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A lot can happen in 90 days. I lost my first acquisition offer, got married, almost lost another offer, persuaded the buyer to stick with it, and finally sold my first business. At any moment, the right shove from the wrong direction might’ve killed my deal. Thankfully it closed.
Five years later, I now realize many of my acquisition mistakes were preventable. No acquisition is perfect, but preparing properly can help you avoid most issues. My second exit went smoother because I knew what to expect. I learned that lesson the hard way — but you don’t have to.
With my experience as a guide, I hope you can avoid these common acquisition mistakes and secure a better outcome. Are these lessons foolproof? No, but they can help you skirt preventable mistakes that might doom your acquisition before it begins.
Related: How Much Time Do I Need to Sell My Business? First, Consider These 7 Factors.
1. Run due diligence on your own company
Buyers conduct due diligence on your business to minimize risk. Due diligence goes through several phases, getting more rigorous as your deal matures. For example, a buyer might accept a P&L when making an offer but will ask for much more financial data in the closing stages.
The private equity firm that acquired my first startup, Bizness Apps, asked for dozens of spreadsheets during due diligence. It wanted data on everything from how often our biggest customers churned to how many support tickets we served.
Luckily, I tracked that data while building the company. If I’d had to scramble for it while closing, I might’ve appeared messy or disorganized, threatening my deal. Avoid this by running due diligence yourself so you’re confident entering the process with buyers.
What does due diligence look like?
- Collecting legal, HR and accounting documents into a single folder.
- Periodically pulling numbers on revenue, churn, web traffic and more.
- Building a confidential information memorandum (CIM) to market your business.
Research common due diligence questions, or ask buyers what they look for before closing a deal. Then collect answers and evidence inside a data room (a shareable, online repository like a Google Drive folder) for easy access later.
2. Build early relationships with potential buyers
I knew I wanted to sell Bizness Apps when I founded the company. Only two exit possibilities existed back then: selling through my connections or a broker.
A broker would market my startup and connect me with potential buyers in return for a cut of the purchase price. That didn’t sit well with me, so I cultivated potential buyer relationships myself.
My shortlist consisted of people and companies we’d worked with and private equity firms I thought would be interested in my company’s progress. Every quarter, I shared updates so they could watch our success. I reminded myself that everyone we worked or networked with could potentially acquire Bizness Apps later.
Did it take more time and effort to keep those relationships going? Yes. But when it was time to exit, one of those private equity firms offered $30 million for 70 percent of the company. The deal ultimately fell through, but the offer probably wouldn’t have been as high had I not fostered a relationship with that firm.
If you’re working with other B2B businesses, suppliers, firms or entrepreneurs, consider them a ready-made buyer pool.
Related: 6 Common Pitfalls Small Business Owners Must Avoid When Selling Their Business
3. Sell at the right time
The best time to sell is when your business is doing well — when it’s making money, growing fast and delighting your customers. You might want to chase more growth and a higher valuation, but disaster can strike at any moment — like when Apple changed its developer guidelines and almost put Bizness Apps out of business (we recovered, but you never know what’s around the corner).
Don’t expect buyers to get excited by falling revenue and customer losses. Show them your business’s current and potential success by selling at a high point.
Timing plays a big role personally, too. If you’re overwhelmed, you can’t commit to the selling process. Selling your business is not a casual task you can knock out on the weekend. You need time to plan and manage your acquisition to land the highest price and best terms.
I dropped everything to complete due diligence requests within minutes of the buyer emailing me. Even at my wedding, mid-deal, I sneaked away to respond to emails. I’m not saying you should be that committed, but letting hours, days or weeks pass between messages will inevitably slow — and potentially kill — your deal.
4. Value your business reasonably
First-time sellers (myself included) frequently overvalue their businesses. When I launched Bizness Apps in the late 2000s, I believed that all SaaS founders valued their businesses by multiplying their revenue by 10. That’s what I read in the news headlines, at least.
But in reality, only the rapidly growing businesses with negative churn and high net revenue retention use those multiples. I soon learned that valuations are complex formulas dependent on several variables. Founders rarely close for the full amount they value their business for.
Try to be realistic about your expectations. It’s okay to leave room for negotiation, but buyers won’t entertain a number you can only back up with your emotions. You’ll have to justify your asking price with data and evidence. And any red flags found during due diligence can ultimately hurt your valuation.
Think of valuation as a starting point for negotiations, and go from there.
Related: 7 Preparation Essentials for Selling a Business
5. Speak to multiple buyers at once
Talking to multiple buyers ensures you don’t miss a great offer and gives you leverage with your frontrunner. A solo buyer can delay the deal and make ruthless demands. Instead, create urgency by involving multiple buyers to better your price or terms.
It’s not a matter of if your business sells but to whom you sell it. Let your buyer know they’re one of several you’re considering — create that FOMO. If you’re only talking to one buyer at a time, they’ll feel no urgency to strike a deal, and you’ll start losing leverage.
You might also consider listing on a startup acquisition marketplace like my company, Acquire.com, where you can connect with large, qualified buyer pools to generate buzz around your business.
6. Conduct due diligence on the buyer
Who said due diligence was only for buyers? You’re entrusting years of hard work and a team of faithful employees to the buyer. Are they equipped to handle that?
Before I sold Bizness Apps, I called up the CEOs of the past ten companies my buyer acquired and asked them how the buyer approached the deal. Any issues during or after the acquisition? Did they re-negotiate at the last minute or push for onerous terms?
There’s nothing wrong with confirming your buyer’s legitimacy and ensuring you’re entering a deal with someone you can trust.
Related: Selling Your Business? Do These 6 Things Right Now.
7. Don’t assume anything
Almost all first-time founders entertain the notion that a company like Google will swoop in and offer billions of dollars to acquire their startup. We’ve seen it happen before. Facebook offered $3 billion for Snapchat. Adobe recently announced its $20 billion acquisition of Figma. But what are the chances of that happening for every founder with a brilliant product?
Don’t assume any buyer will approach you with a wad of cash. Preparing for exit takes just that — preparation. You’ll have to work hard to sell your startup, all while running your business.
This leads to a second big assumption: Don’t celebrate a done deal when you’ve only signed a letter of intent (LOI). The LOI is a non-binding agreement that kicks off negotiations. Wait to pop the Champagne until after the money lands in your bank account on closing day.
8. Constantly sell your business
I’ll admit that I was a bit cocky when talking to early buyers in my first exit. I believed I had the best business to sell, and I led those conversations with, “So, are you buying or not?”
I should have focused on what the buyer and I could achieve together with the deal, wooing them to work with me towards an outcome that made us both happy.
Buyers aren’t just looking at your startup. They’re evaluating countless other acquisitions and won’t hesitate to drop you if a better opportunity appears. Remind them about the support you’ll offer post-acquisition, the great team they’ll inherit and the opportunities for growth in the future. Do everything you can, at all times, to de-risk this acquisition for the buyer.
And remember that acquisitions are relationship transactions, not just financial ones. The more you connect with your buyers personally, the more they’ll cooperate with you.
9. Don’t get greedy
I can’t tell you how many times I’ve watched sellers turn down amazing offers hoping a better one comes along. Nine times out of ten, that seller doesn’t get another offer, let alone one with a better price or terms.
Sometimes you have to say yes, especially when an offer checks most or all of your boxes. Wait too long, and your revenue could dip. Slumps won’t help you attract a higher offer later.
I turned down a few good deals before the private equity firm approached me with its offer: all cash at closing, a short transition period and more. I could’ve told the firm to wait so I could speak to more buyers and drive up the price, but it just didn’t make sense.
I was offered everything I wanted for a good price and from a reputable buyer. If I waited too long, I feared the buyer would reduce the price, add terms I didn’t want (like an earnout) or rescind the offer completely. So I took the risk and struck a deal. I have no regrets.
10. Keep your composure
Your nerves will be taut as a piano wire the nearer you get to closing. Sure, everything’s going smoothly now, but the deal isn’t done until the money lands in your account. Unexpected circumstances or last-minute due diligence issues can give the buyer cold feet.
Weeks before closing the Bizness Apps deal, the buyer said we had too many support tickets. They wanted more time to review, and I had no idea if the deal was still on or off.
The best thing you can do in a situation like that is to stay calm and composed. No frantic emails. No blowing up at the buyer. Focus on what you can control, like shifting the buyer’s attention to the positive aspects of your business.
While the buyer reviewed our support tickets, I modeled a potential price increase on a spreadsheet and sent it to them. I focused the team’s attention on an exciting growth opportunity to explore post-acquisition, reminding them why we wanted this deal to go through in the first place.
Even in the closing stages, I continued selling my business and fostering a relationship with my buyer. You don’t have to sit and spiral when issues pop up near the end of the deal. Instead, focus on how to resolve them.
Ready, set, sell
Most of these lessons I learned the hard way or through watching other founders falter and fail. You’ll likely make mistakes or run into hiccups during your deal. These lessons won’t replace the valuable experience you gain from failure. But I hope they’ll give you the confidence to see your acquisition journey through to the end.
Related: You Sold Your Business. Now What? Embracing a New Chapter with Care and Purpose