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I almost sold Baremetrics for $5M
- jakozaur 7y agoHearing many horror stories over backing out at last minute, I wonder why breakup fees and escrow are not more popular in startup world. E.g. if you would like to acquire for $5mln you need to deposit $100k. If you walk out, this is a breakup fee. If startup bails it also have to pay same amount to the acquire.
- stevespang 7y agoAt least something to pay the lawyers . . .
- rolltiide 7y agoI've seen million dollar deposits get forfeited, people are insane! It might honestly be a good business model on its own.
- pc86 7y agoLosing a million dollar deposit makes total sense if the alternative is losing more than a million dollars.
- monsieurbanana 7y agoA company sales can go wrong for many reasons, how do you differentiate between a legitimate reason to not proceed to the sale and a "last minute backing out"? I assume that's what a LOI (which is all that the founder had) is for: it comes before any legally binding agreements and allows both parties to be sure they get what they want without bad surprises.
- wolco 7y agoUsually happens in steps. You provide some info they decide to proceed to next phase. Price get attached then.
- mrkurt 7y agoThe companies getting purchased usually don't have enough leverage to get a breakup fee.
- jacquesm 7y agoThe typical terms sheet has an 'out' in that any surprises during DD are grounds for annulment without compensation.
- LeifCarrotson 7y agoSimilar to a home purchase...and I imagine that even with an immaculate company or home you can always find something to satisfy that clause and give you an out.
- jacquesm 7y agoBeware of terms that require the target to pay for DD if the deal goes sour.
- aidos 7y agoUnless you’re in England, where people can drop out or change their price on a house sale or purchase at any time, even after months of legal red tape.
- ricardobeat 7y agoWhat would you spend months on when buying a house? Over here (NL) a buyer inspection is a 30 minute affair. Then you sign a purchase contract straight away, three days to back out.
- jacquesm 7y agoIn NL as well. It is not rare at all to do a 'bouwkundige inspectie', that is definitely not a 30 minute affair depending on the kind of building. People doing their own inspections tend to overlook important things.
- RHSeeger 7y agoIf my inspector was done in 30 minutes, I'd tell him to go home and hire a different one. That being said, it depends on where you are. Some places it can take a week to go from first seeing to buying, other places it can take months. Some places, closing costs are a few thousand, some they are 15k. There's a lot of variety across places even in the same state in the US.
- paxys 7y agoIt is standard in bigger corporate M&As, but a tiny startup isn't going to have the leverage to pull it off.
- fludlight 7y agoA contract is only worth as much as you are willing to pay to enforce it. It makes sense to pay an army of lawyers for years to pursue a $100m breakup fee. For $100k, not so much. Quod licet Iovi, non licet bovi
- boulos 7y agoThe solution though is escrow. Upon agreement, you have them wire the money to an escrow agent. If they back out, the escrow goes to you. There's no need for follow-on lawyering. (And no, no escrow agent worthwhile is going to be pressured easily into giving a large corporation their $100k back).
- mbesto 7y agoThis is why reputations in M&A matter.
- jessaustin 7y agoMost high-reputation firms wouldn't hesitate to leave a poor founder swinging in the wind. What's she going to do, sue them? Any lawyer capable of handling that case, the M&A dudes already have on retainer.
- tectec 7y agoApparently something like that is done sometimes: https://www.bloomberg.com/opinion/articles/2019-03-15/don-t-forget-to-do-your-merger https://www.bloomberg.com/opinion/articles/2019-03-15/don-t-...
- hinkley 7y agoPart of any acquisition is getting a look at your books. Now the buyer knows exactly how much runway you have left and all they have to do is drag their feet until you get desperate to make a deal. Either you have to be cashflow positive, or keep at least two buyers on the hook past whatever disclosure phase nets them this sort of information. I think maybe one company I ever worked for was clever and healthy enough to do this. And even on that one, things went a bit touch and go. One of the worst kludges we ever did, it came out later, was worth a month of payroll, which got us through that acquisition without bouncing checks. (Still the longest single method body I've seen a human create, and from someone I thought would never write code like that.)
- deleted 7y ago[deleted]
- jessaustin 7y agoWow I'm struggling to imagine how a too-long method could keep the wolf from the door for a month. More details please, if you can.
- hinkley 7y agoHorrible messy business logic to fulfill a short term contract. It's been a long time, but if memory serves it was used for data ingestion. The file was 6000 lines, the worst method was over a third of that, closer to half. It never really worked, as some of us predicted while the project was being ramped up. Without going into too much detail (most of which has gone from my head anyway), the speed of light won and we used a different architecture which obsoleted most of that code. However, if I and the other people who said it couldn't be done had gotten our way, that sale would have gone much worse for us. Decisions from incomplete data and all that jazz. It went live and the customer and we cashed the check with less than two months of operating capital left, while the lawyers were still futzing around with term sheets. The irony is this was also the owner who thought he was rallying the troops and instead filled us with existential dread every time he tried to give us a speech. Why I wasn't aware we were scraping bottom of the barrel until six months later, I'll never know.
- socalnate1 7y agoTwo quick thoughts on this. 1) The amount of transparency that this company shows is insane. I have a hard time imagining any one else in this situation sharing the way they do. I hope it works out for them long term. 2) The due diligence work they did for this deal was absolutely not a waste (even if they never sell the company). Having gone through this process once will make it orders of magnitude easier if they sell in the future (especially gathering and organizing documents from the very early stages). Even if they don't sell, the process would have shown light on potential liabilities and issues they hadn't even been thinking about. This is helpful regardless of who owns the company. Maybe not worth the time and money; but definitely not a waste.
- froindt 7y ago> Even if they don't sell, the process would have shown light on potential liabilities and issues they hadn't even been thinking about. If I recall correctly, some VC's make their companies put together quarterly reports of similar nature to a normal publicly traded company. It sounds like it would have similar value. Doing so requires significant thought and focus, and provides a structure and cadence to the business.
- irjustin 7y agoCommon practice from VC is to do a 3rd party financial audit - billed to the startup in the end. Very expensive, but as you mention, it helps uncover potential ticking time bombs. It's easy to complain about a heavy, expensive finance audit, but startups commonly are setup or practicing mildly to extremely incorrectly. It's just too risky not to do it. Tech audits seem to fly under the radar a lot. Post deal, I've had one principal complain to me a portfolio company was using a single table for users & bookings just more columns - what. Ruined the company for 14 months to fix the tech with all the deployed money and the business never recovered. Extreme, but there should be someone looking.
- mounram 7y ago"was using a single table for users & bookings just more columns" Could elaborate more on this point please ? Thanks.
- athiercelin 7y ago"In many ways, I feel like my job as CEO and Founder is to absorb all of the insane parts of running a business so my team can focus on building, learning and enjoying their jobs." This is spot on. I would extend to senior leadership in general.
- bcrosby95 7y agoOne way I've heard the role of product manager described as is a "shit umbrella".
- arcturus17 7y agoThis touches me on a spiritual level.
- cletus 7y agoThis is applied to managers in general: - Good managers are shit umbrellas - Bad managers are shit funnels
- azhenley 7y agoI need this on a motivational poster or something.
- jbredeche 7y agoI couldn't agree more.
- geebee 7y agobeautiful metaphor. anyway, I quasi-agree, though I've become suspicious of managers who claims to be an umbrella protecting their team from the rain. Half the time, they're really just trying to make sure their team doesn't see the forecast and quit.
- alias_neo 7y agoI guess umbrellas also keep the sun out. What you need are those clear plastic umbrellas, no rain, but all the sun. Transparency.
- mytailorisrich 7y agoDue diligence works both ways and it pays to do your homework on potential buyers and to ask them to prove their claims, or even ask them to put some money down, before proceeding. I don't know the company or what they do but cynical me can also imagine a third party pretending to want to acquire in order to gain inside knowledge.
- throwaway_tech 7y ago>or even ask them to put some money down, before proceeding. Yep. Just look at mature markets like housing. You don't see anyone wasting time without a deposit, which will be kept if the buyer doesn't go through with the closing. Won't put down a earnest money deposit? They aren't serious. For all you know the do this knowing they won't pull the trigger, but to justify their job/identifying an opportunity, then being the hero when they "find something off" and save the company from a bad deal (which they manufactured in the first place)
- cosmodisk 7y agoRemember having a meeting with a charity org. They wanted to spend quite a bit of money on a CRM implementation.We had a few different companies in a room.After going through the entire block of ideas of what and how they want,my manager asked them: have you got money for this? Turns out their sponsor promised the money but then there are conditions and etc..This was for a simple dev project...
- FpUser 7y agoSame thing happen to me. Only it was 2 mil instead of 5 and I did not really have to do any due diligence as I was selling my product, not my company. So other then spending some time and paying couple of grand to have lawyer go over the agreements I did not suffer much. But boy, was I disappointed ;(
- wolco 7y agoYou lost a few grand?
- elbear 7y agoMore like missing out on 2 mil
- paulcole 7y agoSpending $5 on a losing lottery ticket isn't missing out on $100 million.
- elbear 7y agoI know what you mean, but we're talking about someone's perception, not the mathematical way to see things. Also, winning the lottery and almost selling your business don't have nearly the same probability.
- FpUser 7y agoExactly. Already had some savings. Add 2 mil and was thinking early retirement. Well maybe some work when I feel like here and there but life with no financial pressure ;)
- meritt 7y agoIt's not uncommon for potential acquirers to feign interest in a purchase so they can derail your business for months while your competition (their actual investments) pull ahead.
- verganileonardo 7y agoCould you provide examples of that?
- meritt 7y agoSure, Amazon does it all the time to small startups. They fly you into Seattle, setup a fancy meeting with strategy teams and M&A, make you run through a pitch deck, explain every aspect of your business. They take diligent notes until they fully understand your inner workings, they tell you thanks, you'll hear from us soon. And nothing happens, 6 months later AWS launches your exact product. Founders need to be extremely careful when talking to potential acquirers. Dollar signs cloud your vision and you need to understand why they're talking to you. It may be genuine interest or it may be deceit in order to gain a competitive edge.
- drclau 7y agoThis is not an example. This is an explanation of how it could happen. Can you share an actual case? Such as, a startup that went through this.
- hermanradtke 7y agoAmazon’s flash sale site, my habit, was launched this way. Source: I worked for a flash sale company they did this to.
- deleted 7y ago[deleted]
- pc86 7y ago
- Exuma 7y agoThis is very painful to hear. I've tried selling my main company to 4 different buyers now... every single time we get past the LOI phase, they see all our financials in plain sight, and there's always some stupid hangup/ghosting/sketchiness exactly like in this article. Very disappointing, considering how transparent we are up front sending every financial, and there's no real 'discoveries' later that would change their mind. It's just general terrible flakiness. One guy's excuse was that his brother had put all his money into collateral without his knowledge, and that discovery phase was a waste of 5 months. This last one, we thought we learned our lesson so we demanded proof of funds, as well as much more thorough checks....... and they just magically ghosted us LITERALLY after I FedExed the signed agreement... so after months and months of due diligience. They change their mind after about 100 confirmations from their lawyers, accountants, financers... and just ghost hours after I send it. It has been greatly discouraging to me, as the 3 serious attempts to sell have essentially crushed our momentum, and now the company is dying/dead. I won't say that its a direct result of it, but we ran it very conservatively during these times as not to upset anything, and those were the times we needed to be running more aggressively to keep up with competition. The company is essentially insolvent now, with a large amount of debt. I also made the bad mistake (I was quite young) to originally put the company card on an Amex applied for by me (I had 820 credit at the time). Because of inability to pay back debt on this company, my personal credit is now destroyed. So.. going from 820 credit, making hundreds of thousands profit per month... to freelancing to pay bills with a 590 credit. Such is the life of an entrepreneur and the brutal lessons one learns along the way. PS... I found out later our accountant had dementia, and did all our taxes wrong. My biggest advice, have an accountant who is really on point, and accept absolutely nothing less. Don't fall for the illusion of the pain of having to "retrain" someone if you don't think your accountant is 100%. Just find someone who is fucking good, and if they show a red flag, find someone you fully trust. My business partner has also been ruined in the past by incompetent accountants.
- kerng 7y agoA friend of mine who sold his company told me that it's common to get approached and if the buyer is serious things move very fast. Most of the time though it's just a game of delay to keep competition in control and get more insights. So, if buyer is interested they will make an offer quickly (initially maybe too low), but they show they are serious by doing so. Dont get dragged in meetings or fly around to meet buyers like crazy. Better to focus on growing the business.
- fludlight 7y agoWhat software/service do you use for your data room?
- ngngngng 7y agoThere's got to be a business in here somewhere. A company that acts as a middleman that sorts through all your financials for you, does all the communicating, drafts all legal paperwork and just gives you quick regular updates through the process. That way you can keep running your company during all of this madness. I wish I knew more about selling and acquiring companies since it seems like a business well worth launching if it's feasible, which I don't even know if it is.
- kejaed 7y agoAn investment bank?
- ngngngng 7y agoMy lower class upbringing is showing, is that what an investment bank does?
- boxy310 7y agoYes - this is a major function of private equity in general. They even have investment banks and firms that specialize in "buy side" versus "sell side" of the transaction.
- codegeek 7y agoNot for small companies that generally do less than $2M in revenue.
- einarvollset 7y agoWe do as low as $1m ARR: discretioncapital.com
- codegeek 7y agoYes but you are not a traditional Private Equity if I understand correctly.
- salimmadjd 7y agoJay Jamison (when he was a VC) gave me a great advice once. "Companies are bought not sold"
- pxlpshr 7y agoI didn't fully appreciate the value of our data room until it mattered. Since the last deal, we've kept our data room impeccable and exceptionally granular. We're also way more sensitive about the timing of what we share and what we black-box for as long as possible. There's a strategy for managing your data room in situations like this, so I encourage talking with mentors/advisors if it's your first time. This is also true for general communication to the team about offers like this. It's way too distracting and too high of a risk to morale if the deal falls apart.
- icelancer 7y agoCan you go into more detail on your data room? Thanks.
- rdslw 7y agoI can't even visit OP as my pi.hole blocks it :) Let me guess: another spam^H^Hads analytics^H^H^Hspy business there under the pretext of 'better user satisfaction'.
- bkanber 7y agoNo, Baremetrics is a Stripe-et-al analytics service.
- lmeyerov 7y agoSo hard! And this is a reality even you're not trying to sell but are doing as part of your regular corp responsibility! I've been on the founder side in convs like this, both real+fake, so some advice I got here that has resonated the most: 1. Assume 95+% of inbounds won't go through, even if 'serious' 2. Use every ask from the acquirer to get a parallel give: if they're serious, they'll increasingly show they're not the 95% here 3. Almost all teams are not emotionally equipped to understand the 95% no-deal thing, unless you're say a VP-only company (???). As soon as they hear potential acquirer, it's natural to think "maybe 30% chance for one, so 100% across 3-4 inbounds", not "maybe 5% for just one if we qualify it more." It's hard to do anything if you're worrying about your kid's college tuition for 6mo wrt to a fragile deal's ups and downs that you have little control over. A common path here is to understand indiv employee personal goals, and only bring in the acquirer in front of them, such as for interviews or whatever, only once you've gotten a deal to the 99% point (one of the biggest asks). Baremetrics is going for more transparency afaict, so having someone to help contextualize for both its ~first-time ceo + employees would seem required to avoid morale going through the ringer. 4. Don't optimize for building to exit, but do treat as part of general BD. (Though I feel most YC etc. co's don't do this, and the wave of quick-flip startup people is poisoning the well for follow-on founders more serious about high-trust areas like enterprise.) ==> 4b. This kind of distinction can be all sorts of confusing for team members too, who aren't thinking about BD+Prod+... etc. strategy all day but how to make an X do a Y. They can make bad high-level decisions if it takes center stage. ==> 4c. More likely outcome is becoming colleagues with folks for future accounts/partnerships/etc., and even hires. So do that!
- czbond 7y agoAnyone have an idea on why 3.7x revenue for SaaS was considered a fair valuation? I thought SaaS was always closer to 5-6x
- mritchie712 7y agoBareMetrics MRR is public, check it out: https://demo.baremetrics.com/#start_date=2019-01-01&end_date=2019-12-31 https://demo.baremetrics.com/#start_date=2019-01-01&end_date... 20% growth last year or 1.7% per month. That's considered slow for a SaaS. That's likely what's driving the 3.7x multiple.
- czbond 7y agoFair and thank you for that. Wouldn't their value to Stripe be much more than 3.75x in this case?
- einarvollset 7y agoBasically, there are 3 types of buyers: value PE, growth PE and strategic. Value pays 3-4x, growth 4-7x, strategics ¯\_(ツ)_/¯ Stripe would be a strategic for Baremetrics.
- ablekh 7y agoHmm ... Where did you get these multiples from? Based on what I've seen in many sources (here's one that I have at hand, by McKinsey: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/multiples-analysis-industry-labels-dont-matter-performance-does https://www.mckinsey.com/business-functions/strategy-and-cor...), high-growth tech/IT startups are valued (and, I assume, could be acquired) at > 15x, sometimes even > 20x.
- blrgeek 7y agoFor public companies, growing > 40%, ARR > $100Mn, NDR>125$ revenue multiples are sky-high ATM. For private companies at around $1Mn-$3Mn ARR growing sub-20% YoY there are very few buyers in the first place.
- xwowsersx 7y agoCan breakup fees be negotiated in these kinds of deals to protect the would-be acquired company? Seems like the company to be acquired bears all the risk.
- adventured 7y agoYou can negotiate anything you want, and I'm not joking or being sarcastic about it. A lot of people in this thread will say: well, it's unusual or non-standard to do x y z. Good. Most of the interest a company receives re acquisition is going to be pure bullshit at best and malevolent at worst. Ideally you cause the majority of both types to turn tail and run away immediately. If you're not careful you'll waste an enormous amount of valuable time dealing with bogus acquisition (and partnership) interest. Big companies waste a lot of time and money screwing around with: let's make a deal; they can afford it. The break-up fee should not be layered under 27 conditionals. As someone pointed out, the acquiring company will bury you under a mountain of difficult to fight legal justifications to get out of the break-up fee if they can. And they're almost always going to be far stronger financially than you are. A fee is going into the company bank account no matter what, without conditions, if you want to get serious about an acquisition. You're going to pay us for our time - risk, legal costs, etc. - if you're serious. The mental approach is simple: don't like the arrangement? Fuck off right now so I can get back to running my business. That's not standard? Too bad. It's your business, you can do anything you want to in that respect. Don't let people tell you that you can't do it, you certainly can. If a company is very serious about buying you, they won't run away if you put this on the table up front, they'll be willing to discuss it at least.
- xwowsersx 7y agoThanks for the reply, I agree with you. Parenthetically, I know you can negotiate anything you want. I went to law school (though never practiced) and I find one of the common misconceptions is that contracts are these highly fomulaic documents with no room for creativity. The reality is, as you say, that you can put whatever you want in there. Contract law is mostly about enforcing the freely-negotiated agreements between parties. I wrote a lot of contracts that were highly specific to the scenarios in question and there was a ton of creativity - only trick was to use very precise language (verbose bordering on annoying). My question was more whether this is something that is done in such contexts, namely smallish acquisitions. I think you're right that Baremetrics made a mistake here in not insisting on some of the things you mentioned.
- in3d 7y agoI wish people would name names. That would discourage this type of behavior.
- mrtweetyhack 7y agoSounds like you have a lawsuit to file
- quickthrower2 7y agoSounds like there needs to be a way for the buyer to put some skin in the game. Maybe asking for a $50k non-refundable deposit to kick things off. Sounds harsh? Well non-refundable deposits are a thing in real estate. For example in my country it is common to put 0.25% down to take the property off the market, non refundable, allowing you to do due diligence and then 19.75% deposit within 5 days non-refundable, with a closing period of say 30 days to pony up the other 80%, usually from finance. Probably the 19.75% is lost if finance doesn't come through but IANAL not sure if that holds up court or not or if you can get it back in some circumstances. But people understand it's serious you might lose it. If you don't really need to sell but wouldn't mind $5m this would be a good way to weed out non-serious people. If everyone says NO then that's OK you keep on running the business as before. If anyone says yes then you know they are serious. They might not buy, but you get $50k compensation, which might be less than your costs, but the point is the $50k is like a way of communicating information 'we are serious' than an actual payment. Asking for $50k from someone who invests $5m is like asking $50 deposit for someone who wants to book a luxury hotel room for a week. Maybe I should have said $100k (!)
- trentnix 7y agoAgreed. It’s perfectly acceptable for a business to ask for (or even demand) earnest money when signing an LOI. The buyer, via the LOI, is asking for the right to negotiate with you exclusively. That’s worth something and if they refuse, that tells you how serious they really are. The amount of that earnest money is up to the parties involved - 50k might be high for some situations, low for others, and just right for the rest. But they should pony up something. Otherwise you are just giving away leverage. As the article mentions, there is an incredible amount of work that goes into due diligence and sometimes an even larger emotional investment. A sale falling through, and I can speak from experience, can be devastating.
- mtnGoat 7y agoI agree in this case the author created this problem for himself by not following some norms, namely getting a non-refundable deposit for his time and energy. lesson learned for seller and a good reminder for the rest of us.
- maxzon 7y agocongrats
- rajacombinator 7y ago5mm is just too low for a web based SaaS business. You’ve already done the hard work of getting some PMF validation. Why not double down and try to scale the business? Going from 5mm to 15mm is way easier than 0mm to 5mm.
- Shpigford 7y agoThat's the route we're going down now! As I mentioned in the article: > For me, this came at a time where, personally, life was…draining. Outside of work I wasn’t in a great place mentally. I was dealing with some family issues that were consuming every ounce of my mental energy. I was depressed, anxious and the most stressed I’ve ever been and the prospect of being able to sell the company and give myself and my brain a break was very appealing.
- tnolet 7y agoRule number one: Nothing is real till the money hits the bank account. The rest is all foreplay.
- RaceWon 7y agoWant to sell your startup: don't be desperate; people smell that--and it stinks. Attract buyers (put out press releases about how well you're doing--hire a PR firm), and then Say No. Tell them are too busy to prepare financials, and your lawyers refuse to waste their time. Just say no But Be NICE About it. This works like a motherfucker because (A) People Really Want What They Can't Have... and (B) They Already Really, Really Want It Because Of The Press Releases. (C) Hire a Real Negotiator--and a person who is dispassionate about the business. Pay them a percentage of the gross profits; of course you tell them a bottom line number which is the lowest offer you'd accept. Put the sale money in escrow and you each pay 50% of the due diligence cost After the money is in the bank.
- KODeKarnage 7y agoThis has been posted half a dozen times, but now gets 250+ up-votes and 150+ comments?
- throw3982 7y agoIs there any forum or group that has people that can advise on such matters? I know HN is one but it's too big/too impersonal for this. I mean a place for founders to find "mentors" (i.e. people with more experience or people that have done similar things before) that would be willing to help them with things as a sale to a big company or how to structure a deal.
- bkanber 7y agoI'm in a program in NYC called https://www.venwise.com/ https://www.venwise.com/, it's a moderated CxO peer group that meets for a long session every month and does exactly this.
- throw3982 7y agoThanks. Anything in London?
- HatchedLake721 7y agoFunnily enough, WeWork Labs
- taylortrusty 7y agoThere’s a global peer group called Entrepreneurs Organization I’ve been part of for five years that satisfies this for me. It’s for founders/owners with $1m+ in revenue. 14,000 members around the world broken up into smaller chapters. The NYC chapter has 200 members, for instance. eonetwork.org YPO is another one, though for larger companies ($8+ million in revenue).
- metastart 7y agoSadly it's very common to hear from many reasonably serious potential acquirers before something is consummated. 10 is not unusual I think. It's best to always focus on your business and growing it, assume the acquisition isn't going to close and not getting distracted by it. Avoid any legal or other costs until it's basically negotiated/closed and they're putting some non-refundable closing money down.
- YPCrumble 7y agoOne of the best parts of Baremetrics is that it's an "Open Startup". I can't help but think that the acquisition is clearly not open if he didn't talk about it during the acquisition and doesn't name names here. I think he's right not to dox the company, but perhaps in the future having an "open acquisition process" could have avoided some of the headache.
- Shpigford 7y agoI threw around the idea but the reality was I wasn't in a strong position to try to negotiate that with a potential buyer. Acquisitions are incredibly closed-door and so finding a buyer who was willing to be open about the process would have been nearly impossible.
- rolltiide 7y ago> You see, it turns out they’d misrepresented their funding situation at the beginning. it’s so aggravating when my business partners can’t see these posers from a mile away.