So You Got an Offer: How to Do Due Diligence on Your Potential Acquirer

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There is almost no better and, at the same time, terrifying feeling than when you receive an email from someone who wants to acquire you. There was great joy when that happened to us at FeedbackPanda. Immediately after, we started to think about the level of risk we were about to expose our company to.

The moment you allow a third party into your company, you lose a little bit of control. Someone is checking out if you’re an exciting business for them to purchase, and they will require some information that you never showed anyone before. Making sure that you don’t get into trouble from that is paramount.

In a company acquisition, it’s usually the acquirer who conducts thorough due diligence. We believe that before that happens, you, the seller, should do an equally exhaustive due diligence of your potential acquirer.

I’ll show our experience on how we vetted our acquirer, what are red flags to look out for, where to find more examples of successful and failed exits, and how to prepare for your own company for when the happy day arrives.

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First, let me make it clear that the strategies and actions suggested in this article are based on the anecdotal experience from going through an acquisition process with one company. While we successfully sold FeedbackPanda for a life-changing amount of money, the process may differ for you and your company. I am not a lawyer, and this article is not legal advice, so please consider getting professional legal advice when you face an acquisition offer.

When Do You Need a Lawyer?

That brings me right to a question that many founders often ask at this point. They received an email or a phone call with a party expressing interest in buying their company or product. At that point, most founders wonder if they need to talk to a lawyer immediately.

I don’t think that is required at that point. Lawyers are expensive, and if you were to engage one for every party that expresses interest, you’d be poor soon after. Usually, you will want to hire legal professionals when you start signing documents that lock you into things that can’t be reversed, like complicated non-disclosure agreements or agreements that forbid you from talking to other parties.

Once you are presented with such a document, I would suggest finding a lawyer and have a cursory talk about the process. If you feel that anything might limit you beyond the scope of mutual due diligence between the prospective buyer and you, intensify the conversation with your legal counsel.

The moment you are ready to sign a Letter of Intent, you should definitely involve a lawyer. From here on out, you’ll be in the deep end, and you will need to make sure that you’re protected. You can rest assured that the buyer has a lawyer on their side, as it’s probably not the first time they have purchased a company or product.

What to Do as Soon as Someone Reaches Out?

Alright. So you received that email. Someone is interested in your business. Here is what we did when we received our fist offers for FeedbackPanda.

The Acquisition Sanity Check List

The first and most important question you will need to answer is if this is a real person with the intent to actually purchase your business. Many bad actors are trying to scam business owners or extract sensitive information from companies. Good actors will have a track record of successfully buying businesses. Bad actors will not.

Research the Company, Research the Person

To verify the truthfulness of the offer, research the person that reached out to you, and the company they are working for. Like real estate, acquisitions are mostly a reputation game. Parties who want to continue acquiring valuable businesses will need to present themselves as honest, respectful businesses. A botched acquisition or shady behavior will cause a lot of damage to the brand, and bad news travels fast.

Look for traces of bad behavior and complaints both for the person reaching out and their company. That’s quickly done with a Google search with something like “<company name> acquisition problem.”

Look for public appearances by the person reaching out to you or the CEO of the company that has expressed intent to acquire you. Check how you feel about dealing with this person. If you feel an instinctive attraction, great. If you don’t like them, make a note. While an acquisition is a deal between companies, it’s transacted between people. If the relationship doesn’t work, the deal might become sour.

Research the Portfolio and Make a List

Next, look into the companies and products that the acquirer already owns and operates. Are these businesses you want to be associated with? Do you think they could benefit from your business strategically? Or is it just a financially motivated acquisition? You’ll have a much clearer understanding of this once you figure out what your acquirer is already doing.

This is most easily done through Google Search as well. You can usually find portfolio companies and products by googling for the full legal name of the acquirer, as it will be in the Terms and Conditions, which are often the same for all portfolio companies.

At this point, you should make your first list. Put down the name of the company or product, and find out who sold it to your acquirer. That will require some exploration and research, as pre-acquisition names are usually removed from the properties after they are purchased.

You can likely find traces of the names of the original founders in these locations:

• old company blog posts
• source code of the website
• old commits in public open-source code repositories
• public interviews about the sale of the company

Finding public information about the sale and the conversations that often happen around it will give you some insight into the process, as founders who have sold their businesses are frequently asked about the details of the process. I talked about this on Indie Hackers a few months after going through the sale of FeedbackPanda.

If you can’t find public information about the sale, ask yourself why that is. It doesn’t have to be sinister, as some founders like to keep their privacy, mainly when they just sold their business for many millions of dollars. Being too public can lead to a lot of trouble and stress, so many founders keep it a secret. Finding those founders will take more work, but it’s worth it.

Request a List of References From Your Acquirer

Once you have a reasonable list of at least five founders who have sold to your acquirer before, I suggest asking the person who contacted you to give you a list as well. Ask them for a list of founders you can contact and ask about the process. Most acquirers are prepared for this and will present you with a few names and email addresses, and they might even make introductions.

While this is an excellent sign of trust and transparency, I advise you to be careful. The list an acquirer gives you will likely only include references that will be very positive and supportive of the acquirer. In most cases, that is because the acquirer is doing honest and reputable work, so their references will reflect that. However, there is a chance that a few people had less-than-optimal experiences, and they are likely not on that list.

You’re Making a List and Checking It Twice

To find the most interesting people to talk to, take your list, take their list, and make a shortlist with the founders that are just on your list, but not theirs. Your chances of finding potential red flags and problems are highest here. Call those founders first, or send them an email explaining why you are interested in talking to them. If they have warnings to give, they will reach out quickly. If they’re not responding, they likely just want to be left alone.

Then, call the founders on their list. While those founders are pre-selected for you, they will still give you great insight into the process and what to look out for.

In our case, the introductions from this list gave us the chance to talk to people we had only ever interacted with on Twitter. Having a personal connection to people who went through the same thing makes selling a company much less scary.

What to Ask in a Due Diligence Call

Here are the questions that we would ask in every call, to anyone on our list and on theirs.

How Was the Transition Period, Was It Frantic, Was It Professional?

You’ll want to learn about the amount of work that will be ahead of you once you hand over the reins. Some companies make it extremely easy, as they may already have a team in place to take over the operations. Others might need you to stick around and help them get on their feet. Ask which steps your reference had to take while transitioning the company and if there were any surprises.

Do You Feel the Acquirer Did Your Business Good? Are Their Goals Similar to Yours?

Alignment is incredibly hard to predict. It’s a mindset problem, and you can’t expect to know how compatible you’ll be before you’re working with the acquirer. But you can ask the founder you’re calling how well they were aligned: were there differences of opinion? Where did the business go during their transition? They won’t be able to give you details, but they will be able to express their sentiments.

Did They Trap You in Some Way? Did You Need to Stay on Longer Than Required?

This is really about clarity and expectation management. You’re likely selling your company with future plans in mind; you may have other projects to take care of, personally or professionally. Ask the founder you’re calling if the acquirer made an effort to be truthful, clear, and precise in their communication. Ask how well they responded to questions about these things as well.

Did They Take Care of the Team?

If you have employees, they will likely migrate over to your acquirer. Ask the founder you’re calling about how smooth that transition was for them (if they had employees). Ask if people were let go, and how well the ones that stayed were integrated into the team. Were there incentives for their employees to stay on? Were there guarantees?

Do They Understand the Businesses They Run? What Is Their Ultimate Goal With Them?

Some acquirers have been around for a long time and may have dozens of similar businesses in their portfolio. Others may just be starting. Ask your reference for how well the acquirer understood the business they bought, and how much work went into non-operational knowledge transfer. If they had to explain to their acquirer what a SaaS business is, that might be a problem.

Figure out If They Acquired for Financial or Strategic Reasons

If your business is acquired for financial reasons, the acquirer may have different expectations of your involvement than if they bought your business for strategic reasons. Get a feeling for the kinds of acquisitions made by your acquirer.

Make Notes on What Stands Out

What is your reference talking about, what are they not talking about? Are there topics they don’t want to talk about, where they change the subject of the conversation? Are there things they are very passionate about? Put those notes on your list.

Do a Background Check on the Money

Ask for and do a background check on where the money on the company that acquires you comes from. Are those clean sources? Is your acquirer willing to talk about the origin of their funding? Is it publicly available information, or are they secretive about it? Private Equity is often, well, private, but that should not mean that you have to be in the dark. When asked for in confidence, a good actor will give you at least some information on the funding they use to invest with.

Red Flags to Look out For

Here are several things that should raise the alarm in your mind when doing your own due diligence on your potential acquirer.

There Is No Public Information About the Acquirer

It’s relatively easy to create a presence on the internet. If your acquirer does not have this, you should wonder why they would want to stay in the shadows. A company blog or at least a landing page should be present for any serious business. If there is none, this points at severe information asymmetry. In the end, that makes an interaction with such a potential acquirer very risky for someone like you: a founder who has to both run their business and research another one at the same time.

You Ask for a Specific Reference, and They Ignore That Request or Try and Dissuade You

If there is a person that someone does not want you to talk to, that should make you very wary. As I said, the acquisition business is a reputation game. If there is dirt that a company wants to sweep under the rug by making it inaccessible to you, that shows a lack of transparency and professionalism.

They Ask You to Sign Extensive NDA Constructs Before Talking to You

The more complicated legal documents you’re presented with, the worse off you’ll be. Acquirers have legal teams to deal with M&A while you have to run your business, grow your business, and deal with the acquisition offers. There is much more risk to your business in these talks than theirs, so why would they need to annoy you with the time-wasting legal requirement? After all, it’s just a conversation. At its best, this is wasting your time. At its worst, it could be an intentional attempt at distracting you from doing your work.

They Demand Access to Very Sensitive Data

If an acquirer asks you to give them access to things like your customer contact information, stop and think immediately. What could someone do with this information? Is the acquisition offer an attempt to grab your data? Make sure that they only have access to read-only data, limited views, and can’t easily export all of your sensitive information.

They Want to See the Real Data (Instead of Just Reports)

If an acquirer asks to see the data of individual customers before you sign a Letter of Intent and start the real Due Diligence, be careful. Even after signing the Letter of Intent, which is a non-binding agreement, you should make efforts to restrict access to this information. The acquirer can always back out of the transaction later, but you stand to gain nothing. If you must, give them partial access, but don’t give them the keys just yet. That is what happens when you actually sell the business, not before.

They Are No Culture Fit

Working the transition will be very hard if they’re not on your level. During the transition period, you will effectively be colleagues. You’ll be spending a lot of time with people inside your acquirer’s organization. If you feel that everyone you’ve been talking to feels weird to interact with, you might want to consider backing out of the deal.

At FeedbackPanda, we made sure to check for all of these red flags when talking to potential acquirers. When we interacted with SureSwift Capital, we were pleasantly surprised to find how professional and transparent they were from the beginning. But we still checked for every single potential issue, and we found no problems.

Trust is earned. That’s why doing your own due diligence on your acquirer is essential and needs to be conducted with care. Try being realistic about the transaction. There will be small obstacles and conflicts of interest. But you can talk these things through. In the end, both businesses want to benefit from an acquisition, and an optimistic perspective will make this an enjoyable process.

How to Prepare for Your Due Diligence

Finally, now that you have taken an in-depth look at your potential acquirer, here are a few things you can do to prepare for their due diligence on you.

Follow the scene. Listen to podcasts and read blog posts by the funds and Private Equity companies and brokers in your industry. That way, you will understand not only what multiples businesses are selling at, but you will also get to know the people who are involved in those businesses. I had been aware of SureSwift Capital long before they reached out to us since they have been present in the bootstrapper scene for a long time, providing blog content and being on podcasts and interviews.

Always have a Profit & Loss sheet ready, and keep it current. This is just good business hygiene. If you’re tracking your business metrics, you might also want to use several analytic tools like ProfitWell and Baremetrics. If you’re among the emerging group of founders who are using planning and forecasting tools like Summit, having your forecasts and plans available for acquirers to look into might also give you an edge when negotiating the sale price. Set up read-only accounts with these tools so you can quickly provide them to interested parties.

Read Built to Sell and listen to the Built to Sell podcast. John Warrillow offers hundreds of episodes about people selling their business, mostly as interviews. I listened to almost all of them in preparation for our due diligence, and the recurring themes in those interviews gave me valuable insight into what questions I should be asking.

And most of all, relax. I know this is an exciting time, and the thought of life-changing amounts of money are just a prevalent as the thoughts of dangers and risks of such an important transaction. Talk to your spouse, talk to your parents, talk to trusted friends. Don’t rush things, and most importantly, keep your business running. Sometimes, what sounds like a dream opportunity turns into a risky gamble, and you will back out. That is perfectly fine, maybe even necessary. You will know when the time is right. And now you also know what you’ll need to do.