Winning the Acquisition Game – Five Steps to a Successful Deal

by Mark Friedler (view Mark’s Blog)

Many entrepreneurs dream of selling their companies to a large acquirer; it’s one of the most exciting aspects of building a business from the ground up. I had previously built and sold 2 companies and was negotiating the sale of my third business to TimeWarner, the world’s largest media company. I learned a lot in the 6 month process. Several of my consulting clients have recently begun the acquisition process and it made me think of what we should do to best prepare for the journey. So I put together a top 5 list for them and for you. Looking back, here are five steps that would have made the process easier and more profitable.  I hope this insight can help entrepreneurs and growth CEOs prepare for a successful exit.

1.     Sell your company before it’s for sale. When it comes to acquisitions, focus is a key element that attracts buyers. When I considered how to best prepare for an exit of our VC-backed company, I adopted a focus that was clear to both our customers and the market. My company, GameDaily, created content and delivered advertisers a mainstream audience interested in video games. I huddled with my senior management team two years before the deal happened and asked, “How can we be laser-focused?” We decided to increase our commitment to the growing mainstream, while our competitors fought over the same over-served core audience. We believed we could be the leader in creating a product for people who liked games and didn’t just fit the “young male gamer geek” stereotype. We focused on the audience that today is driving the social games revolution. When the Nintendo Wii became a huge success, our differentiated approach, product and customer-value proposition was a clear winner in stark contrast to our competitors. Five potential acquirers came knocking on our door because of our focus.

2.     Upgrade your team. To plan early for the acquisition, we decided to top-grade our team, incenting high performers in the content, tech/programming, client management and sales. I worked with a consultant to assess my team and matched their DISC behavior strengths, values and talents to best suit top performers with optimal roles. ( I now use these assessments with most of my clients) I let go of laggards, promoted or hired the best people, and then trained them on specific skills in my business. Having a top team was a huge benefit for us in the due diligence process, and it made the overall acquisition process easier.

3.     Prepare for due diligence BEFORE a deal arises: Many of the items on TimeWarner’s due diligence list were things we hadn’t thought about. We didn’t have audited financials, our programming code was not as well-documented as it could have been, and some of our key operations and sales processes were not written down. We hadn’t prepared a neat file of our trademarks, patents and other IP. Rushing these things to get a deal done is stressful and time-consuming. I wish I had instituted an internal due diligence process, along with hiring an experienced business consultant, law firm and CPA at least two years before I went to market. I discovered that this a critical component in substantiating your valuation and asking price.

4.     Review your key client contracts: Many large firms calculate the multiples of your business based on predictable future-client contract terms. Many of our deals had “60-day-out” clauses or were month-to-month. This was a big mistake. If all our large client deals had been two-year terms or longer, we would have increased our valuation substantially. I “didn’t know what I didn’t know,” and it was a costly mistake. Looking back, I would have gladly given up a few points on price in our contract negotiations in exchange for longer-term deals, because in an acquisition, the buyer evaluates your long-term sustainable revenue streams when arriving at a valuation.

5.     Think of what you want next: When I joined AOL in an executive role in leading the build-out of the GameDaily brand, I knew I’d be there for one or two years and then I’d go onto something new. However, I hadn’t counted on all the meetings I was expected to attend. Conference calls took up almost my entire day.  I didn’t have the same flexibility to make quick progress and the environment was a lot more “slow pace” to get things done. After problems arose, I negotiated my role specifics with my boss. That conversation should have happened in detailed specifics before I joined. It would have been better to have clearly been clear and specific about details of my role in advance so everyone was clear from the outset.

The lifecycle of growing a business to the point of acquisition is fun, challenging and exciting. Having a plan in place and people who have done it before greatly increases the chance of success of the best possible deal for the company, its team and investors.