Maria Montero

Ten Friendly VC Tips For When Someone Wants To Buy Your …

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.