How should startup founders and their boards evaluate potential acquirers during an acquisition? Or, when it comes time for an exit?
If your startup is successful, you will end up at an exit event. It could be an IPO or a merger.
Though an acquisition may be the most likely and attractive path to take.
In fact, even if your startup isn’t as successful as you hoped, you will find an acquisition far more appealing.
That is as compared to just closing the doors, folding the business, or declaring bankruptcy.
Planning for a successful and the most profitable exit, and the next phase of the venture and your life is going to depend heavily on various factors.
These may include selecting the optimal buyer for your startup.
So, what steps, boxes to check off, and metrics should be on your list to evaluate?
Remember that mastering the storytelling side and how you are positioning your business is critical when it comes to engaging and speeding up the process. This is done via your acquisition memorandum. This is super important to reach a successful acquisition. For a winning acquisition, memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.
Here is the content that we will cover in this post. Let’s get started.
- 1. It’s All About Finding The Right Buyer For Your Startup
- 2. Ideally, you will be reading this even before starting your startup.
- 3. Decide What Is Most Important In A Buyer
- 4. Evaluating Potential Buyers For Your Business
- 5. Likability & Trustworthiness
- 6. Aligned In Mission & Vision For The Venture
- 7. Alignment In Values
- 8. The Capability To Buy You
- 9. Operational & Execution Capability
- 10. Experience in M&A
- 11. Level Of Due Diligence They Require
- 12. Resting & Vesting
- 13. Earnouts
- 14. Your Team
- 15. How Will They Value You
- 16. Tests Passed
- 17. How Soon Do They Want To Close?
- 18. Will They Want Everything, Or Not?
- 19. Tax Implications
- 20. Summary
It’s All About Finding The Right Buyer For Your Startup
The future of your company, product, and mission all rely on who ends up buying your startup.
Even the transaction itself will all be about the buyer you choose to engage with.
That not only includes whether the deal closes or not, and close to the terms of your original LOI.
But how much of your sanity you may still have by the time the wire comes through, the state of your personal relationships outside of work, and how you’ll feel about the deal for the rest of your life.
Even your own future possibilities, limitations, and how easy things go for you from here out depend on the buyer.
This is much like the impact of picking the right investors, hires, and co-founders for your business.
Perhaps only with the importance and impact multiplied by 10x or 100x.
You may have ended up here after already receiving an inbound offer and wanting to run an auction process.
That is, after having realized that your startup is maturing or hitting a ceiling.
It may be because you want to move on to something else, or because a crisis has made it your only appealing choice.
If that’s the case you have no time to waste in learning this process.
And may want to accelerate your learning and strengthen your position quickly by bringing on an M&A advisor to help you avoid dire mistakes.
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Ideally, you will be reading this even before starting your startup.
This will allow you to define your ideal buyer months and years in advance.
It means that you can structure, plan, curate, and design your startup to be the perfect, must-have deal for that buyer.
As well as making all the right connections in the meantime. A scenario that will yield much more value for you.
And help you evaluate potential buyers during an acquisition.
Keep in mind that in fundraising or an acquisition, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Decide What Is Most Important In A Buyer
You’ll start by checking off any generic lists, or opening up the opportunity to a wide range of potential bidders or investment bankers.
But, before that, get clarity on what is really most important to you in an acquirer, and the deal.
M&A deals are time-consuming and resource-consuming enough even in the most straightforward arrangements.
You definitely do not want to compound and multiply that by seriously engaging or flirting with many parties who are not the right fit.
That can prove costly in many ways.
Decide what is most important to you in the process and outcome of selling your business.
Prioritize what you want and care about the most. Use this as your overarching decision guide for everything else.
Including the weight you give to the following evaluation points.
Evaluating Potential Buyers For Your Business
You shouldn’t just be begging buyers to pick your company to buy. And desperately trying to please them and present what you think they want.
You are giving them the privilege of being the winning bidder and custodian of what you have built with lots of sweat, energy, stress, and risk-taking.
You should be interviewing, screening, and vetting them. Just as you would an important hire or investor.
Here are some of the ways that you should evaluate and measure potential acquirers.
Likability & Trustworthiness
It may not sound like the most formal and mathematical equation for a business transaction.
But this may be the most important deciding factor in who you really want to sign with.
You are going to be putting your business baby in their hands for the next few years, decade, or more of its life.
It may not be too different from sending your child off to a college, having them adopted, or choosing a guardian in case something happens to you.
So, you want to put it in the hands of someone you trust and like.
Even more so considering that you may end up working for them for the next four years.
It is going to take time to assess this and to build the personal relationship enough to really be able to gauge this.
Not only do you want to evaluate their past reputation, but will be best served by building these connections over months and years ahead of an exit.
Aligned In Mission & Vision For The Venture
Are you just cashing out, and simply want to walk away and put this company behind you?
If not, then finding alignment in the mission and vision you had for your company could be a top priority for you.
This may be in terms of specific products or IPs you developed. Or the impact you wanted to have for customers and the world.
Focus on that when you evaluate potential buyers during an acquisition.
Alignment In Values
Goals and metrics are one thing. More importantly, may be the values and how the next owner will get there.
How they will execute and make decisions. Whose best interests will they be operating in?
Will everything be run by boosting the quarterly numbers at all costs?
Or will they put customers and impact, or other values first as guiding principles?
The Capability To Buy You
How strong is their capability to buy you? Is this a transaction easily within their reach and budget. Or will they be stretching their limits?
If it is supposed to be an all-cash deal, do they have that on hand? And a substantial surplus in case of a crisis before you close?
Or, if this is a leveraged buyout (LBO) or financed deal, do they have the credit and facility in place?
Will they be raising another round of funding which can be risky?
How are their stock value and outlook if they want to pay in stock?
Operational & Execution Capability
A potential buyer may seem like a great match in vision and values, but how capable are they of executing on those stated goals?
How well do they run products and business units like this? Is there a strong culture match?
Do they have a strong track record of successfully integrating companies that they acquire?
Experience in M&A
Is this their first attempt at M&A? Or do they have a well-oiled acquisition process and system?
Do they know how to close fast and efficiently? Or is this going to be a steep learning curve at your expense?
Get this information when you want to evaluate potential buyers during an acquisition.
Level Of Due Diligence They Require
How much due diligence are they required to complete this deal? Do they just want to get it done?
Or do they need to bring in teams and outside experts to run a process?
That process could be many months long, with every detail comprehensively evaluated and renegotiated.
If you aren’t sure about the due diligence items listed or excluded in your LOI, can you reach out to other entrepreneurs and learn about their experience selling a business to this company?
Resting & Vesting
How long will they want you to stay on, or not, after the closing?
Will you immediately be a free agent with no restrictions? Or will you be tied in for three, four, or more years, as an employee of this buyer?
How much of the sales price and your personal payout will depend on earnouts after the sale?
In addition to the specific performance metrics and milestones you’ll be required to hit after the close, what detailed provisions in writing are you getting that will empower you to hit those goals?
What will happen to your team as a result of this? Will they have jobs, good job titles, benefits, stock options, etc?
Or will they have the freedom to move with you or on their own and keep working within the industry?
How Will They Value You
What are the factors and metrics that they are valuing you on? Are they strategic or financial buyers?
What elements are most important to them. Can you keep firing on them through closing?
Is this in alignment with what is most important for you?
In any acquisition, knowing how to value your company is a critical factor. If you would like more information on how to do that, check out this video I have made. You’re sure to find it helpful.
With so much at stake, it is worth testing the relationship and these factors before you dive deep into M&A conversations.
Have you proven you can work together synergistically through test partnerships already?
Can you collaborate on marketing, bundling products, or other factors to test this match before going deeper?
These tests can be mutually beneficial and profitable and will tell you far more than any promises, pitches, or initial LOIs.
How Soon Do They Want To Close?
Is the closing on your timeline? Is it set to be very fast and lower risk for you?
Or could be it an extended timeframe with great risk of not completing, as well as substantially more cost and work for you?
How fast they are willing to close can say a lot about how serious and committed they are?
As well as how smooth and efficient the transaction may be. This information can be a great first step when you evaluate potential buyers during an acquisition.
Will They Want Everything, Or Not?
Do buyers you are talking to want all of your business and its assets? Or are they focused on one or two particular items?
This will reveal a lot about their intentions and plans. It can also unlock a lot of extra value for you.
Know what specific parts of your business they want to acquire, as well as those they don’t.
Do they want your team, physical assets, and inventory, contracts, cash on hand, IP, and individual products?
Are there any they specifically don’t want?
There may be some items they aren’t interested in, or which could save them time and money by not including them in the deal.
Sometimes these are the parts that you actually may feel are the most valuable and have the greatest potential.
You may retain them, spin them out into new businesses, or sell them for more to other buyers.
Taxes can be hugely impactful. They can make all the difference in the net for you, your co-founders, team members with equity and options, and your investors.
Understand the deal structure, your options, and alternatives, and how does it impact you?
Tax to your tax experts on how you can minimize your tax liability relating to this transaction.
Considering selling your business? The buyer you choose to sell with will make all the difference in your exit and your future.
Know what’s most important to you, and weigh these factors when you evaluate potential buyers during an acquisition.
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