Yeah, I'm not suggesting that everyone should optimize right out of the gate for acquisition, I even thought about making a more detailed set of points on that, but decided it was overkill.

I think it's like this:

- There's a base level of prep for acquisition that just falls under the category of "good operational cadence for a company". This is the basic level of keeping the books clean, organizing your papers, etc.

- Then there's a level of prep that it makes sense to do when you think you are getting close to a term sheet, or planning to start to actively seek acquisition. This is the much more detailed indexing of contracts, covenants, tracking down old shareholders, etc. Hopefully if you did the above point, this is made easier, since you're at least storing everything in one place

- Then in the DD phase, there's going to be requests that you just can't prepare for, because they're out of left-field. If you've done #1 and #2, you can invest most of your efforts on those.

But to your point:

> If a deal is worth doing, it's probably not going to live or die based on how many tens of thousands of dollars you can whittle off closing costs.

It's almost never a matter of closing costs. It's a matter of momentum and risk. Yes, if a company is 100% convinced that they absolutely must have your technology/customers/IP/whatever, they'll overlook many many flaws.

But, if you go into the due diligence process and things are overly messy, it throws up red flags and creates delays, neither of which are in the entrepreneurs favor.

The DD folks and legal counsel for the acquirer are there to be a voice of reason and caution - the messier things are, the more likely they are to start cautioning the acquirer. Typically, the corp dev guys are raring at the bit, since this is what they're there to do. Legal is meant to act as the countervailing weight to that.

Risk is unlikely to kill the deal outright, but it could delay things and create uncertainty in the acquirer. All of a sudden they start talking about putting an extra 10-15% in escrow, or doing an earn-out instead of a straight acquisition, as a hedge. Or they decide they want to interview a few more customers before they pull the trigger.

Which is where delay comes in - the longer the interval between term sheet and deal signing, the worse off for the startup. Not because of the legal costs, but because:

- it's disruptive to the business - your whole life becomes dealing with due diligence, not to mention the stress level

- it gives the acquirer the chance to rethink their decision or consider another route

- business conditions could change - your biggest competitor goes up for sale at a bargain basement price

So, in the end, you're not optimizing for cost, and prepping for DD is definitely not worth doing pre-product or at the expense of building your business. But it does reduce risk and improve the likelihood of deal close once you get to that point.

This is a pretty great comment.

Speed, not cost, is the main advantage of doing at least some work (think 80-20 rule) to keep your ducks in a row on an ongoing basis, in anticipation of future due diligence. In some (many?) deals, due diligence happens before the acquisition agreement is signed, under an NDA, meaning that the prospective buyer can walk away at any time, meaning in turn that it's in the seller's interest to get the deal done as quickly as possible. For example, I saw one client's sale unravel before signing because of an unrelated internal power struggle in the buyer's organization --- when the dust settled, the buyer executive who had championed the acquisition had been pushed out; the new powers-that-be didn't care about the acquisition, and walked away.

I think tptacek's point is that for most companies, the hardest part of getting to an acquisition is building an organization that someone wants to buy. It does you no good to have all your ducks in a row for an acquisition if you have no customers, no revenues, and no employees, and this is the median outcome for startups. So rather than focusing on DD, focus on getting customers, and then if you need to, fix things later. Having a potential acquisition derailed in DD is a nice problem to have; it's better than not having anyone want to talk to you in the first place.

Yes! I'm saying: (a) you are unlikely to get acquired, and (b) if you're going to get acquired, chances are the DD process isn't what's going to kill it unless you make a mistake bigger than bookkeeping.

"chances are the DD process isn't what's going to kill it "

Except to keep in mind of course a few things about deal making:

a) Time kills all deals. It's more true than not.

b) Strike while the iron's is hot. [1]

c) Never make deals without some time pressure on a buyer (leads to "a" and lack of "b"). Either artificial or real. (The "never" of course needs to be qualified for the situation for sure).

d) Don't make open ended offers. Why? Time pressure (managed carefully of course) brings people closer to emotion which can make them overpay for something. Now of course everyone wants a "win win" situation so why does that matter? Because, once again and in general, people are either happy with what they have negotiated or they are not. Paying 1 billion for Facebook or 3 billion, assuming the same outcome as we have, would still be viewed as a good deal.

All of the above is generality of course and obviously specifics of the situation do matter.

[1] Go at lightning speed and don't delay. Things do happen to people you are dealing with. Health, accidents, life changes all sorts of things. (Example is Lewis Katz who perished in a plane accident about a week after closing his newspaper purchase). Oh yeah, stock market and general business climate as well. Don't play games and don't delay (other than if you are using it as a strategy of course).

Well, most of that may be true, but then an even bigger picture is that if you've built a large & growing profitable business, there will always be another deal to try again, while if you're failing there's a good chance there won't even be this one deal. While it might be good to have the tactics in your back pocket for a sale with no negotiating leverage, it's much more productive to work on the fundamentals of the business so that there'll be another deal even if this one falls through.

Look if you've got a hot business with many people pursuing you the world is your oyster.

However most businesses, traditional ones, and even ones that are on the web, don't have that leverage. They will get literally one ready willing and able suitor who comes along (and will pay a good dollar) and so they will have to take advantage of that opportunity. I'm not talking about people accomplished enough to be able to hire investment bankers to shop their business.

It's not that I disagree that much with what you are saying and obviously you shouldn't spend a great deal of time on this either.

Lastly people tend to feel as if they could sell at any time maybe perhaps because they've had some inquiries from time to time.

Obviously there is no disagreement as far as working on the fundamentals of the business. Otoh if your intention is to sell there are many things you can do to package your business to make it more attractive to buyers along the way.

My startup is in a relatively new industry that has had multiple investments/acquisitions in the past year or so, and we've not been able to pursue conversations with some of these acquirers because we don't have financials in order. We're bringing on an accountant now, but it's never been a priority for us historically as we're in a high margin business with great cash flow. If I could do it again, I'd hire an accountant/hr/operations person a year ago (1yr after starting the company) rather than today.

I've never really thought about warrant DD before. Makes me wonder about what to do with gag orders. My guess is inform the issuer and they will reissue to the new party, but it would be a stressful situation.

In DD, "warrant" is short for "warranty"; these are the legal docs that value your assets and receivables and set the factual terms under which the purchase price can be clawed back if you misstate something.

Based on my experience of it, negotiation took a couple weeks, and warrants/reps took sixteen thousand years. My partners went into the process looking like young David Lo Pan, and ended it looking like old David Lo Pan. (I spent the whole process as the weird floating orb of goo with the big eyeball).

Ahhh, I just came from the Vodaphone comments, and my context switching is slow.

It's true that the legal side is onerous. We like to think that it prevents more trouble than it causes, but reasonable minds may differ.

I still think my question is an interesting one, even if it's not what you were saying. I don't know that there's any public precedent on the matter, but I imagine it's not as rare as one might think given all the different sort of public and private NDAs that exist.