How to Position Your Startup for Acquisition
Your startup can end in two ways. One, it goes under, or two, it gets acquired. Any sensible entrepreneur will hope for number two, which means preparing your startup for a life-changing exit in the future. Now, you might think exit planning starts when you’re ready to sell, but if you want to sell quickly and easily, it should start long before (at least a year). Why? Because the more prepared you are, the better your outcome.
Acquisitions can be difficult and complex. You have to find buyers, attract their interest, negotiate terms, undergo due diligence, and transfer assets (assuming it’s an asset purchase and not a stock sale). Throughout these stages lie legal pitfalls, areas where a missing document or misused term can stall or derail your acquisition. Buyers don’t like surprises, and if you’re unprepared, they’ll likely keep their distance.
The best defense attacks, as they say, so if you want to get your startup acquired without the usual headaches, start preparing now. Below, are a series of steps to follow when positioning your startup for acquisition. They include why acquisition goals are important, how to market your startup, and how to prepare your startup for acquisition (including what documents to prepare and who can assist you).
Set Acquisition Goals
What would get your startup acquired mean to you? You might take early retirement, start a new venture, or even stay on with your business under new ownership. The possibilities are varied and what you want will determine how to position your startup for acquisition. If you’re planning to take time off, you’ll likely want the buyer to pay cash, which will impact your buyer pool, negotiations, and how you structure the acquisition deal.
On the other hand, if you’re starting a new venture or staying on, perhaps upfront cash isn’t as important. You might accept a down payment and then offer financing through a seller note (a debt instrument where the buyer owes you) or earnout (where you get paid upon your startup hitting certain milestones). Getting acquired as fast as possible or finding buyers that align with your mission will also influence how you plan to exit.
Consider Your Buyer
Also, what does a buyer want from your startup? Financial buyers expect different things to strategic buyers, for example. A financial buyer wants a return on investment but a strategic buyer acquires companies that bolster their own (they might acquire IP, talent, or new markets, for example). Although strategic acquisitions often make the news, financial acquisitions are more common.
Attracting the interest of a financial buyer might only mean demonstrating strong revenue and profit growth with attractive future projections. But if you want to get acquired by a strategic buyer, you might have to switch to their tech stack, location, or develop products and enter markets they’d find useful. Improving your financial performance is arguably easier than adjusting your operations, so factor time and effort into your exit plan.
Reflect on Your Startup’s Strengths and Weaknesses
Acknowledge that you’re emotionally attached to your startup. You were there when customers were few and the product was mediocre. You stayed up late to fix bugs or draft SEO and marketing campaigns. I wouldn’t blame you for overestimating your startup’s strengths while underestimating its weaknesses. But now is not the time for subjectivity. Take the rose-tinted glasses off and scrutinize your startup as a buyer would. Be honest.
Understanding your startup’s strengths will help you market it to buyers. Whether it’s your codebase, features, or superior customer support, know what makes your startup uniquely brilliant. What differentiates it from the competition? Strong financials? A lean, agile business model? Fantastic. Learn how to articulate these strengths in the best light possible, and how they support a return on investment to any prospective buyer.
But more importantly, get to know and accept your weaknesses. Your startup needn’t be perfect to get acquired (none are), but you must be transparent about its faults. Strangely, your startup’s faults might be the very thing that attracts a buyer. Some buyers search for skill gaps they can fill to help growth soar and earn their return on investment. Your weaknesses, therefore, are growth opportunities for the right buyers. Sell them.
Buyers will ask you hundreds of questions, and you’ll need to provide evidence when giving answers. In early acquisition discussions, it might be simple things like your startup’s domain, name, pitch deck, and financial metrics. You can choose who to reveal this information to when you sell your startup on a marketplace like MicroAcquire. Such data is easy to connect to your listing, but you’ll need a data room as talks progress.
What’s a data room? A virtual, permissions-based folder – a bit like a Google Drive folder – where you store everything pertinent to your acquisition. Rather than fiddle around with email attachments and cloud storage accounts, you create a single folder from where you selectively share data with buyers. You could wait to populate your data room until you’ve found a buyer, but I don’t recommend it for the following reasons.
First, buyers expect you to answer questions promptly and accurately. If you leave populating your data room to the last minute, you risk errors or delays that could put the buyer off. Also collating the information for your data room (P&L, contracts, licenses, HR records, your counsel’s digital minute book, and so on) is a trial run for due diligence. If you discover a problem, you can fix it before it becomes a deal-breaking issue later.
Hire Outside Help
Following the guidelines above will help you get acquired. But if this is going to be your first acquisition, or if you expect to sell for several millions of dollars, you’re much safer hiring an acquisition professional to help you secure the best outcome. At the very least, you’ll need counsel to help draft or review legal documents such as letters of intent (LOIs), purchase agreements, and various clauses and conditions. Don’t attempt this yourself.
Another helpful professional is a mergers and acquisitions (M&A) advisor. Think of an M&A advisor as your battle-hardened acquisition general. They’ll devise strategies that help you market your startup, find the right buyer, secure the maximum price, and negotiate the best deal structure. They also have a professional network of other advisors they can call upon to help with things like reducing your tax liability at the close.
Perhaps the biggest advantage of an M&A advisor is that they know the market. They know what startups like yours sell for and can help you set a realistic asking price. Usually, only the biggest acquisitions make headlines and most M&A activity is locked behind non-disclosure agreements (NDAs). Determining a fair asking price is extremely difficult unless, like an M&A advisor, you have intimate knowledge of the market.
As you can see, positioning your startup for acquisition needs plenty of forethought. Leave it all until the last minute and you set yourself up for failure. If you want to eventually get acquired at the maximum possible price, start preparing for acquisition now. Learn what makes your startup attractive, exploit your strengths (and weaknesses), document everything, and hire an acquisition professional to see you over the finish line.