Best Practices When Selling a Business

Best practices during exits

As a founder of a business, you always need to have one eye on the exit, and so I had a list. I had a list of all the different companies that could potentially buy Work Market, and I made it my business to reach out to a head of Corp Dev or Strategy every time they came through Manhattan. 

I want to stay at the top of their mind. I want to know what they're thinking about, what they're looking for. Because it's very important. And that being said, you know who was not on that list? ADP. ADP was not on the list of companies so I was not in touch with them. 

Thinking about an exit

Well, I will say that corporate finance outcomes are very difficult to manufacture, much like ADP not being on the list of companies I thought would buy us. And if you run a good business and you have customers that love your product, the corporate finance outcomes will take care of themselves. 

So without question, your prime focus needs to be there. That doesn't change my statement that you should keep one eye on what that exit may be, but almost all of your energy needs to be on making sure that you're building a business and that you have happy customers. 

Happy customers tend to solve most problems, and if you've got happy customers and you're in a large enough market, the corporate finance outcomes will find you much as ADP found us.

Remember that keeping in touch with heads of Corp Dev and Strat is not just about your exit. 

• You want to know what they're thinking. 
• They're talking to all the players in the market. What are your competitors up to?
• Who do they think is doing really cool stuff? And let's go take a look at them.
• Who's getting funded? 
• What kind of things are happening? 

They are the best keepers of that information. And so that, and a host of other reasons, in my opinion, it makes sense to stay in touch with those people.

When to start reaching out to corp devs

I did it on Google Docs. I shared it with my investors and advisors and asked for help. I didn't pretend that I knew everybody. I started that list on day one. And it's not just about asking them to buy us. You should also understand the strategic initiatives of your potential buyer who is a big company in the space. 

Even though they don't end up buying you they have all this information that you really want as you are building your business because these are the important players in your space. 

Kison: You make a good point on how this aligns with partnerships as well, and that this is just a lot of strategic initiatives in general. I can see that being a good path and direction of thinking and identifying these companies. Was there any particular means that you had to identify them that worked specifically well, or do you just naturally encounter those companies?

Identifying key players

If you're building a company in a space, you should have a pretty good sense of who they are. We don't build these companies in vacuums. You want to always be talking to everybody as much as you can, as often as you can. 

You do not have a monopoly on good ideas. You do not have a monopoly on what the best way to do anything is, or where the right product is, or pricing. Have conversations. If your idea is so fragile that sharing it damages it in some way, you have a terrible idea and you should not build that. 

Ideas are easy. The will to execute is hard, and so talk to as many people as possible and start to build up that knowledge base if you don't have it today. But I'm going to guess that most entrepreneurs have that knowledge base. You don't go and start a company in a space you haven't thought a lot about. You haven't researched and done your homework.

You're there to learn from them, but they're there to learn from you. The heads of corp dev also wanted to talk to me because I always build cool things in the gig economy space. 

Engaging with investors

Look, investors want to be value add. We were unbelievably fortunate, and I've been in almost all of my ventures to have great financial partners that aren't just writing a check and walking away, or asking for an update every week. 

You want investors that are right in that middle that are willing to help if you need anything and will check-in once a quarter, whether that's a board meeting or an investor update.

And so I've just been very,very blessed with people that have been unbelievably helpful. They have opened their networks and their experiences with me and my team, and so they were unbelievably helpful in opening doors, making intros, and coaching. 

If you want them engaged, just ask. Every board meeting had a slide for our asks. We would show them:

• The things that we are struggling with in terms of intros. 
• All the companies we're struggling to get into that we think would be great customers. 
• All the strategic partners we're struggling to talk to who can make intros. 

And what I always would do, is send the board deck out a few days before the board meeting. If you were spending your time in a board meeting, reading a deck to people, you are wasting everybody's time. 

Send the deck out a few days before, let them read it. The first half hour of the meeting should be about questions they have on the materials you gave them. And then the rest of that time is about the challenges that we are facing, and ask for their advice. That's what a board meeting should be. 

So we’re always sharing our pipeline, both from a partnership standpoint and a customer standpoint. Here are companies we're trying to get into. Here are customers that are on the one-yard line. If they know anybody inside those companies that can push this over, that'd be great. They all want to help. They're all certainly aligned in incentives to help. They want an outcome for this company too. 

Giving them the list beforehand will give them time to research and look for introductions. We try to make it a competition of who can introduce the most and that makes it fun. 

The path to being acquired

One of the lists I keep is people that invest in the future of work because it is a space that I have spent a lot of time in. So certainly, I have seen a lot of companies, I have friends that have started companies, and people always come and they ask for advice. 

I'm very slow to give advice because advice without the proper context is not helpful. So I would always say that I just learned about their company, and I don't have anything constructive to say. But what I can do is introduce them to some people who may want to help in their next round of capital. 

I always tell founders that they should go talk to various series investors. Understand what gets them excited, even if they're not raising capital. And so I read about ADP and ADP Ventures, and I was interested that they had a venture arm. 

And so I reached out to the head of ADP ventures, cold email via Linkedin. He responded and we got to know each other. She ended up visiting us and I showed him how the work market works. I gave him a demo and gave him a talk about the future of work. We shook hands and I thought I'm never going to see him again. 

A month later he came back with a friend and asked to see the demo once again. And then a few months would go by and he would come back with more people. And it happened again and again and it went like this for a year.

And then one day he wanted to come back with 30 of his colleagues and I just couldn't take it anymore. I told him he can't come and I feel like he's just wasting my time. And then he told me that he has interest in buying the workmarket. 

They were very discrete at first because they were doing a lot of research. They were meeting with many entrepreneurs and talking about new stuff. 

Tips for Outreach

Currently, LinkedIn is very difficult from a noise standpoint. It would be much better if you have warm intros from somebody you know. I personally answer 100% of the warm intros we're friends of mine want me to talk to a particular person. But I do not respond to blind reach outs. 

But if you have no choice, cold outreach should be three sentences max. Get to the point. 

First conversation

So what happened next was that the president of ADP took me to dinner. We were having a lovely time and suddenly he said they'd like to make a formal offer. He took out a piece of paper, put it on the table, and slid it across. 

And even though I wanted to jump up and dance, I told him that I will inform my board and I will get back to him in due course. I am just one member of a five member board of directors so I had a fiduciary duty of informing them before making a decision.

After hearing the offer we just had decisions to make.

• Do we hire a banker or not?
• Do we invest more money in the company and go for another 2 years?

We ended up selling the company and hired a banker which I was behemothly opposed to. I don't think bankers can add any value because I can do what they do. I am a former M&A banker who has a lot of relationships with heads of corp dev. Why would I pay someone millions of dollars when I can do what they do? But I got out voted so we hired a banker. 

Key people when executing deals

Junior bankers adds huge amounts of value when getting deals done. Senior bankers, if they can introduce new players, will be a huge asset. But in our deal i knew everyone which is why i didn't think senior bankers were necessary. 

We already have our legal counsel and so we used to same one. ADP on the other hand had thousands of people which shocked me. They are one of the most well-run companies in the world and they have to be perfect all the time. But that doesn't work in an M&A process. 

They almost overwhelmed me and I couldn't believe how many people were going to my office during diligence. 

Negotiating Law firm prices

I've never been a fan of hourly rates. Never have, never will be. I always negotiate for fixed rates. I always ask what they think is a fair fixed price to get this done. I don't want the notion that they can bill me every call, and that they can spend as much time as they want on a single task and bill me. 

Negotiating LOI

We pretended that the process was more robust and that there were people chomping at the bit. Before they actually made their formal offer we had just but a company that had increased our revenue 30%. We are now bigger so they should pay more.

That is what ultimately drove the most incremental value out of the deal and there wasn't a huge amount of back and forth. I always thought their initial offer was fair and then when they increase their offer I feel like we have pushed these people as far as they're going to go. 

You are not getting anything more and we are now resting them walking away because ADP is not very acquisitive. They don't buy a lot of companies and they are not very comfortable doing this on a regular basis. So it was just around 2 rounds of back and forth. 

One thing we negotiated hard on the letter of intent was the working capital adjustment. I must admit I did a bad job negotiating this and it ended up costing us six figures. 

Confirmatory due diligence 

During confirmatory due diligence they came in and they had a bunch of opinions about my business. I remember one of their lawyers told me that I needed a banking license all this time. And I gave him a list of all the reasons that we don't. 

There was also a big conversation around sales tax. We were not charging sales tax, and they thought we should. So I had to spend one hour to walk through 30 people, the logic of why we don't charge sales tax. They deliberated for another hour and finally agreed that we don't need to charge sales tax. 

I don't doubt that they do amazing work and I don't doubt that they are necessary. But they have a very specific point of view and they have a very risk-averse approach for their clients. 

Fight like hell for your business because you've been building it. You know your business way better than they do. You've studied it way longer than they do.

Also always assume that the deal won't happen. Protect your team as much as possible because they have a business to run. There is still that probability that the deal wouldn't happen and you need to be ready for the day after. 

Communicating with employees

The senior people we're really the issue, But the same is true for everybody. You go to a startup because you want a lot of a take it and their lottery tickets all get paid. The next step would be to work for a big company and there's no more lottery tickets. 

And the one thing I knew have and is the day the deal got announced every single person got a hundred calls from recruiters asking them to work for another startup and get another lottery ticket. And so keeping them was a challenge. 

Before the LOI, the only people who knew about the deal were the board and me. And then when the letter of intent came I started looping in the executive team, the hr team, the legal team and then the entire accounting and finance team. 

Announce day

During announcement day, I knew that most of my people don't want to work for ADP. But i told them that they should view this as being acquired by google or amazon. They are a great technology company with a group of technologists where they can all learn. 

We all built the product with bubblegum and duct tape, and held it together when it fell apart. ADP is one of the largest, most well-run companies on the planet, And they should want to stick around for at least two years and see how they fix the product and scale it. 

If they are able to learn that skill everybody will want to hire them. So most of my people stayed, we had retention payments and a very generous program. I made sure that everyone got the same retention package. 

Integration

ADP did an excellent thing and put an executive as my number two. She would shadow me to learn how I ran the business. He would keep all the ADP people away from us and for the first year, I ran the entity as if we were still independent.

On our one year anniversary she took over and became the GM and I was just there to support him. Focus more on the customers giving speeches and handing things that and i enjoyed it.

It was difficult at first because I am not the one making the decisions anymore. During executive meetings, everyone still looks at me and I tell them I don't have any authority anymore. They should look to the new GM. I will be leaving on a certain date and they should be all accustomed to the new norm.