While IPOs (or even ICOs) may garner most of the media attention when it comes to startups, acquisitions are another common exit strategy. An acquisition is a corporate action in which one company buys most, if not all, of another company’s ownership stakes to assume control of it. While private acquisitions can be completed similar to a merger, where the purchasing company forms a wholly owned subsidiary into which the acquired company merges, a true acquisition is essentially when one company purchases another.
According to CBInsights, 433 startups have been acquired by the top 10 tech companies in the US by market cap (as of 8/15/2017) since 2013. And, while mergers and acquisition activity has slowed this year, there have still been some very large acquisitions – to name just a few, CVS has plans to acquire Aetna, Amazon has acquired Whole Foods, WeWork has acquired Meetup, and Walmart has acquired Bonobos and ModCloth.
So what do startup founders and board of directors need to know about acquisitions? Just like an IPO, acquisitions can be risky and involve many moving parts:
- Knowing when to sell. This will require self-analysis and an understanding of your company’s and your industry’s current state. As a founder, you must recognize when it’s time to move on – maybe you aren’t enjoying your work any longer, maybe your skillset isn’t required any longer, or maybe you see an opportunity elsewhere. Likewise, if you see trends changing in your industry or are receiving many inquiries from potential buyers, it may be time to consider selling. Similar to raising funds, potentially the best time to sell your startup is when you don’t need to. If you get to the point where you’re experiencing slow growth, ample competition, or lack of fundraising, there may not be many buyers interested at a price you’ll want to consider.
- Preparing for the acquisition. Your startup will be valued based on its financial value and strategic value to the purchasing company. That said, you may need multiple valuations depending on the buyer, the nature of the business, and the deal itself. There’s no “right price” for a startup; it ultimately depends on what the purchasing company can justify and whether both sides agree. Having clear books and records can help the purchasing company with due diligence, and you want to have years of financial information available so you’re prepared to counteroffer. You’ll also want to consider whether you want to stay on board in some capacity in a new role or aid in the transition, as well as create a personal financial plan for after the acquisition is complete.
- Negotiating offers. When you have an offer, the next thing to do is determine your alternative options. You can notify other potential acquirers that you have received a term sheet and are considering selling, or you can notify VCs who have expressed interest in your company and ask for a term sheet for your next round. You’ll also need to firm up your startup’s valuation and other important consideration details, like retention packages, as quickly as possible – in fact, you’ll want to negotiate the business and legal points in as much detail as possible, for you very well might not have another chance to do so.
- Getting to the close. From First Round Review, “The best thing you can do when embarking on a deal is expect it to fail. You have to stay as disciplined, as productive, and as passionate about your own company as you would if you didn’t think you had a shot.” What this means is that you have the ability to walk away from an acquisition if something should happen, such as running out of funds, reevaluation of your startup’s valuation, or last-minute team changes. Acquisitions are commonly referenced as being even more stressful and distracting than fundraising. Throughout the process, even up to closing, you’ll want to make sure your team is still operating effectively and efficiently without added stress.
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