Many startups with investors hope to exit through an acquisition, merger, or initial public offering (IPO). Successful exits are a liquidity point for investors, which means an exit strategy should be an essential element in your overall business plan if you have raised or want to raise funds from investors.
Sometimes a startup will disrupt the market or otherwise make a noticeable impact, and potential buyers will take notice. In other cases, you may decide that you want to actively pursue acquisition possibilities. Either way, you can (and should) prepare ahead of time to be a good candidate for an acquisition. Following are areas to consider as you prepare.
Stay Organized and in Compliance
As standard practice to keep your business running smoothly, you should regularly review your business structure, financial documents, and other compliance items.
Corporate Structure and Human Resources
Your company should have organized records to evidence that you are running your startup according to your articles of organization and bylaws. If you have a board of directors, maintain, organize, and file all minutes and other paperwork to show how it has been operating.
Your human resource matters should also be in order. Regularly review employee classifications for accordance with current applicable laws. This includes employee versus contractor designations as well as exempt versus non-exempt status for employees. You should also make sure that all payroll matters are current, accurate, and properly documented.
Keeping your paperwork and accounting documented and organized is key to running your business from day one, but it will become especially important approaching a potential acquisition. You likely have already been through a due diligence process when you brought in investors previously, but you will need to again ensure that your paperwork is up to date and in order as you approach an acquisition deal.
A few things to consider regarding financial items:
- Cap table – Ensure your cap table is up to date and accurate.
- Financial statements – Check that your accounting is accurate and thorough.
- Taxes – Make sure you’ve been filing your taxes accurately.
Regulatory and Legal Considerations
Review your permits and filings in all applicable jurisdictions to ensure you are conducting your business in compliance with all regulations that apply to your startup. You’ll also want to review legal protections for your intellectual property. This may include copyrights, patents, or other protections. You may also want to perform a lien and litigation search to check for any red flags you need to take care of or be able to explain to a potential acquirer.
Protect Your Startup
When you do begin discussing interest with a potential acquirer, make sure you protect your company.
Non-Disclosure Agreements (NDAs)
NDAs are an important element to protect your financial information and intellectual property, as it spells out the specific contractual obligation of each party to not disclose information you want kept confidential. An attorney can make sure that your NDA is specific to your needs. You should have this document ready to sign very early in the process of talking with a potential acquirer. Even after you’ve passed due diligence and are in the final stages of negotiation to sell your company, the potential deal could still fall through. The NDA will help protect your intellectual property if a potential buyer has seen all your information but then walks away from an actual acquisition.
In addition to an attorney assisting with your NDA, the attorney can also help you navigate various legal matters that emerge during the process. Bringing in a banker may also be a key factor in this process. A good banker will be able to help you assess your market value and other factors that affect your value as you head into acquisition negotiations.
Although a successful acquisition is never guaranteed, being properly prepared and ready for due diligence will make you a better prospect for this type of exit.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.