.”
So, how do you do it? Iseri said start with corporate development, and ask questions about their strategic objectives. If you can, find the business champion and build the case for strategic impact together. The bottom line is, don’t wait for them to tell you the greater why.
“Deals can and often do fall apart even after a term sheet, especially when there is a lack of alignment in telling the greater strategic story,” Achler said. “The key to alleviating tension is a communication cadence that includes regular conversations as part of the purchase process.”
4. COMMUNICATE STRATEGICALLY WITH YOUR TEAM
Deals are often secretive. While you are meeting with your lawyers, bankers and running the deal, your team is hopefully running your business. Since you can’t be in two places at once, Iseri said you must trust that your team is holding down the fort.
“There is no single correct approach,” Iseri added. “We tend to err on the side of making sure your key executive team knows what you are doing and how you are spending your time.”
In the absence of information, human nature is to fill in the blanks and sometimes assume the worst. So, the question becomes when to tell your full team about the deal. Achler and Iseri’s rule of thumb is to keep things confidential until you see the finish line.
“Our recommendation is once you have a signed term sheet, you should probably tell your full team,” Achler explained. “Confidentiality is key here, though, so you have to ensure and set the expectations up front that your team will not share any of this.”
5. CREATE A SENSE OF URGENCY
Achler and Iseri admit that with any deal, keeping the ball moving forward can be difficult. Hopefully, you are negotiating from a position of strength and are ready to sell at the optimal time. You’re selling because you want to, not because you are running out of money or desperate to leave.
“The journey of a deal can be maddeningly slow with fits of activity and moments where it looks like nothing is happening.” If you’re the CEO, the duo said this can feel like torture. “Stay calm, stay true to your path and be proactive whenever possible,” they advised.
“While your options may be limited, larger companies are going to have to work through their process,” Achler said. “However, you do still have some weapons at your disposal.”
Remember, the duo said, this is not about you. It’s about them. Given that, they recommend “creating some urgency by focusing on the rationale of the deal. The more the acquiring company believes in the deal rationale, the more urgent their actions will be.” In addition, they will be motivated to work through the problems to maintain the closing timeline.
6. REMEMBER DUE DILIGENCE GOES BOTH WAYS
Achler and Iseri said that every time you interact with the buying company, see it as an opportunity to learn more about them. Now that the term sheet is signed, due diligence will begin in earnest from the buying company. They are going to explore every nook and cranny of your business. “Nothing will go unexplored, so be prepared,” they said.
“Engage in your own due diligence, as well” Iseri explained. “Now is the time to understand their corporate decision-making structure in order to build alignment, prepare a mutual integration plan and most importantly, refine the deal rationale.”
You need to be just as proactive in gathering all the information you can to help build the case and continue to reinforce and push the sale through, Achler and Iseri urged. In many ways, this last piece of advice mirrors the spirit behind each of the six steps the duo outlined.
“Don’t sit back and let them manage the process,” Achler said. “Now is not the time to rest on your laurels. Momentum is good, but momentum alone won’t close the deal for you.”
