Selling Startups

I sold a travel company during the pandemic. It is the hardest thing I have ever done. We saw a huge drop in revenue- from 2019 to 2020 from 100M in annualized travel to around 10M. I thought I’d outline the process of a sale as a resource, as well as add some pointers so you can avoid the mistakes I made. Also, the book Magic Box Paradigm goes into depth about some of these topics. I broke down the process into steps:

The Set-up

1. Make a list of everyone who could ever want to maybe think about buying your company. For us, we listed all travel companies, any sort of company we’d ever partnered with -ERPs, Expense, ATS, and more. When we were done, we had a list of 70+ companies, from big travel companies, to really long shot companies like Zoom.
2. Prioritize who you would have the best likelihood of success with. Start with people you’ve already built relationships with. In our case, we made a spreadsheet with the following criteria: P1- likely to buy with existing relationship P2-somewhat likely to buy, existing relationship P3- Could happen, no contact P4- Long shot. We did personalized emails to those players that we knew, and we used this template for cold outreach. Make sure that for each scenario, you have an idea of how you are positioning the sale. The question you need to answer is why your company, and why now?
3. Opportunity Exploration. In addition to outreach for acquisition, I also scheduled catchups with people that I knew just to brainstorm about ideas on what to do or opportunities during this really difficult time. Nearly everyone I reached out to agreed to meet, and one of those companies actually ended up buying us. I also time boxed this into a two month period. This is very important to do as it creates time pressure for responses- you need to create a finite deadline in which to complete a transaction. The best way to think about it is as follows: can you run the company in a reasonable manner past that time period? Define your parameters of what is reasonable to you- the answer is often not black or white here. If the answer is no, then the opportunity cost of continuing past the time box will likely be extremely high.
4. Investor Management. I spent a fair bit of time managing my key investors expectations. I kept them in the loop every step of the way and we had bi-weekly, if not sometimes weekly board meetings in the weeks leading up to and during the acquisition process. During these meetings, I communicated the following in ALL meetings -a) KPIs/state of the company b) state of industry c) any big updates -(LOI/terms sheets on the table, buyers we were talking to) d) Potential scenarios and outcomes. The key outcome you want here is that your investors support your decision so you can come to a mutually agreeable conclusion. I also had slides for every meeting detailing all major decision points.

LOIs and Term sheets

“If you only have one buyer, you don’t have a deal.” -Bill Phelps, CEO of Wetzels Pretzels, Blaze Pizza, and Dave’s Hot Chicken.

The tricky thing about this is that most people in the situation is there is quite a bit of time pressure and very little time to figure out what to do. Here is a breakdown of how to run the process, assuming you don’t have a forever timeline (which we at the time didn’t.)

1. Get an LOI. This creates urgency for every other buyer, even if the LOI aren’t at terms you (or your investors) are happy with. I am a huge fan of Xenon who sent us our first LOI. Although the terms aren’t what venture investors seek (existing team keeps proceeds, investors don’t receive a return) their process was as painless as possible for an extremely difficult situation. They were professional, precise, and did exactly what they said they were going to in a defined timeframe. At the time of the sale it was clear it was time to exit the company- if we had tried to keep it running we would have been doing a disservice to our customers and ourselves. Over the previous 12 months, I had done 3 rounds of layoffs, watched the industry evaporate and was having an extremely difficult time retaining the team.
2. Define the shopping period, and shop the LOI. I went back to anyone I’d ever spoken to in the past, and broke through to some new players as well. It also made players who were already in the process be decisive and put them on a timeline. At this point, we also sent out cold emails stating “ we have an LOI from someone in your space.” We contacted all viable buyers. All in all, we contacted over 70 companies. Document the whole thing.
3. Decide on a path, and don’t look back. In our case, it was to take the offer that is right for the company as a whole. My investors pushed for Travelperk as the buyer, while Xenon would have been the best outcome for me due to the quick exit/commercials, and we had a few acqui-hire opportunities that would have been best for the team. In the end, we decided to do the best thing for everyone involved.
4. Make sure the term sheet has all the conditions you must have before signing. One of the biggest mistakes that we made was that rushed the term sheet signing (I was ending the shop period on the LOI, and so in our case it was necessary, but would not do this again. If I could go back in time, I would have signed the other LOI as it mitigated the risk of no deal being done at all. ) Two things to watch out for ahead of time would be the amount of diligence and exclusivity period. Also it is typically in the best interest of the seller to have a short shop period, so that the buyer has urgency to complete diligence and close the deal. I would recommend a 30–60 day no-shop maximum (and eliminate the no-shop in its entirety if at all possible.)
5. Hire a good lawyer. Negotiate the terms beforehand. We hired Litwin Law and asked for a flat fee due to the nature of the deal. They were absolutely awesome.

Note: It is normal for buyers and sellers to have a lack of alignment. What will make the deal successful is if there is enough alignment between the two parties to get the deal done.

Get Wen-Wen Lam’s stories in your inbox

Join Medium for free to get updates from this writer.

Remember me for faster sign in

Diligence

1. Prepping the Data Room. You should start this far ahead of time, as it is very time consuming. All buyers will need a basic (and oftentimes a more extensive) check list of items. A short list of things you will need to provide going back to the inception of the company:

All documents related to the company (Incorporation, Cap-table)
Financials
Customer contracts
Data about the company
Employment agreements PIIA agreements dating back to the beginning of the company
A bunch of other things that you’ve completely forgotten existed

2. Agree beforehand on the amount of diligence that is going to happen. For small deals, you can and should negotiate this: you can limit diligence, particularly if you are on a timeline and have multiple offers.

Closing

1. Get a full understanding of the process and what is needed. Since it was the first substantial acquisition on both sides, I think we both didn’t know what to expect. I wish I had spent time going over with the lawyers step by step what needed to happen in our specific case. There was a lot I didn’t know, like the difference between the mechanics of an asset sale vs. a reverse merger vs. an acquisition. On the Friday before close, both parties thought we had everything done when we were actually missing a pretty critical piece to close (which would not have been needed in other scenarios.)

The People Part

This probably goes for more than just acquisitions but these guidelines are important.

1. Work with people that you like and trust to guide you through the process. Ask for help. I reached out to my investors asking if they knew anyone. I also leaned on friends who were going through the same thing at the same time and asked them for advice.
2. Try to prepare all stakeholders as much as possible to the closing. We had a ton of angel investors that I didn’t do a great job of this with- mainly because I wasn’t sure the deal was actually going to close until a few days before. If I could go back in time, I would have communicated with them more frequently and effectively throughout the lifespan of the company and acquisition process.
3. Hope for the best, but expect the worst. People have all sorts of strange behaviors in these type of circumstances. Try to communicate the outcome as much as possible to everyone involved. As such, protect the company and yourself as much as possible, document the entire process, and get D&O insurance.

As a final note, I found that psychologically, the best way to approach the sale of your company is to think of it as something you just have to get done. As a founder, selling a company is naturally an emotional time. You are letting go of something that has been a large part of your time, life, and identity for some period of time and its healthy to acknowledge the loss.

Last but not least, I would like everyone who helped me through the acquisition process. A special thanks to Pete Van Dorn and Dino Zaharopolous who were there every step of the way, and my fellow entrepreneurs in travel - Chris Yeh, Ethan Bernstein, and Diego Saez-Gil who gave me amazing advice throughout :)