How to Get Your Startup Acquired: A Brief Guide to Achieving What You Want From an Acquisition
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What do you want from an acquisition?
For most founders, it’s three things: to sell quickly, easily, and for the highest price.
You might hold secondary goals such as finding a buyer who’ll continue your legacy and take care of your customers and employees. Knowing your startup is in good hands is certainly a reassuring thought.
But the main aim for most founders is maximum reward with minimum stress – and that’s okay. You deserve a return on your hard work bringing your startup to exit.
And if you’re preparing for exit now, you’ve chosen one of the best times in history. The global M&A market was worth over $5 trillion in 2021 and doubled in size in the US alone.
Buyers are hungry for profitable, high-growth startups, and our startup acquisition marketplace makes it easy to list and free to sell. Throw in seller financing and you’ll be irresistible!
Everything points to 2022 and beyond being an incredible time to sell your startup.
But how do you get what you want from an acquisition?
The process is notoriously slow and complicated, and buyers experienced in M&A tend to wield an advantage.
If it’s your first time, you might be unsure where to start.
Well, you’ve come to the right place.
The golden rule in acquisitions is preparation. Exit planning should start now, not in a year or longer when you’re ready to sell.
While it’s beyond the scope of this blog to give you a detailed breakdown of all aspects of acquisitions (there are thousands of considerations!), the tips below should help you get started.
Once you reach the end and are ready to list, open your seller account on MicroAcquire for free.
Before Listing Your Startup for Acquisition
Set Your Acquisition Goals
It might seem paradoxical, but it’s your goals that set the tone for your startup’s acquisition, not a buyer’s. Sure, they’ll try to convince you otherwise, but it’s all part of the negotiation. As a result, you need to know what you want to achieve the best possible outcome.
Buyers hate prevarication and might also use it to their advantage, so you must understand exactly what the acquisition means to you. For example, have you considered the circumstances in which you’d sell? How much would you want for your startup? What will you do after acquisition: retire or start a new venture? Answering these questions now, even if you don’t plan to sell immediately, helps determine how to play later stages to your advantage.
With acquisition goals in place, even temporary ones, you know what you need to do in the interim period to prepare. For example, if you want to merge with another company in a strategic acquisition, you might adopt a similar tech stack or target their customer demographic.
Early exit planning also prepares you for any unexpected offers. If a buyers offers you a generous package on the condition that you stay on for another three years, you might say yes now if you already know you’ll retire then anyway (and who knows if you’ll get another offer as good?).
Or, you might accept an offer now if it means starting a new venture earlier (speedy execution could mean the difference between success and failure).
Hire an M&A Advisor
Walking into an acquisition without experience is like trekking through the Amazon without a guide. Chances are, you’re going to get bitten or lost. An M&A advisor, however, can guide you through every step of the acquisition process, recommend other professionals when required (such as legal counsel), and help you avoid the pitfalls that derail acquisitions.
Acquisitions can take months to close. During that time, your startup must continue to grow and generate profits. If you’re distracted by the acquisition and the numbers begin to slip, buyers will want to renegotiate the purchase price. With an M&A advisor handling the acquisition, you get to focus on what matters – operating your business until the point at which it changes hands.
You don’t need an acquisition professional to get your startup acquired, but it could mean gaining an enormous advantage in negotiations. An M&A advisor knows the market, understands what motivates buyers, and can help with everything from due diligence to valuations. If you want the best outcome, an M&A advisor boosts your chances of getting it, and in that sense, they usually pay for themselves.
Fix What Needs Fixing
The better condition your startup is in, the more buyers you’ll attract and the higher price you’ll command in the market. If revenue or profitability are falling, fix the underlying causes before listing your startup for sale. The same applies to any ownership disputes over your intellectual property (IP), operational inefficiencies, product faults, poor reviews, and so on.
Your startup needn’t be perfect (none are), but it should be the best version of itself. If you know there are underlying weaknesses to address – perhaps you’ve deferred remedial action due to more pressing matters – solve the problems before presenting your startup to market. That way, buyers have fewer issues to fix or worry about and will be more amenable to closing on your terms.
Set Up a Data Room
A data room is a shared virtual space where you store everything critical to the acquisition. It’s a bit like a digital filing cabinet to which you and the buyer have access and makes sharing information easy, permission-based, and controlled. Everything from your financial records to operational manuals goes into your data room.
Never created a data room before? Check out this free data room template we created for you. Prepare it well in advance of listing your startup so you can respond to buyers’ requests quickly and easily. It’s much easier using a data room than fiddling with attachments and hundreds of Google Drive links.
Attracting and Evaluating Offers
Get Your Valuation Right
One of the biggest reasons a revenue-generating startup fails to attract acquisition offers is overvaluation. It’s okay to be ambitious, but you must also be realistic. Valuations are more than just a multiple applied to EBITDA or revenue – they also depend on market variables (buyer appetite, consumer trends, competition, and so on) and the unique qualities of your startup.
Failing to get your valuation right repels buyers for many reasons. One, they might think you’re trying to rip them off, two, you may be so distant from each other’s numbers there’s no room to negotiate, and three, they might assume you’ve been equally unrealistic or over-confident in other areas of your business (which could potentially reduce their return on investment).
In most cases, the buyer will determine your valuation and then it’s up to you or your M&A advisor to negotiate. Given your attention should be on running your business during the acquisition process to maintain momentum, your M&A advisor is best placed to calculate your valuation and will take the time necessary to understand all the facets of your business before determining a number.
Let’s say your valuation is spot on, but you’re still struggling to attract offers, or interested buyers can’t stretch to your asking price. The likely issue here is your buyer pool is too small, which can occur if you’re operating in a niche market. To increase your buyer pool, you could offer seller financing: a down payment and then installments (at a premium, if you wish).
It might feel strange to bear the burden of financing, but if your ideal match lacks the capital to acquire your startup, you might end up selling to someone less desirable. It also helps to close any gaps between your and the buyer’s pricing expectations. Seller financing combined with an earnout could mean the difference between a quick sale at the price you want and no sale at all.
Negotiate the Terms of Letters of Intent (LOIs)
While it’s tempting to crack open the bubbles when you get that first LOI, it’s really just an opening move in a rather elaborate chess game. That’s not to say you must outmaneuver your buyer if you want to achieve your acquisition goals, but that you must consider the LOI as the opening gambit on the buyer’s side and the point at which negotiations begin.
Will you accept an exclusivity period, for example? What about an earnout? Are you going to offer financing? How will the purchase price be paid? These are just a sample of negotiation points you need to consider (which is why it’s so important to set your goals before you enter a negotiation). Don’t be fooled into thinking the LOI is the final say and the buyer won’t budge. Ask for what you want and you might be surprised and get it.
Closing Your Acquisition
How to Close Financial Gaps
In some ways, finding the right buyer is more important than getting the exact amount you want from the sale. You might want someone to continue your legacy or ensure your employees are well-cared for and supported. But if the right buyer comes along who happens to lack the capital to acquire your startup, you needn’t slash and burn to close the gap.
As mentioned earlier, you might even pocket a little more than you expected by offering seller financing. Assuming your buyer’s credit is sound, accepting a down payment and then the rest of the purchase price in installments (at a premium) could easily close the gap. Or, suggest they source their own financing via an alternative lender.
If they’re concerned about earning a return on investment, consider offering them an earnout where you again receive a down payment and then regular installments once you hit pre-agreed milestones. It’s not ideal, since you have little control over your startup once it’s been acquired, but it could be an acceptable compromise if you decide to stay on for a year or so.
Prepare for Due Diligence Early
Once you’ve agreed on a price, you’ll move to due diligence, which is typically the stage that induces the most nerves. Diligence involves answering hundreds of questions and sharing potentially hundreds of documents. It’s an audit on steroids, and if you go into it unprepared, you’re going to get burned. Plan early, however, and it could be a breeze.
Upload relevant documents to your data room (a trailing 12-month P&L, employee profiles, vendor and customer lists, licenses, and so on), fix any outstanding legal issues, and hire the services of an M&A advisor or attorney. Your attorney will steer you through due diligence, prepare everything you need in advance, and deal directly with your buyer’s counsel.
Create an Asset Transfer Plan
Once you emerge from due diligence, perhaps a little bruised but by no means broken, all that’s left is for the buyer to sign the purchase agreement (which is the point at which the buyer can’t legally back out of the deal) and you to transfer the assets specified in the agreement.
Asset transfers can get a little messy if you leave it until the last minute, so I suggest you create an asset transfer plan in advance. Your plan should list all the transferable assets, which could be anything from GitHub repositories to excess stock, and the steps you must take to transfer them. Then when the deal is done, you know exactly what you need to do next.
You’ll probably spend some time with the buyer post-acquisition to help them settle in, but demonstrating a tightly organized transfer plan will give the buyer confidence and will put less pressure on you after the deal closes.
I hope you find the above information useful. Everything will become clear once you start the acquisition process, but you’ll endure fewer nasty surprises if you prepare now, and will increase your chances of getting what you want from the acquisition, too.
I can’t overstate how valuable professional help can be – even if you’re a year or more from listing your startup on the market. Most founders enter the acquisition process and lack the time and direction needed to achieve their goals, which can mean walking away with less in your pocket or waiting months to sell.
Don’t let a lack of foresight impact your acquisition. Start exit planning now with our first in-market M&A advisor directory: a virtual Rolodex of over 50 professionals with expertise in brokering, legal, diligence, valuations, escrow, and more.
Join MicroAcquire now and get the professional help you need to sell your startup quickly, easily, and at the highest price.