I’ve been lucky enough to have been on half a dozen rides this year, and I’ve seen the process run smoothly, and at other times, like a roller coaster with the most tenuous connection to the track. Here are ten tips I’ve gleaned from these experiences in case someone makes you an offer for your startup.
1. Understand the motivations of your acquirer.
The first thing to understand is why the acquiring company wants to get you started. Have a strategic product or technology, a unique team, or a sizeable revenue execution rate? Strategic acquirers, such as Google and Facebook, You likely want it for your tech, gear, or sometimes even your user traction. Financial acquirers, such as physical education companies, are much more concerned with revenue and growth. Buyers’ motivations are likely to be the biggest influencer of the multiple offered.
It is also essential to talk about price from the beginning. It may be a bit awkward for less experienced founders to come up with a valuable valuation for their company, but it is a critical step toward assessing the seriousness of the discussion. Otherwise, it is too easy for an acquirer to put their business in a distraction process by what amounts to a disappointing offer or, worse, a strategy to learn more about their strategy and product roadmap.
2. Don’t “Test the Waters”. Pass or fully commit.
Going through a M&A process is the one most distracting thing a founder can do to his company. If executed poorly, the process can lead to terminal damage to the company. I recommend founders to consider these three points before making a decision:
Is now the right time? The decision to sell can be a difficult decision for first-time founders. Often times, the opportunity to sell the company presents itself just as the management process becomes enjoyable. Serial entrepreneurship is a low-percentage game, and this may be the most influential platform a founder will ever have. But the reflex to sell is understandable. Most of the founders have never had the opportunity to add millions to their bank accounts overnight. Also, there is a team to consider; Usually everyone with mortgages to pay, college funds to shore up, and the myriad of other expenses and needs must factor in the decision.
Is it really your decision to do? Most investors see mergers and acquisitions as a sign that their company could be even bigger and an opportunity to put more capital into operation. However, when VCs have lost confidence and see a fair offer, or hear that a larger competitor is considering entering their space, they can pressure you to sell. Of course, the best position to be in is one where you can control your destiny and use profitability as the ultimate BATNA (“the best alternative to a negotiated deal”).
How long do you have to stay? In the case of competitive offers, you may have limited ability to negotiate the price, but other negotiation terms may be negotiable. One of the most important is the amount of time you have to stay with the company and how much of the sale price is held in escrow or depends on profits.
3. Manage your team.
As soon as you attract an acquirer’s interest, start socializing the idea that most M&A deals roll back, because they do. This is important for two reasons.
First of all, your executive team will likely start counting your potential earnings and only let the key performance indicators (KPIs) be key to executing the trade slippage. If the deal doesn’t close, the senior team will be rejected, unmotivated, and you may start to hear some mutual noises. This attitude quickly seeps through the team and can be deadly to the culture. What was supposed to be your moment of triumph can quickly turn into a catastrophe for team morale.
This is typically the most difficult part of the M&A process. You need the executive team to execute to close a deal, but you are also finding yourself in some of the deepest corners of human nature. Recognize the fact that managing internal expectations is just as important as managing external process.
4. Raise enough money to stay flush for a year.
Assuming you are selling your company from a position of strength, make sure you have enough capital not to lose leverage due to a cash-lacking balance sheet. I’ve seen too many companies start M&A discussions and loosen up on the business, only to see the metrics shrink and the leads shortened, allowing the acquirer to play hard. In an ideal scenario, you want at least 9 months of cash in the bank.
5. Hire a banker.
If you’re getting serious entry interest, or if you’re at the point where you want to sell your business, hire a banker. Your VCs should be able to introduce you to some strong firms. Acquisition negotiations are a big gamble, and while bankers are expensive, they can help avoid costly rookie mistakes. They can also play classically and plausibly as the bad cop to their good cop, which can also contribute positively to their post-merger relationships.
My only caveat is that bankers have a playbook and tend not to be creative enough. It can still be additive in helping to fill the funnel of potential acquirers, especially if you have had communication with unlikely acquirers in the past.
6. Find a second bidder… and a third… and a fourth.
The most difficult advice is also the most valuable. Get a second bidder as soon as possible. It’s Negotiation 101, but without a credible threat from a competitive offering, it’s all too easy to get swept away.
Hopefully, you’ve been talking to other companies in your space while you’ve been building your startup. Now is the time to call your point of contact and warn them that a deal is falling apart, and if they wish, they must do so quickly.
Until you’re in a position of formal exclusivity, keep talking to potential buyers. Don’t be afraid to add new suitors late in the game. You would be surprised by the amount of information that spreads through the M&A return channels and you may not even realize the rivalries that can be extremely helpful to your search.
Even when you are far down the road with an acquirer, if they know you have a backup plan in mind, it can provide you with valuable leverage by negotiating key terms. Valuation can be set, but the amount paid up front versus earnings, the lockout period for employees, and a host of other details can be negotiated more favorably if you have a real alternative. Of course, nothing provides a better alternative than simply having a growing and profitable business!
7. Start building your data room.
Founders can raise surprisingly large sums of money with launch pads and spreadsheets, but when the time comes to sell their startup for a large sum, the buyer will want access to documentation, sometimes even minutes of engineering meetings. Financial records, prospective models, audit records and any other spreadsheet will be analyzed. Large buyers will even want to see information like HR policies, pay scales, and other HR details. As the negotiations progress, you are expected to share most of the details with the buyer, so start gathering this information sooner rather than later.
One CEO said that during the peak of the errand, there were more buyer people in his office than employees. Remember to treat your CFO and your general legal counsel well, as they will most likely get very little rest during this process.
8. Keep your board of directors closed, your small investors away.
Founders are in a tough spot because they are starving for advice, but they must avoid the temptation to share information about the negotiations with those who are out of alignment. For example, a small shareholder at the top table is more likely to share with the press than a board member whose incentives are the same as yours. We’ve seen deals failed because word got out and the acquirer has gone cold.
Loose lips sink startups.
9. Use leaks when they inevitably happen.
Leaks are annoying and avoidable, but if they do occur, try using them as leverage. If the press reports that you have been acquired and you have not been, and you have not entered an exclusivity period either, try to make sure that other potential bidders notice. If you’ve had trouble raising interest in potential bidders, a report from Bloomberg, The Wall Street Journal, or TechCrunch may spark interest in a way that a simple email won’t.
10. Expect sudden radio silence.
There is a disconnect between how the founders perceive a $ 500 million acquisition and how a giant like Google does. For the founder, this is a life-changing moment, the fruit of a decade of work, a testament to the efforts of his team. For the developer person at Google, it’s Tuesday.
This reality means that your deal may fall as all hands rush to get a higher priority multi-million dollar transaction at the finish line. It can be scary for founders when productive conversations go quiet over the radio, but it happens more often than you think. A good banker should be able to turn back the channel and read the tea leaves better than you. It’s their day job, not yours.
No advice can prepare you for the M&A process, but remember that this could be one of the higher quality problems you are likely to experience as a founder. Focus on execution, but feel good about achieving a milestone that many entrepreneurs will never experience!