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.


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.

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.

As I noted in last week’s article, our company was tightly controlled and profitable. The beauty of running a business in this manner is that when it comes time to have discussions with a potential buyer it is very easy to answer their financial questions quickly and precisely. Additionally, when it comes times to consider whether you actually need an audit you can conduct frank conversations with your M&A firm and potential acquirer and seek their opinion. If your business is like ours everyone might agree that the expense and time required for an audit isn’t necessary.

In mid-June we received a follow-up to that first phone call. The investment committee from Riverside Capital, the PE firm working closely with The Mansell Group, had approved plans to buy our company. New meetings were arranged and our first in-person event would take place when they agreed to visit our office the beginning of July.

Of course we were still working with our M&A firm to ferret out other, potential acquirers. We had not yet received a letter of intent (LOI) from Mansell. There was interest, but nothing concrete. So, logic dictated that we keep on with our original plan. Run the business but continue seeking other acquirers. The challenge we were facing in reaching out to other potential buyers was that things tend to slow down in the M&A space during the summer. Vacation schedules impeded efficiency of communications.

Conversations with Mansell and Riverside, though, continued. Plans were set so that principals from both firms were to visit Seattle in early July. We met in our main conference room and then again for dinner, inviting some of the executive staff to meet our guests.

At this point our plans to have the business acquired were known to only five  people in the company and our attorneys. It is almost certainly advantageous to maintain the utmost secrecy about acquisition deliberations for as long as possible, no matter the size of your company. Discussions of a merger or acquisition, while exciting, can be disruptive to both employees and customers. That situation benefits only your competitors. So, keep it simple by keeping it completely secret.

We already knew that our potential acquirers had previously reached out to some of our customers, trying to find out as much about our company and our management team as possible. Similarly, a few days before our first in-person meeting, I initiated a small due-diligence exercise myself. It was important for Brian and me to know who might one day be running the company and taking over relationships with our employees and customers. I contacted one of Mansell’s largest customers with the cover that we were considering entering into a business relationship with them (which we were). I was able to get what I believed was an honest, candid overview of the company and how they treated their customers. I liked what I had heard.

Had I heard horror stories would I have attempted to shut down discussions with them? Yes, without question. What if a formal offer had been made – one that matched our financial expectations? Same answer. We had invested considerable time and effort in developing our reputation with both employees and customers and were unwilling to risk diminishing that. It was paramount that we find an acquirer that held similar values of professionalism and dedicated service toward our customers.

The beginning of August brought the official letter of intent (LOI) for our company to be acquired. We had just a few days to respond. At this point we engaged the law firm that would end up representing our interests through the rest of the process.

Of course we already had several corporate attorneys. But, this was something new. Something different. We had been given a recommendation to work with a firm well known for helping technology companies. Besides a sterling reputation, the firm’s offices were in our building. We already knew there would be lots of meetings, both telephone and in-person, that would require privacy. Convenience and reputation were only two of the factors that convinced us to use the new firm.

It was also important that we fully understood all the potential costs to be faced in selling the business. Our new attorney understood our expectations and their prior M&A experience (from a cost and time perspective) allowed them to estimate costs for completing the deal. For a relatively small company to be acquired it’s safe to estimate something between $50-$100K in legal fees. The buyer will have their own attorneys and, depending upon their size, might end upon spending a great deal more money to complete the deal.

We eventually agreed upon a hybrid, fixed-fee structure with our attorney. We also set up some simple ground rules related to what work would require review and approval by us before being pursued.

Keep in mind that you can ask your attorney almost anything related to the deal. It could be about taxes, deferred revenue, non-compete agreements, the closing process – literally anything. Be aware, though, that he or she will do their very professional best to answer your question. That might require extensive research. It might require consultation with their colleagues or other expert attorneys. Something you may casually ask on a Friday afternoon might deliver a beautiful, succinct answer the following Monday. But it may have required ten or more hours of work over the weekend. If you’re not careful and willing to control the process tightly legal expenses can become alarmingly large.

Discussing these things with your attorney at the very beginning of the relationship is critical to determine expectations and understand and agree upon limitations. You don’t want to start working only to be surprised by an outrageously large bill the first month.

One of benefits of engaging The Corum Group for our M&A work was that they had extensive experience selling high-tech companies and had successfully completed several deals with Seattle firms with which we were familiar. Two of their deals had been done with Google and some of that work had shaped a philosophy to do as much detailed work in the initial LOI as possible. Once we had received the LOI it was up to us to review it and suggest and request changes. Our initial response was due quickly, but the overall process of negotiating and finalizing the LOI took nearly a month. There was lots of back and forth and this is where the Corum’s deal prowess proved particularly valuable.

At the very end of August the LOI was signed and delivered back to Mansell/Riverside. From this point forward things would begin to operate in a more structured manner. Deliverables would be assigned. Dates would be set. We suspended all efforts to find other acquirers. Our course was set and our goal of selling our business to Mansell had been cemented.

Another in-person meeting was scheduled for September. This time Mansell would learn even more about the inner workings of our company. Source code would be shared (in a controlled setting); our data center would be toured; and we would begin the formal due diligence process where pretty much everything about our business would be exposed – in detail.

What does due diligence look like? How is it performed? For our transaction it began with a shared data vault that everyone could access electronically. Mansell and Riverside delivered a document detailing requests for information relating to our finances, our agreements and contracts (with employees and customers), leases and examples of marketing materials.

Almost all of our contracts and agreements were not only archived in paper but copied and saved as PDF documents. This proved to be a huge time saver. We literally completed our early document delivery tasks within a couple of days thanks to our having kept electronic versions of our materials.

Everything wasn’t perfect, though. One of the things we neglected to do over the years was centrally organize notes about all our electronic documents. While all of them were organized within specific folders, there was no quick and easy way to, for example, determine which customers had which versions of our sales agreement (we had three over the years). Or, in the case of employee documentation, which employees had signed invention assignment documents? Which had executed NDAs? We literally had to go through and read our documentation, whether on paper or electronically, to answer some of the questions we had been asked.

As the end of September approached everyone seemed to realize and agree that an October close, even on the very last day, was unlikely. We were concerned because we were trying hard to complete the transaction in 2010 before any changes to the long term capital gains tax could be made. Similar to Summer where M&A activity seems to temporarily slow down while everyone vacations, late Fall events can be hampered by weather and Thanksgiving Holiday plans.

At the end of the first week in October the stock purchase agreement (SPA) was delivered.  The first few days of the next week were spent reviewing the document with our attorneys and M&A firm. Early efforts to detail issues in the LOI proved valuable as the SPA contained very few new issues of great concern.

We continued to review and discuss the SPA while documents continued to be prepared and delivered into the data vault. As November approached we were literally weeks away from a closing event. It was both thrilling and exciting.

Once the SPA had been agreed to by both sides the mechanics of the close event started to be discussed in detail. How would the funding take place? What would happen to the cash in the business? How and when would the attorneys and M&A firm be paid?

On December the 2nd previously signed signature pages were released by both sets of attorneys. Stock certificates that had been held in escrow were sent by Fedex to the new owners. All that remained was to complete the funding event by initiating a series of well-orchestrated wire transfers. These would occur the next morning on the third, which was a Friday.

The new buyers had flown out over the weekend and were present when news of the event was revealed for the very first time to our staff Monday morning. Approximately the same time our meeting was concluding a previously scheduled email was instantly delivered to every WhatCounts customer using our own platform. At 10am that same morning a story appeared in TechFlash, a regional Technology Blog run by John Cook and Todd Bishop, describing the event publicly. Congratulatory calls and emails from friends, former colleagues, vendors and competitors started to arrive moments later.

Two exciting additional items were revealed that morning. The first was that instead of WhatCounts operating as a Mansell Group Company, Mansell would be rebranding and adopting the WhatCounts name. Second, Brian Ratzliff was invited to join the new Board of Directors.

#MBA Mondays

Comments (Archived):

  1. RacerRick

    So was it all stock or cash and stock? Not exactly clear.Great inside info -thank you.

    1. RacerRick

      Also did they agree to a break up fee?

      1. fredwilson

        i bet not. i have not seen break up fees in these kinds of dealsmaybe to cover deal expenses

    2. davidgeller

      It was all cash and there was no break-up fee.

  2. Darren Herman

    Thanks for posting this Case Study. Your series continues to rock (MBA Mondays) and the case studies add another dimension.

    1. fredwilson

      and i don’t have to write on monday mornings!

      1. Kenyan

        Admirable outsourcing :-)Thanks for the story.

      2. davidgeller

        I’m looking forward to reading next week’s column and being introduced to a new victim.

  3. Christian Brucculeri

    Great piece. Thanks.

  4. RichardF

    Are you able to expand the LOI a little more, David? You say that Corum’s deal prowess proved particularly valuable, can you give examples? Thanks v much

    1. davidgeller

      It’s hard to offer specific examples other than to say there are lots of little issues that we had no experience with whatsoever. So, being able to bounce questions off of someone that had done it many times was very important.

  5. Pat McCarthy

    A helpful read to see this laid out, and one thing that seems tricky here is having so many calls and long meetings over months without word leaking to internal employees and causing a distraction.When Right Media was acquired by Yahoo! there was some internal buzz and speculation based on so many Yahoo employees visiting the offices for long meetings with various executive team members. While employees pretty much stuck to their work, there was definitely a challenge to people’s focus and future speculation that occurred that would have been more of an issue had the deal not gone through.

    1. davidgeller

      One key is to keep the deal team as small as possible. If the business is healthy it’s already pretty darn busy, so there’s less of a chance that employees are preoccupied trying to second guess direction.

  6. ctbtj

    Thanks for taking the time to write this up, it was very interesting.Although the deal ultimately went through, did you have any concern early on that Mansell (or some other potential acquirer) might use the due diligence process to access information that would help them to compete against you? Was there a strategy for reducing the likelihood of that happening?

    1. davidgeller

      That’s an excellent question. We had certainly revealed a lot about the business and our technology. But, we weren’t that concerned about them turning against us if the deal fell through. Were things to totally dissolve, prematurely, I’m confident that both of us would have been able to continue operating with little or no material impact upon the other’s businesses or customer base. We both dealt with big, complicated software products and platforms and long-term customer engagements. It’s just not that easy to do bad things to one another, thankfully.There were times when some members of our team were reluctant to share certain technical and financial details with our potential acquirer. I worked to squash those feelings quickly. It was important to deliver a sense of trust to the buyer and, as I noted above, didn’t feel as if there was anything they could do with the information, in the near future, that would materially harm our chances of continued success if things fell apart.

      1. ctbtj

        Makes sense. In many ways, I think having strong technology and customer relationships can give you the confidence to be open enough to develop good partnerships – that seems to have extended to an acquiring partnership here.Thanks a lot for responding!

      2. calabs

        The complexity of the software made you feel more comfortable exposing yourself during due diligence? Do you feel like that creates an incentive for developers to keep things complex enough to be intimidating, but simple enough to change with the business?

  7. CliffElam

    Very useful!When we sold our startup I was able to find a good regional firm to handle the M&A for for a fixed $20K – but we only had a handful of customers and we’d already completed a due-diligence book for a VC. The company buying us spent a LOT more than that on their side as our attorney stuck them with all the weird stuff related to the buying company being in the UK.A good attorney is like a good CFO – you wonder how you lived without them.-XC

    1. davidgeller

      Sounds like your process was incredibly efficient and cost effective. That’s great. Our costs were significantly higher but everyone seemed pleased with the results. I do plan on doing some things differently the next time that I’m sure will contribute to greater cost savings and efficiencies.

  8. Charlie Crystle

    How did employees react? How are things for them now?

    1. davidgeller

      Employees were surprised when we revealed the deal to them three days after formal closing. I think, though, most of them met it very positively and were happy for our success and for recognizing that the company had suddenly grown in size and, now, had the potential to compete more effectively.There have been relatively few changes since then. The plan was always to allow the company to continue to act somewhat autonomously. I’ve heard, though, that our platform is being considered for use in the other divisions of the company and has the potential to become the dominant product.

  9. Steve Poland

    Are you and your cofounder still tied to the company for a set term?

    1. davidgeller

      We both exited but Brian was invited to be part of their Board of Directors and accepted that role. I don’t know whether I would have been invited to participate had I not been so involved nursing my other company Eyejot. Brian, though, is uniquely qualified to continue an active role in the email marketing space and will add a great deal of value to the new company.

  10. baba12

    I read this and I find that in essence the M&A process in general is an inefficient process. It takes so much time, money and effort to make it happen. Wonder if firms like USV when investing in a company would make some efforts to define how the company they invest in ( at that early a stage) could advise and also provide the templates for these companies to use as the basis of keeping records etc that would make a future M&A activity more efficient.Seems to me the long draw meetings/conversations are beyond the due diligence and is mostly about a agreement around price and power.Due diligence for a startup should not take months, if it does then I am guessing the process is broken and maybe you can put a “cliff notes” around M&A.If M&A activity is cumbersome and long drawn is it because it is managed by lawyers and MBA”s who are trying to find ways to milk a juicy udder.

    1. ShanaC

      There are reasons why the inefficiencies exist. It helps give time to the due diligence and have questions asked by the right people…I was working with a pink sheet which was trying to figure out what to do with itself after its CEO got caught in scandalous behavior. They functioned more like a startup. Had I not been pulling very quick all nighters, I would not have caught further shenanigans that the ex-CEO had left behind.That’s why- you can’t wrap that information up easily. It takes tons of time and energy.

      1. Leonid S. Knyshov

        But does it have to incur hourly rates in excess of very high numbers?This to me is an application of “security by obscurity”. My books can be audited in an hour, my corporate records are all in one place with secure backups worldwide.Time for due diligence should not be linked to inefficiencies, but instead be well-defined.

        1. ShanaC

          I agree, but wait until you see a train crash. You’ll realize that the excessive amounts of time have to do with those who traincrash because in that case, it has to do with needle in a haystack like hunts.

        2. davidgeller

          Most of the due diligence work was performed by our team without help from our attorneys – so there was no additional expense beyond our own time. Granted, the more time we spent working on the deal the less time we could afford going out and selling and winning new customers. Even though we were working toward an exit the business had to keep going and growing.Confirming that your financial numbers are accurate is, of course, easy – in most cases. Having someone agree to stand behind them and put their stamp on the fact that they’re accurate is totally different. How’d you make your money? Were the contracts you had with your customers correct? What’s your exposure to litigation because of bad documentation and bad contracts? What’s your tax liability? You’d be surprised how complicated it can become. At least, I was.

  11. Dale Allyn

    Great post, David. Thank you for taking the time to share your experience. And thank you, Fred, for facilitating it. The “Case Study” segments of MBA Mondays are a great addition.Looking forward to David’s reply to a couple comments above.

  12. Dave

    Interesting take. I’ve been on both the buy and sell sides a number of times–over 60 completed deals and literally hundreds of deals discussed at various stages. I actually find the company driving discussions with a strategic, even when a banker is involved, to be fairly common. Ultimately, you know the industry and the players and the strategics are going to try to reach directly to the company. The strategics want to hear about your company from you not through the bankers. In that case, the bankers can become more strategic advisors to help shape discussions/negotiations and can also step in to have the most difficult conversations (typically with a buyer’s corp dev group). In those circumstances, if you have outside investors, the bankers can also be very helpful for management and outside directors/investors so that everyone feels like they are getting a fair shake. There is less finger pointing by outside directors that management is taking advantage of their position, and bankers can help bridge internal gaps as the investors focus on maximizing purchase price and management focuses on long-term issues with the buyer.One suggestion for all VC backed companies or technology startups is to get a detailed set of M&A diligence lists with business, market, technology and legal diligence questions as early as possible in the company’s life (from day two is easiest if you can). Bankers, lawyers and buy side players all will likely share these with you. Your lawyers can typically provide generic samples from large buyers with limited cost b/c they just pull the names out. Then look at those lists, think of all the things you need to keep, organize materials accordingly or at least know where to look to pull things together, and periodically/quarterly update the responsive materials. It not only facilitates a sale or financing process, but will also help you avoid problems that cannot be fixed by keeping people focused on day-to-day issues that can creep up on you. As one example, what are the open source products you use, what licenses are they under and do you have any obligations to give code back to the community. A diligence process cannot increase your company’s value generally, but it can cut it to zero with deals dying, purchase price cuts or long-term escrows of large %’s of the purchase price.

    1. davidgeller

      Great comment!

  13. jpwoodland

    Thanks for sharing David and congratulations on the exit. How did you and the other insiders ground your expectations on price? Did you have a number in mind already? Did Corum provide a valuation to form that basis?How did you choose the five insiders who were knowledgeable of the deal throughout the process? Were they integral to the deal? A natural selection? One in the same?Lastly, how much time was spent between the two sides talking about how Mansell was going to run the merged company, and what positions WhatCounts leadership would retain?Thanks again and good luck with the next chapter.

    1. davidgeller

      We had a number and Corum helped us to articulate it. There wasn’t a lot of special treatment done here, though. It was reached based upon current and projected sales, EBITDA and comparable deals that had been done in our space. It could have shifted it the deal was a mixture of cash and stock, but ours was all cash.No one is ever 100% happy with the negotiated price. The key, I think, is for both sides of the negotiating table to share some degree of discomfort.

  14. Dan Wolchonok

    Great post, I loved reading it. Gives great insight into how long the process takes, why it takes so long, and how expensive it can be.I’m curious to know when price is typically negotiated. I’m not asking what the price was, but when in the process the acquirer typically offers a number, and when the negotiation around total number and earn-out takes place.

    1. davidgeller

      Some pricing is negotiated during early discussions and before the LOI is drafted.

      1. Sebastian Wain

        I am also very very curious about negotiation (beyond private details or numbers):i) How negotiation works on M&A? one thing is negotiating “in the small” and other negotiating big deals. I suppose that negotiating big/hostile deals is more related to perception than to concrete numbers or do you see/think that in the major part the final price is a “simple” multiplier range of profits/EBITDA/etc?ii) What are good resources about this kind of negotiation? Probably they are an exception and not a rule in M&A?I am thinking in deals like Google/YouTube.

        1. davidgeller

          Fred and others should weigh in here. For us, there were lots of things to negotiate beside the “big” number. They related to the escrow, non-compete agreements, accounting procedures and how certain revenue was recognized, how the working capital numbers were calculated – and a dozen other things that, on the surface, appear small but can be extremely important. Actually – it’s all very important and you can’t really brush any of it aside. I suppose that’s one of the reasons the process is long, complicated and requires good professional guidance from attorneys and tax and accounting experts.In case you were asking about the raw mechanics of the negotiation process – they typically took place through phone calls and redlining documents. Some of our documents went back a forth a number of times – and we were grateful for some of the sophisticated compare features our attorney employed.Toward the very end of the process both the buyer and seller can grow weary of the process (as is typical, I’m told). For us, there were certain points that we grew tired of refining through repeated legal review and, in a few cases, told our attorneys to, simply, stop and accept whatever state things were in – for a few particular points.There’s also, frequently, a back-channel discussion process that takes place between principals. I was offered the opportunity to reach out to the buyer’s CEO for issues I thought the attorneys were beating to death – without adding value. And, I exercised that option a couple of times.

  15. lushfun

    I wonder how long a full audit takes if the firm is mid-small

    1. davidgeller

      Expect an audit to take 4-8 weeks, if I remember correctly. You can rush the process by paying more. I know that’s a bit of a fuzzy answer, but it’s highly dependent upon the complexity of the firm’s finances and how well they’re organized (both physically and legally). Only a portion of that time, in most situations, is considered field work where the audit firm is onsite. Most of the work is done in their offices.

      1. JLM

        This brings to mind a suggested discipline for companies who are thinking about being acquired or ever going public — start having your financials audited a couple of years before you think you are going to need them.This provides a great springboard for movement and suggests a level of professionalism that makes a buyer more interested.Years ago I knew I was going to sell three substantial portfolios of real estate assets and just got used to the idea of having them audited at year end. I never actually looked at the audits though I made our CFO make each and every modification suggested.When I got ready to sell the assets I was dealing w/ pension funds, who could not draw breath without an audit, and they were astounded that we had 5 years of audited financials. We got three huge deals closed in 150 days from start to finish.

        1. davidgeller

          Excellent advice. I didn’t reveal, because there simply wasn’t enough space, that we had initiated a professional audit a few years earlier when we had considered taking on funding (which we never did). We had hired a regional firm that was well-known and, for the most part, did a pretty thorough job.

  16. David Clarke

    David: thanks for a disarmingly straightforward if (for the casual start-up voyeur) regrettably uneventful and somewhat generic account. You’re no Ernst Malmsten! I don’t know this space, but it’s striking that notwithstanding several reported acquisitions -including one of a listed company- you report that your acquirer was still only a comparable size (people, $, customers) to you at deal time. Did you do much financial due diligence on them? Do you have any nagging inkling that your apparent (and understandable) desire to monetize after ten long years led you to sell out in an asymmetric deal to a poor man’s CA? I imagine forking over the ca. $1MM minimum fee to your advisers hurt, too, given that you produced the prospect and there was no competition in the deal? It also seems ironic given last week’s well articulated and thoughtful VC-abstinence that you ended up engaging bankers…

    1. fredwilson

      what is your point of this comment? i don’t follow it

      1. David Clarke

        Compared to, for example, your recent Chilisoft case and to what seems to be a typically more volatile M&A experience, I found this to be a somewhat unemotional account of what appears an unusually uneventful transaction. It seems to focus disproportionately on administrative considerations– costing your attorney, keeping clean records and accounts, mailing stock certs. I”m not criticizing that, and it’s all useful advice, but it’s not especially informative as to the key dynamics of these processes. In addition, a very brief review of the acquirer suggests that their organic business was arguably inferior to WhatCounts’. If that’s the case, then David’s thinking around the deal (then and now) may involve more conflict, nuance and complexity than comes across to me in the account as presented. Other commenters have also asked about seller’s remorse, and how this is working out now for the employees. Flippant references to bankers aside, and respecting David’s right to finesse details, I’m just interested in more depth on some of the non-administrative aspects.

        1. davidgeller

          I appreciate your comment. It was difficult to write this piece in a way that was entertaining, provided useful information and accurately reflected more than six months of discussions – all without being in conflict with my non-disclosure agreement. There were certainly nuances of the deal that a better writer could have shared more effectively.I’ll try to add more color to the piece through comments over the next couple of days.

          1. calabs

            I for one really enjoyed the thoughtful, calm tone of your writing. I hope you continue to write about your experiences, perhaps in a blog of your own!

        2. JLM

          Having bought and sold more than my fair share of companies in my life, I would say what you have read is the account of a thoroughly well grounded and experienced professional who probably has a few more grey hairs and a bit more seasoning than the typical whiz kid.It just reeks of thoughtfulness, competence and professionalism to me.When you are going to the pay window, you do not get paid extra for drama.

          1. Tricia Salinero

            I agree that it was a thoughtful and appropriate digest of 6 months of long days, running your business in the face of 1000 daily questions from buyers, bankers and lawyers. Great job, David. I’m a tech banker to small companies in SV, and it sounds like you received good advice all around. I would suggest that you and Fred (and JLM?) perhaps put together a checklist for M&A 101 as part of the series.

    2. davidgeller

      I remember Boo.com quite well and their excesses and poor financial control influenced my perception of VC funding.Regarding financial due diligence – we did as much as we could with our “formal” acquirer and read a great deal about their PE partner Riverside that had over $3.5bn under management.

  17. claude

    Are you having seller’s remorse yet?

    1. davidgeller

      Not yet. Remember, the “process” takes so long that you sort of reach a mental state of acceptance well into it – and well before the deal closes. There were times during negotiations where we considered abandoning the process. But toward the end things progressed quite well and, at least for me, allowed me to become very comfortable with the situation.

  18. joewaltman

    Fred/David,Great post(s)…thanks a bunch for sharing.I am bootstrapping a company in a similar space and wanted to ask a question that is somewhat unrelated to the M&A process (my apologies).I am specifically interested in how you dealt with customers that were not totally delighted with your service; outages, delayed features, etc.thanks in advance,Joe

    1. davidgeller

      Great question. I’ve learned over the years to deliver as pleasant an experience as possible to customers. Winning their business is often the easiest part of the relationship. It’s retention that’s key – and the best way to do that is to treat them well, service their needs and quickly deal with problems when they occur.We had service level agreements (SLA) in our contracts with customers so any downtime would, potentially, incur costs to us. In the few situations where outages did occur we moved quickly to return our systems to their normal operating states and then followed up with phone calls and, if necessary, in-person meetings with customers. We’d be as transparent as possible about the causes of the outage and 9 times out of 10 customers were extremely forgiving. Our really big retail customers had all dealt with similar problems themselves.We were never thrifty when it came to providing SLA-related refunds to customers. Often, though, we would ask if we could provide them with a month of service for free at the end of their contract and that was often met favorably.In general, though, it’s good time to ask a dissatisfied customer what their recommended or preferred remedy should be instead of offering one proactively. You’ll often be surprised to find that what they think is required to set things right is often simpler and less expensive then you had originally imagined.

  19. Mark Essel

    The detail about time lines and how you chose to handle it (complete secrecy/need to know) are much appreciated. I understand the concept of the sale of a company can be extremely distracting to the team and it’s customers, but it must have been difficult to conceal such a major event from your team.How would you handle your company differently (besides the centralized database of paperwork)?How did the team take it?How about the customers?

    1. davidgeller

      Keeping things secret was critical. It was difficult, but fundamentally important. I wouldn’t have changed that aspect of our experience at all.On the day we announced our deal to the company I asked everyone who had known about our plans. Who suspected we would have arrived at the point we were at. Except for those that we had specifically briefed, no one was aware of the deal. That told me that we were able to keep things private (which was good for our company and for our customers) and that employees were focused on serving our customers completely. That was rewarding to learn.The team was shocked and surprised but the whole process was handled so professionally, thanks to careful planning and Mansell’s guidance that things progressed extremely well that day and the continuing several weeks. Customer reaction was also favorable.Mansell had acquired several smaller companies before us and had become quite experienced in handling these types of events. They had setup a page designed specifically to guide customers through the process: http://whatcounts.mansellgr

      1. J.R. Sedivy

        Hi David – Beyond the advantages of the process running smoothly from a legal and professional standpoint were there any disadvantages from secrecy? Did any members of your team, employees, or customers express disappointment by not being informed prior? Was trust lowered or otherwise affected?I realize that secrecy and transparency are a tricky balance but am curious if there were any intangible team side effects to this approach. Thank you for sharing your experience!

        1. davidgeller

          I don’t think there were any specific disadvantages to remaining secretive. I know of another startup that was recently approached by a buyer. Their management team shared the information with their team. What ensued was lots of speculation and lots of questions – despite the fact that the potential change was months off into the future.I’m not suggesting transparency isn’t a good thing, but sometimes, especially in an acquisition or merger, where the outcome isn’t truly known until the very end, it’s best to reduce confusion, speculation and distractions.Also, a company that shares too much information, too early, potentially opens itself up to unwanted litigation – potential actions by former employees, vendors, etc.The selling management team needs to stay focused and, in my opinion, sharing too much, too early, make their job harder.

          1. J.R. Sedivy

            Thanks David for sharing your experience as well as the experience of the company who took the alternate path. Your articles and comments really gave me an appreciation for the length and difficulty of the process; there is no doubt that the team must remain focused during this period and minimize distractions.

  20. Matthew Tucker

    Terrific post David. Having done this a few times in VC-backed companies, I commend you for a paragraph that couldn’t be written about VC deals, “Had I heard horror stories would I have attempted to shut down discussions with them? Yes, without question. What if a formal offer had been made – one that matched our financial expectations? Same answer. We had invested considerable time and effort in developing our reputation with both employees and customers and were unwilling to risk diminishing that. It was paramount that we find an acquirer that held similar values of professionalism and dedicated service toward our customers.”

    1. davidgeller

      We were lucky to have few constraints placed on our behavior.

    2. Kyle Comeau

      “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.”In a venture-backed situation, what would the VC typically advise you to do? If you have already initiated a targeted auction, are they going to pressure you to continue through bidding – even if one group comes forward ready to pursue a negotiated sale?While VCs always want to go for the big win, I imagine they would become more conservative when it comes time to realize their return.

      1. fredwilson

        in the market we are in now, the VCs would have a hard time blocking the dealthat has been done in the past and the VCs who did it took a hit totheir reputationswhat is more common these days is the VCs will offer the foundersliquidity as an alternative to a sale

        1. Ravi Trivedi

          What about board members’ fiduciary duty to minority shareholders? Does entering a negotiated deal vs. a auction process increase the chance of a shareholder lawsuit from a dis-satisfied stockholder.

  21. ShanaC

    Tips on choosing vendors for the banking, the legal?What kind of questions do you think have to be asked to your attorneys? (Considering you are talking about how to control legal costs)Anything you would have changed in the process?

    1. davidgeller

      When we were considering whether to use the new law firm or our existing corporate attorneys the following factors were considered: expertise, reputation (particularly in the M&A space), pricing flexibility and geography. Their physical proximity to our offices proved invaluable. We wouldn’t, though, have made a decision with any one of those. It was a combination of them all that influenced our selection.For the M&A firm we shopped around extensively but reputation was the guiding factor. The Corum folks were extremely well known and several friends had known and worked with them.For my company Eyejot (http://www.eyejot.com) I’ll be looking to both these firms for help, again, when I go shopping sometime in the future.

      1. ShanaC

        Thank you. And Good luck with the new venture.

  22. shafqat

    Without disclosing financial details, can you say how you guys converged on a price? What was that process like?Assume the price is X, how does did you guys go about figuring out your internal valuation (was there a middle case and a dream scenario?). And then how did the other side do the same? If those numbers are far apart (I guess at the LOI stage), is there a lot of time spent going back and forth?Fred – feel free to answer this from a more generic perspective from your experience…

    1. davidgeller

      There wasn’t a great deal of price negotiating. The offer was reasonable and the terms favorable. It was as an all cash deal and there was no debt to work through. Some of the negotiations that did occur that impacted the final price surrounded the escrow terms and working capital.

  23. hatchbrands

    Great post

  24. JLM

    David —What a great story, told in a calm and clear voice. The calm way that you approached and executed the transaction says volumes about your judgement and poise. Of course, you had been in the deal for a long time and did not have your pants on fire.What I want to know is what did your wife say when you went to the pay window?I hope you bought her a very expensive ring or bracelet to memorialize the event.How did it feel being unemployed the day after the closing? LOLThanks for a great lesson.JLM

    1. davidgeller

      You have to appreciate that Brian and I had already enjoyed some professional success with the business performing well over the years. Lots of employees, and of course management, were frequently given bonuses. We had also experienced a positive stock event when Starwave merged with Infoseek and was acquired by Disney.So, when this funding event took place we were pretty grounded. We were pleased the event had completed, but, at least for me, there were no big celebrations. Life goes on. There was still school the following Monday (for my daughter) and the family dog didn’t notice anything out of the ordinary.I returned to work immediately so that I could grow Eyejot, a company I started in 2007. It’s the best video mail platform with huge potential but was starving for my attention this past year.

  25. Yalim K. Gerger

    Did the employees get anything out of the deal?

    1. davidgeller

      Some did through phantom stock that they didn’t know existed. I got to play Oprah when I shared the news with them. We were able to use some of the financial buffer we had maintained for things like this. Throughout the years I believe we were generous and compassionate employers.

      1. Yalim K. Gerger

        If all they got was compassion, that isn’t much. :-). Overall what % of the deal was distributed to the employees?

        1. davidgeller

          Yalim – work for a company with little compassion toward their workforce and then work for one that truly cares about their welfare – then tell me if you think it’s a lot or “isn’t much.” In our case, some employes were rewarded at levels similar to what c-level execs would get coming in at the founding stages of a company. We weren’t cheap or greedy.

          1. Yalim K. Gerger

            David, it was just a joke. :-). I am sure you did the right thing. I am just trying to figure out what the appropriate level of compensation for employees is in your and Fred’s view for such a circumstance and whether having no VC’s around effects the way employees are treated.

  26. Stephen H

    We read your article with interest and would suggest that if you want to learn more about the whole arena of due diligence you should read Due Diligence for the Financial Professional, 2nd edition by L. Burke Files. It is a well written guide to the thought process and not a book of mindless checklists.

  27. Jon Katzur

    Thanks for writing this- really interesting to hear what it actually feels like to go through the process. Quick question: I could tell from your post last week how much you cared for your employees. When you are getting acquired are there any safeguards or agreements you put in place involving them? For example, are they staying in Seattle or moving to Atlanta? Also, you mention the success of keeping the process secret, and their shock at the announcement. How did you present the deal to them to avoid causing any potential confusion or worry? Thanks in advance for your response!

  28. seankelly

    Fred, if the firm was USV backed, would the acquisition play out any differently? Given David only did this once and you many times.

    1. fredwilson

      i don’t think it would have played out much differently

  29. reece

    Way to get the deal done!These M&A deals are so involved and it’s great to learn about the process.Really appreciate you sharing here, David.

  30. dougan

    Candor. Thanks for this article, David. Congratulations.

  31. Hesky

    first -Dave congrats former partner 🙂 very happy for you and Brian this was a great read!! Fred if it makes sense I can co-write a post on the merger of Dailyshopper and CrossMedia service ( the precursor to the sale of the combined entity,Shoplocal to Gannet, Tribune and Knight Ridder) with CrossMedia then CEO Brian Hand. The interesting part about our merger is that we were dead on competitors with lots to hide and even some lawsuits against each other. In our market we had roughly 25% of the online circular market and CrossMedia had 40% – the combined entity would have the majority of large brick and mortal retailers in the US as exclusive customers creating what we thought would be a local shopping powerhouse ( our buyers certainly thought so as well 🙂 ). It raised a lot of interesting issues but the bottom line is the merger turned out like the right thing- may be a story worth sharing…

    1. davidgeller

      I’ve love to read that story Hesky!

    2. fredwilson

      email me at fred at usv dot comi’d like to talk some more about this

  32. Deirdre

    David- Really appreciate the post. Excellent story. I also enjoyed reading last week’s lead up– love the approach you took to maintaining a 6 month employee salary reserve. What is your general philosophy toward employee equity and how did it play out with respect to the acquisition? I tend to favor broad distribution of employee equity as I appreciate fostering an “ownership” culture in a business. On the other hand, my guess is that having every employee be a shareholder can create complexity in the sales/acquisition process from both the buyer side and with respect to maintaining confidentiality. Would appreciate your thoughts.

    1. davidgeller

      If my next startup takes external funding I’ll initiate an option pool. If it doesn’t, and I design it to grow quickly and exit within 24 months (a model I’m trying to follow) I’ll keep it closely held. However, I’d do my best to provide competitive salaries and deliver 100% of the employee healthcare and transportion costs, and and other attractive benefits. Then, if the entity were to be successful I’d reward those folks that performed in an exemplary manner.

      1. Eric Kennedy

        David, thank you for sharing so much detail. It’s great to read Seattle startup success stories.Given how much time and money the sale process consumed for WhatCounts, I’m curious why you’re trying to follow the model of the quick flip for your next startup? For me, my next venture is going to be something I’m really passionate about and would be happy doing for 20+ years. (I’ve identified the idea but still have work to do at my current company before moving on.)

        1. davidgeller

          I’m more interested in building the core technology this time and allowing other people with more experience to build and grow the service model around it. I’m no less passionate but have a shorter attention span and want to touch more things.