Selling your company is going to be one of the most exciting moments of your life. It is certainly going to be the biggest event in your startup’s journey to date. So, as a founder, what should you be thinking about and considering before your company is acquired?
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. Exiting Your Company
- 2. Have Your Board On Board
- 3. What Do You Want Most Out Of This Transaction?
- 4. What Will You Do Next?
- 5. What You Need To Earn The Earnout
- 6. What Will Happen To The Team?
- 7. Integration Planning
- 8. Are Your Books Optimized?
- 9. Are Your Legal Documents Polished?
- 10. How Much Do You Need To Sell For To Give Your Investors Their Desired Returns?
- 11. How Much Do You Need To Sell For To Make It Worth Your While?
- 12. Taxes
- 13. Do You Prefer Cash Or Stock?
- 14. How Will You Preserve Your Data In The M&A Process?
- 15. Lawyers
- 16. Negotiation Representatives
- 17. Do You Have A Killer Pitch Book?
- 18. Be Sure You Are Getting The Best Deal
- 19. Efficiency In The Process
- 20. Other Considerations
Exiting Your Company
Whether merger, acquisition or other form of exit, this is the great culmination and acknowledgment of your hard work, grit, effort, and evolving as a leader. How you play it and execute it can make all the difference in the real outcome. Selling your startup is a big deal.
Some have gone from bootstrapping their startups right to selling for billions of dollars. Some have had to sell their seemingly successful businesses, and have ended up walking away with nothing, after poorly structuring the obligations they’ve taken on.
Going through an acquisition is rarely easy or stress-free. Though how grueling and speedy and profitable it will end up being is largely up to you.
Since you probably won’t get any do-overs for this venture, here are some of the most important points to consider before your company is acquired in order to make the best of it.
Have Your Board On Board
If you have a board of directors and shareholders, or just cofounders, the decision to sell your company, when and for how much may not be up to you.
This is where many M&A deals go horribly wrong. Often with irreparable damage to relationships and shareholder dynamics. If you are not on the same page you can miss critical opportunities to exit. Opportunities that often don’t return. After which many find their companies have peaked, and quickly decline into crisis situations.
The time to get their agreement is well before an exit is even on the horizon. Be sure there is alignment and agreement on when you will sell, on what terms, and how. Then when it is right, everyone should be in unison on pulling the trigger on the deal.
What Do You Want Most Out Of This Transaction?
What is it that you really want out of an acquisition? What about this specific transaction?
Avoid distractions, detours, and lost opportunities by having clarity on this well in advance. List out in bullets your top one to three priorities. What must you have in this deal to even consider it?
This may be followed by one to three must nots. Items that would be absolute deal breakers and non-starters.
Shorter and simpler is better. Though another one to three nice-to-have bonuses could be added to this sheet as well. These can at least be great negotiation points to ensure you get what you must have. As well as to spot a deal you can’t refuse.
All of this will be your M&A decision guide and greatly streamline these conversations.
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What Will You Do Next?
Before you finish this chapter in the journey it is worth considering what you will do next. Having a roadmap will certainly make the transition far smoother, easier to handle, and more profitable.
As financially rewarding as having your company acquired can be, it can be emotional. You put a lot of heart into it. Even if you walk away a billionaire, there can be some separation anxiety. It’s like sending your kids off to college in another country. Only they aren’t coming back home.
Will you be okay with putting in a few years of resting and vesting, working for your acquirer? Most entrepreneurs aren’t cut out to be corporate employees for very long.
Or do you want to continue to handle the long-term management of it as an employee, instead of a founder? Or perhaps you crave immediate freedom, with no strings.
How will you plan to find your next idea if you haven’t already? Plan your break and quality time out and decompression time. Then how you will prepare for the next startup.
Consider how much you need to start your next company. In addition to the money, what about tech or assets you can take with you? Do you want your team free to come with you, with no non-compete agreements?
What You Need To Earn The Earnout
Earnouts can be a beneficial provision that can dramatically increase how much you may make when selling your company. However, you may also end up with a fraction of what you expected if you can’t earn the earnout.
Be sure you know what you need to achieve the qualifications being set. Do not count on getting it if it isn’t in writing before you close the deal.
How much of a budget will you need? What about other resources and a team? What about decision-making control and authority?
Be sure there are clear performance metrics in writing. Determine if there will be any partial earnouts if you can’t hit all of the milestones.
What Will Happen To The Team?
This is one of the top concerns of founding entrepreneurs. Your team has probably sacrificed and contributed a lot. You want to make sure they are taken care of.
For some that may be freedom to pursue their own startups. For many, it will be retaining their income and jobs. It may also be about securing job titles, benefits, and what happens to any options.
Integration is a beast. The vast majority of M&A deals end up being a disaster because they fail at integrating.
You may or may not continue to have a financial interest in the future performance. Though perhaps more importantly you may consider what will happen to the mission, team, and your customers if things don’t go well.
This makes it vital to evaluate the integration process and plan in advance. What are the chances of it working? What tests will be done in advance of the closing or certain agreements? What is the acquirer’s experience with M&A and integrations? What is their level of success? What is the plan? How has it been proven to work in the past.
Are Your Books Optimized?
The details matter a lot. Many details and terms of the deal can change once things get into due diligence. Especially if your books are a mess.
So, is your accounting clean and beyond challenge? Is it organized? Have you paid off bad debt or optimized your finances for a sale? Are your accounts going to show that everything is heading in the right direction?
Are Your Legal Documents Polished?
Much of the value of your business and risk for your acquirer is tied up in your many legal documents (or lack of them). Have you taken time to prepare?
This can include your vendor contracts, IP protection, employee agreements, articles of incorporation, financing agreements, and much more.
How Much Do You Need To Sell For To Give Your Investors Their Desired Returns?
Funding and loan agreements can be very complicated. Often many clauses and calculations don’t rear their heads until it comes to an exit and you are trying to figure out all of the math. Get help understanding all of the nuances ahead of time. Figure out how much you are going to need to secure in an offer to provide your investors the returns on their investments that they are expecting.
Not only will this make this transaction far easier, but it will do a lot for your reputation, and for raising funding for future ventures as well.
How Much Do You Need To Sell For To Make It Worth Your While?
While you may not always have a choice in selling, nor all of the power in negotiations, when you do, you want to make sure it is worth it for you. You’ve put in a lot of blood, sweat, tears, sleepless nights, stress, and money. Be sure you are getting a great return on all of that.
With big gains and payouts come big tax bills. Know how much the taxes are going to be on this sale. Consider how you can structure this deal to minimize them. Otherwise, you may end up giving half of your winnings or more to various tax authorities.
Do You Prefer Cash Or Stock?
How will the acquirer pay you for your company? Will it be cash or stock, or a combination of the two?
How will this impact you in terms of taxes? What is the potential risk or upside of each option? Do you prefer to play it conservatively? Or are you willing to gamble everything?
Keep in mind that in fundraising, 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.
How Will You Preserve Your Data In The M&A Process?
Getting to the closing is going to require deep due diligence. Potential acquirers are going to want to go through every tiny detail if you allow them to. Depending on the language of your agreements they may have that right.
There can be bad apples out there. Some investment bankers and companies are just on an information-finding mission. You have to know how to screen buyers. You need to know how and when to throttle the release of sensitive information. It is not just about NDAs.
This is one of those moments when you definitely want a lawyer in your corner. You may need your own personal lawyer in addition to the legal firm your company employs.
If this is your first or even third M&A deal or exit it is still smart to have representation and expert advice on tap. Will you use an investment banker? Will you use a consultant or experienced and tuned-in M&A advisor?
Do You Have A Killer Pitch Book?
Do you have a great pitch book that will maximize the opportunity with the right story? A lot of the value to be created in an exit is about the presentation and how you sell it. A good pitch book can be worth hundreds of millions of dollars or more. It is worth the investment.
Be Sure You Are Getting The Best Deal
Don’t sell yourself short. Don’t sell your team or investors short either. It is worth the small extra effort to ensure you are really getting the best possible deal. This may be negotiating. It may be running a process to bring in additional bidders and pressing them for the best they can do.
Efficiency In The Process
Be sure you are prepared to run an efficient process. Acquisitions can take as little as a couple of weeks or could stretch out for two years. Which would you prefer?
Know who you will dedicate to the team to run this process, and how you will keep it organized and flowing.
Know how you will make up for these distractions and interruptions to accelerate your business and keep pushing performance through this critical period.
Other considerations to keep in mind before your company is acquired include:
- Testing the match between your companies before you get too deep
- Evaluating who is the best buyer
- Knowing your alternatives to an acquisition, such as an IPO, more fundraising or mergers
You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.