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Ready to sell your startup? How do M&A negotiations work? Figuring out how to negotiate an acquisition could be one of the most important things you may do during the execution of your entrepreneurial journey.

It’s inspiring to read stories of other entrepreneurs who are offered crazy sums of money for their young startups. You’d think every deal is just a slam dunk, putting an enormous amount of money in your bank account, after signing a few pieces of paper.

I’ve interviewed some of the most successful founders with big and fast exits on the DealMakers Podcast who seem to have stories like this. Of course, in reality, most deals can take a lot longer, be far more complex, and take a lot of detailed negotiation.

So, how does it usually work? How can you get the best deal? What should you pay attention to when thinking about how to negotiate an acquisition?

The Process of M&A Negotiations

In theory, the process of M&A negotiations is quite simple.

  • Begin basic discussions of a match
  • Set out the basic terms in an LOI
  • Work through due diligence
  • Close on the final terms
  • Get paid

Of course, there can be many pitfalls and complications in this process too. Larger companies may just want to keep you locked up and busy, while they dig in and learn about your company, and figure out what they want to do overtime. 

If you really aren’t clear on your aligned goals and terms, in the beginning, it can get quite messy as you get deeper into it figuring out how to negotiate an acquisition. There may be a fair amount of renegotiation as well. 

Mastering M&A with the Right Mindset

1) Creating a Win, Win, Win, Win Deal

A one-sided deal is a losing deal. Even if you get it done, there will be plenty of other losers in the process. The best M&A deals that actually make it through to closing and that you won’t kick yourself for, for the rest of your life are those which are win-wins. Where both buyer and seller are working toward a mutual goal.

In the startup world, when thinking about how to negotiate an acquisition it’s about more than just you as the exiting founders and the executives of your acquirers.

You’ll be wanting to work toward creating a win for:

  • You and your cofounders
  • Your investors
  • The company
  • Your employees
  • Your acquirer

2) Preparation

Preparation is key. It will make the due diligence process far easier, reduce the headaches of renegotiation, and give you an upper hand.

This involves getting your own house and documents in order. Make sure your financials are up to date and accounting is done right. Be sure you have all your paperwork and contracts, and upload them to a virtual data room. Know the process, and keep your eye on the end game and what’s next after this sale. As well as knowing what you need to make this a deal when you will walk away, and being comfortable with continuing on if the closing doesn’t happen.

Before even thinking about how to negotiate an acquisition, make sure you have a solid acquisition memorandum that captures the essence of the business as its key. 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.

3) Know Your Opponent

While you are ideally working on a mutually beneficial deal and goal, with all the bankers and lawyers and others involved, you may be in some really negotiations across the table. The buyer and their team have a responsibility to try and negotiate the best possible terms for their shareholders. You have a duty to do the same.

Knowing those on the other side of the table can give you a great advantage. What is their negotiation style? What habits do they have in these types of negotiations? What are the terms of other recent deals they’ve done? What is most important to them as individuals and in their corporate roles?

4) Strategy in M&A Negotiations

What’s your strategy?

Are you going to:

  • Play hard to get?
  • Go in with a high firm price upfront?
  • Leave room for negotiating multiple terms?

Who will you have helping you to negotiate the deal? Having a third party in the mix can really help. It’s a great buffer, prevents you from impulsively giving in, and ensures you have an expert to represent you. This may cost money, but can often result in a better price and certainly terms you’ll be happier within the years to come.

What to Negotiate

There will be many points to negotiate. Here are some of the most important and overlooked factors. 

1) Escrow and Holdbacks in M&A Negotiations

How much money will be held in escrow to protect the acquirer, and for how long? This could be 10%, 20% or more, and be locked up for 12 months or longer.

2) What Happens to the Team 

These are the people who gave up other (often higher-paying) opportunities to help you build this. They’ve been betting on you. How will you negotiate their future jobs and benefits? Not just titles and temporary desks, but the ability to actually do rewarding work.

3) How They’ll Pay for Your Startup

When thinking about cash vs stock acquisitions, it is critical to know how the deal will be structured. If it’s stock, what class of stock and what will it be based on? A certain number of shares or certain dollar amount? How will the transaction be structured? An asset purchase, true merger, etc. There may be debt obligations to solve in this negotiation as well as evaluating the different tax implications. 

4) Your Responsibilities After the Sale

Your responsibilities are unlikely to end on the day of closing or when you receive your funds or stock. Will you be waiting for money in escrow to be released? Will you be working for your new owner? If so, will you be responsible for hitting certain targets to finish getting paid? If so, what real control will you have over making those targets? Or, if you are free, what restrictions may there be on soliciting your old team to join you in a new venture or starting a new business in a similar space?

The impact of these terms can last for years and maybe far more important to you than the price so keep them very much in as you are thinking about how to negotiate an acquisition.

If you are looking to get your company acquired and run a successful M&A process, a great acquisition memorandum template like the one below should provide the right guidance so that you build your own and make all the difference.

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