The possibility of an acquisition can be exciting, but a lot needs to go right before you can ride off into the sunset. You may experience a rollercoaster of emotions throughout the process. After all, you’ve poured your heart and soul into the company. You want it to find a new home where it continues to thrive and grow while also ensuring that you’re adequately compensated for all of the work you’ve done.
It wouldn’t be prudent to think that you can put your feet up as soon as a buyer shows interest. Lack of adequate preparation could see the deal fall through and that could negatively affect your startup’s prospects. It may also end up denting employee morale, ultimately making you rue yourself for considering an exit that failed.
It’s incredibly important to prepare for an acquisition as it enables you to negotiate from a position of strength, expand the options available to you, and also provides you with an exit strategy should it appear that the deal isn’t going to work out.
By simply being mindful of these seven important considerations you can approach the entire process with more confidence and increase your chances of an exit on your terms.
If you’re not a serial entrepreneur that has gone through multiple exits, chances are your perception of the entire process might be a bit flawed. A lot of things can happen that can throw a wrench in the works. Expect challenges and difficulties every step of the way.
In a perfect world, the startup founder has a brilliant idea and they’re able to transform it into reality. The company might struggle a bit initially but it’s ultimately able to build a stable business and raise considerable funding.
It all goes well and you eventually receive an offer from an entity that’s willing to buy you out. The deal goes through effortlessly and you’re on a beach somewhere enjoying the good life. That’s what might happen in a perfect world but it certainly doesn’t in the real world.
You should have complete clarity on where you’ll draw the line during negotiations and that requires establishing clear boundaries on several things, such as:
This provides you with a framework to proceed with the negotiations to ultimately achieve a seamless transition.
You shouldn’t be flying blind into what could potentially be the biggest deal of your life. It’s important to research to get a sense of the mergers and acquisitions activity in your industry. Form an understanding of the type of buyers companies in your industries attract, what the deal sizes tend to be and how acquisitions work out over a longer period.
Oftentimes you’ll find benchmarks for valuations from your research but you won’t want to apply them without thinking through the logic as it applies to your startup. During buyer negotiations, leveraging a coherent foundation of how your valuation was built gives you an authoritative advantage. For SaaS valuations, often a multiple is applied to revenue rather than earnings since it’s common for SaaS startups to prioritize growth over profits. However, that means you’ll need to show the buyer that you’re actually growing in lieu of profit.
Buyers will be focused on three main SaaS metrics when determining your growth potential:
All three metrics are often combined to get a more complete view of growth, so it’s in your best interest to arm yourself with at least a strategy to improve each metric based on your experience as a founder.
You may receive several offers when considering exiting from the startup. It’s highly unlikely that every single one of those offers is going to result in a deal. It can indeed be an exciting moment when prospective buyers are lining up at the door but until it’s all said and done, you can’t take your eye off the ball.
You must continue to operate with a business as usual attitude. Even as you receive interest from buyers and deliberate internally on which offer to opt for, that shouldn’t take away your focus from the ultimate goal of growing the company.
Deals of this nature aren’t signed in a day. It’s going to be a lengthy process that will involve a lot of due diligence from the buyer. These things tend to take time and it’s common for deals to fall through just before the final stage. If you lose focus during this process and the deal doesn’t happen, you risk losing the valuable momentum that your startup has generated over a significant period of time.
No buyer is going to hand over a penny without thorough due diligence. Expect them to go over everything with the sole purpose of finding something that they can use to push the price down. Before deciding to sell, strive to keep impeccable legal and financial records, as you would be required to hand them over.
Work with your legal, accounting, and HR departments to make sure that there are no discrepancies in the documentation. Fix any that may exist before starting the process. Shabby recordkeeping can quickly make deals fall through so even if you have interest from a buyer that would be a good fit, if you don’t pass their due diligence, they won’t offer a deal.
An offer that’s great in monetary terms might seem too good to pass up but that shouldn’t be the only thing you consider before signing on a dotted line. It’s important to figure out if the buyer is going to be the right fit. Misaligned cultures can derail transitions and prevent synergy between teams.
Does the buyer have the same beliefs and values as your company? Is its mission statement aligned with yours? This would require interviews with their leadership, discussions with key executives, and possibly even interactions with employees to form an accurate assessment.
You need to be on the same page with the buyer regarding the strategic alignment for the future, particularly if you intend to stay on with the company after selling it. Having this discussion beforehand provides you with the opportunity to describe what your expectations are and also understand the vision of the buyer.
Ask them about how they see your startup meshing with their existing operations. If staying on, establish exactly what your role will be and if you’ll be allowed to have a say in key decisions going forward. Inquire if they intend to make any significant changes to your product to see whether that aligns with your vision.
Startups often make the mistake of going with their in-house counsel when negotiating a deal. That may not always be the best approach. There’s no alternative to experienced legal representation that specializes in mergers and acquisitions. Retaining experts in the field helps you protect your interests in the deal.
The outside legal counsel you retain will assist with everything from negotiations with the buyer’s counsel to drafting various agreements, making necessary regulatory disclosures, guiding staff through legal formalities, and ensuring that the entire process is done according to the relevant laws.
Employees have a right to know but informing them that you’re seeking a potential exit even before a deal has been signed is likely to dent morale. They might become unsure about their future at the company once it gets acquired or they might actively start looking for other opportunities elsewhere.
If the deal doesn’t go through, you could end up losing valuable resources. There may also be legal considerations before they can be informed. For instance, employees might be required to sign NDAs or non-competes. Let them know only when it’s a done deal.
Acquisitions can be tricky and a lot needs to go right before the deal is signed. Any number of trivial matters can derail the process and it can often be quite difficult to get it back on track. By keeping these considerations in mind, you reduce the chances of making insignificant mistakes that can jeopardize things.
Your ultimate concern might be to ensure that the startup continues to grow under new ownership. You might also want to ensure that the team that has worked so hard in building up the startup is well taken care of. By following the aforementioned steps, you can ensure that your expectations are valued and the deal is executed as close to your terms as possible.
This will prevent you from being double minded down the line or thinking about whether you did the right thing or not. Once the deal goes through successfully and you end up with the fruits of your labor, you can start thinking about what your next initiative will be, or if you’re ready to call it a day and put your feet up for good.
This is a guest post by Andrew Gazdecki, a 4x founder with 3x exits, former CRO, and founder of MicroAcquire. Gazdecki has been featured in The New York Times, Forbes, Wall Street Journal, and Entrepreneur Magazine, as well as prominent industry blogs such as Axios, TechCrunch and VentureBeat.