I’ve been lucky to have been a part of half a dozen exits this yr, and have seen the method work easily, and different instances, like a curler coaster with solely probably the most tenuous connection to the monitor. Here are ten bits of recommendation I’ve distilled from these experiences within the occasion somebody makes you a proposal to your startup.
1. Understand the motivations of your acquirer.
The very first thing it’s essential perceive is why the buying firm needs your startup. Do you will have a strategic product or know-how, a novel group, or a large income run fee? Strategic acquirers, like Google and Facebook, probably need you to your tech, group, or typically even your consumer traction. Financial acquirers, like PE corporations, care an important deal extra about income and development. The motivations of the consumers will probably be the single-biggest influencer of the a number of supplied.
It’s additionally important to speak value early on. It may be considerably awkward for much less skilled founders to suggest a wealthy valuation for his or her firm but it surely’s a crucial step in the direction of assessing the seriousness of the dialogue. Otherwise, it’s far too simple for an acquirer to place your organization via a distracting course of for what quantities to an underwhelming supply, or worse, a ploy to be taught extra about your technique and product roadmap.
2. Don’t “Test the waters.” Pass, or totally commit.
Going via an M&A course of is the only most distracting factor a founder can do to his or her firm. If executed poorly, the method can terminally injury the corporate. I’d strongly advise founders to contemplate these three factors earlier than making a call:
Is now the appropriate time? The resolution to promote generally is a robust alternative for first-time founders. Often the chance to promote the corporate comes simply as the method of operating it turns into satisfying. Serial entrepreneurship is a low-percentage recreation, and this can be probably the most influential platform a founder will ever have. But the reflex to promote is comprehensible. Most founders have by no means had an opportunity so as to add tens of millions to their financial institution accounts in a single day. Moreover, there’s a group to contemplate; often all with mortgages to pay, school funds to shore up, and the myriad of different bills and their wants ought to issue into the choice.
Is it truly your option to make? Most buyers have a look at M&A as an indication your organization might be even larger and as a chance to place extra capital to work. However, when VCs have misplaced confidence and see a good supply are available, or they hear a bigger competitor is coming into your area, they might push you to promote. Of course, one of the best place to be in is one the place you may management your future and use profitability as the final word BATNA (“best alternative to a negotiated agreement”).
How lengthy do you need to keep? In the case of competing provides, you will have restricted potential to barter value, however different deal phrases might be negotiable. One of a very powerful is the period of time you need to keep on the firm, and the way a lot of the sale value is held in escrow, or depending on earn-outs.
3. Manage your group.
As quickly as you entice curiosity from an acquirer, begin socializing the concept that most M&A offers crumble — as a result of they do. This is necessary for 2 causes.
First, your government group will probably begin counting their potential beneficial properties, and so they simply could let KPIs key to operating the enterprise slip. If the deal fails to shut, the senior group can be dejected, demotivated, and chances are you’ll begin to hear some mutinous noises. This angle shortly percolates via the group and may be lethal for the tradition. What was alleged to be your second of triumph can shortly flip right into a disaster for group morale.
This is often the hardest a part of the M&A course of. You want the exec group to execute to shut a deal, however you’re operating into among the deepest recesses of human nature too. Recognize the truth that managing inner expectations is as necessary as managing the exterior course of.
4. Raise sufficient cash to remain flush for a yr.
Assuming you’re promoting your organization from a place of energy, ensure you have sufficient capital so that you simply don’t lose leverage resulting from a steadiness sheet missing money. I’ve seen too many firms begin M&A discussions and take their foot off the gasoline within the enterprise, solely to see the metrics drop and runway shorten, permitting the acquirer to play hardball. In a really perfect situation, you need at the least 9 months of money within the financial institution.
5. Hire a banker.
If you get severe inbound curiosity, or in case you’re on the level the place you wish to promote your organization, rent a banker. Your VCs ought to be capable of introduce you to a couple sturdy corporations. Acquisition negotiations are excessive stakes, and whereas bankers are costly, they will help keep away from pricey rookie errors. They also can classically and plausibly play the dangerous cop to your good cop which may additionally contribute positively to your post-merger relations.
My solely caveat is that bankers have a playbook and have a tendency to not get inventive sufficient. You can nonetheless be additive in serving to fill the funnel of potential acquirers, particularly in case you’ve had communication with unlikely acquirers up to now.
6. Find a second bidder… and a 3rd… and a fourth.
The hardest bit of recommendation can be probably the most useful. Get a second bidder ASAP. It’s Negotiation 101, however and not using a credible menace of a aggressive bid, it’s all too simple to be dragged alongside.
Hopefully, you’ve been speaking with different firms in your area as you’ve been constructing your startup. Now is the time to name your level of contact and warn them deal goes down, and if they need in, they should transfer shortly.
Until you’re able of formal exclusivity, maintain speaking with potential acquirers. Don’t be afraid so as to add new suitors late within the recreation. You’d be amazed at how a lot information spreads via M&A again channels and chances are you’ll not even pay attention to rivalries that may be extraordinarily helpful to your pursuit.
Even once you’re far down the highway with an acquirer, in the event that they know you will have a fallback plan in thoughts it may present useful leverage as you negotiate key phrases. The valuation could also be set, however the quantity paid upfront vs. earnouts, the lock-up interval for workers and a large number of different particulars may be negotiated extra favorably when you have an actual various. Of course, nothing gives a greater various than your merely having a rising and worthwhile enterprise!
7. Start constructing your information room.
Founders can increase shockingly giant sums of cash with pitch decks and spreadsheets, however when it comes time to promote your startup for a big sum, the client goes to wish to get entry to documentation, typically all the way down to engineering assembly minutes. Financial data, forward-looking fashions, audit data, and some other spreadsheet can be scrutinized. Large acquirers will even wish to have a look at data like HR insurance policies, pay scales, and different human sources trivia. As negotiations progress, you’ll be anticipated to share virtually each element with the client, so begin pulling this data collectively sooner reasonably than later.
One CEO stated that throughout the peak of diligence, there have been extra folks from the acquirer in his workplace than staff. Remember to deal with your CFO and General Counsel effectively – chances are high excessive that they get little or no relaxation throughout this course of.
8. Keep your board shut, your tiny buyers far-off.
Founders are in a troublesome scenario in that they’re ravenous for recommendation, however they need to keep away from the temptation to share information about negotiations with those that don’t have alignment. For occasion, a small shareholder on the cap desk is extra prone to blab to the press than a board member whose incentives are the identical as yours. We’ve seen offers scuttled as a result of phrase leaked and the acquirer received chilly ft.
Loose lips sink startups.
9. Use leaks once they inevitably occur.
Leaks are annoying and preventable, but when they do occur, attempt utilizing them as leverage. If the press studies that you simply’ve been acquired, and also you haven’t been, and likewise haven’t entered a interval of exclusivity, attempt to make sure that different potential bidders take discover. If you’ve been having bother drumming up curiosity with potential bidders, a report from Bloomberg, The Wall Street Journal, or TechSwitch can spark curiosity in the way in which a easy e mail received’t.
10. Expect sudden radio silence.
There’s a disconnect between how founders understand a $500M acquisition and the way a large like Google does. For the founder, it is a life altering second, the fruition of a decade of labor, a testomony to their group’s efforts. For the corp dev particular person at Google, it’s Tuesday.
This actuality implies that your deal could get dropped as all palms rush to get a higher-priority, multi-billion greenback transaction over the end line. It may be terrifying for founders to have what have been productive talks go radio silent, but it surely occurs extra usually than you suppose. An excellent banker ought to be capable of again channel and skim the tea leaves higher than you may. It’s their day job not yours.
No quantity of recommendation can put together you for the M&A course of, however keep in mind that this might be one of many highest high quality issues you’re prone to expertise as a founder. Focus on execution, however be ok with reaching a milestone many entrepreneurs won’t ever expertise!