Thinking of selling your startup? Here’s what you need to know about startup acquisitions.
Having sold my own company, interviewed dozens of the most successful founders with big exits on the DealMakers Podcast, and through my work advising entrepreneurs at Panthera Advisors, the following factors really stick out as what you need to know before you think you can hang up a for sale sign and cash out of the business you built.
Companies are Bought, Not Sold
You don’t just put your company up on Craigslist or stick a for sale sign on the corner when you are ready to cash out. Even if you did, you’d get a lot less than positioning for a strategic acquisition.
You can take your company to an investment banker when you are considering getting ready for a sale. They can help evaluate your business and subtly make the right connections for you to get bought.
Even more important is simply positioning your company to be attractive and even irresistible to be acquired. If you know your industry, you know what other larger companies need to keep fueling their own organizations. Prepare that on a silver platter and they’ll come knocking.
Years in the Making
What you need to know about startup acquisitions is that exits are generally years in the making. Things have seemed to be speeding up recently, though that could be a part of a larger cycle. There are exceptions where companies have sold or gone public in just a year or two. However, it normally takes years. Both investors and founders should be prepared to be committed for at least 10 years.
If you’ve checked out the case studies on the DealMakers Podcast, where I interview some of the most successful entrepreneurs, you will have seen that in most cases founders have been developing relationships with their eventual acquirers for months and years in advance.
Get to know them, keep them updated, build the friendship. Let them come up with the idea of buying you out.
The More Options You Have the Better
Getting acquired may be your plan A, but it’s always smart to have a plan B and C. If you can also go for an IPO or maintain the business with great cash flow and profitability, then you’ll always have the upper hand in negotiations.
What you need to know about startup acquisitions is that wou’ll be negotiating from a position of power. If you do go the merger or acquisitions route, then you can hold out and encourage prospective buyers to keep making better offers or create an auction that generates the best possible multiple.
Everything is Negotiable
“It’s standard,” is the worst line ever. You can negotiate some pretty incredible terms if you have an experienced negotiator who is really in your corner.
Some of what is possible or easy may depend on the strength of your business and the wider economy, and the timing, though don’t just sign everything blind, without asking.
You’ll want to know what your responsibilities will be after the sale, secure what happens to your team, and ensure your customers are well taken care of.
The initial offer is never written in stone either which is one of the critical factors when thinking about what you need to know about startup acquisitions. Less experienced M&A departments and the really aggressive can come back and renegotiate just about everything during the due diligence process. This can also be a strategic opportunity for you to negotiate some extra advantages too.
You Name the Price, I’ll Choose the Terms
Savvy M&A experts know that the terms are far more important than the cover price. This is especially true for maintaining your freedom and maximizing your opportunities after signing.
Check out the incredible terms Derek Wall pulled off that allowed him to announce the launch of his next startup. Or you may be locked into a lengthy resting and vesting period that really makes you hate life for the next few years.
Don’t Forget the Taxes
Whatever you do, what you need to know about startup acquisitions is that tax plays a key factor. The tax hit on cashing out a successful startup can be a lot like the shock lottery winners face. Taxes always seem to go up too. You might be facing a 50% or 70% bite out of your share by the time you tally them all up, and then go pay the sales taxes on anything you buy with the money you walk with.
The right setup in advance can help minimize this by millions of dollars.
The Due Diligence is Your Biggest Test Yet
If you thought launching, fundraising and growing your startup has been hard so far, you haven’t seen anything yet if you compare to startup acquisitions.
This is a huge test and learning experience for every founder and executive. It means endless hours of meetings, weeks without sleep, and a whole new level of both excitement and stress. The more you can be prepared for this and how to cope with it the easier it will go.
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.
Postpartum is Real
Not to make light of postpartum depression at all (I have a wife and three daughters who I have incredible respect for), but it can be surprisingly difficult to let go of your startup baby too after going through startup acquisitions. You’ve spent years birthing and nurturing it. Maybe a lifetime dreaming of this moment. Yet, it can be hard to separate your identity from the role as founder. Making a plan for what’s next and with a big-picture perspective will definitely help.
It Can Take Time
What you need to know about startup acquisitions is that even once an offer is made, the actual process to get to signing the final papers and money in the bank can still take months and years. Expect at least one to 24 months. Be wary of getting ahead of yourself and doing anything which may derail the process in the meantime, or weaken your business should the deal fall through.
The More You Give Up, the More You Give Up
The more you give up on the way can shrink your piece of the pie. Every time you raise money you’ll dilute your share of ownership. A billion-dollar exit sounds great, but be sure you’ve been doing the math right before spending a penny.
Keep the above in mind and you will be in a great position to master what you need to know about startup acquisitions.