What is an Acquisition?
An acquisition occurs when one company takes ownership of another company. This includes their stock, equity interests, and other assets. There are plenty of reasons why a company may be looking to acquire another, including growth or even eliminating competition. The acquirer could choose to keep current employees, merging them into their entity, or they could choose to close up shop.
The appeal of a well-priced acquisition is obvious for founders and shareholders – it means an exit, or a liquidity event. And no matter where a startup is in its lifecycle, the offer of an acquisition is certainly an accomplishment.
For an entrepreneur, an acquisition can trigger a whirlwind of varying emotions – from the excitement of achieving an exit, to stress over finalizing the deal, to the bittersweetness of handing over the reins. While you’re striving towards your exit, here is what you can expect during a startup acquisition.
1. It’s Not Official Until It’s in Writing
Just because you meet with a potential acquirer, doesn’t mean the deal is a sure thing. Just as companies shop around for an acquirer, it’s also common for acquirers to put their feelers out before making a commitment. Things start to get serious once you receive a Term Sheet or a Letter of Intent (LOI).
2. Negotiating the Terms of the Deal
Reaching a price agreement can be difficult when parties disagree on how a company should be valued. Once you receive the Term Sheet or LOI, you may want to try to negotiate for a higher price. There are a couple of ways to do this.
A good place to start is to show the acquirer how much value you can bring them in the long-term. For example, try to find out how much a user/client/account is worth for them. Then, you can add in what you’re offering them and extrapolate that out over the next few years. If you’re growing quickly and have a decent amount of cash in the bank, those are also excellent negotiation points in your favor.
If you’ve only got one bidder, you don’t have much in the way of leverage. Another way you can negotiate for a higher price is to shop around for other potential buyers (as long as you haven’t yet signed the LOI). Oftentimes, shareholders will actually require that you do shop around before signing the LOI.
3. Buckle in for Due Diligence
The due diligence process during an acquisition will be quite thorough, so get ready to have everything scrutinized and evaluated, from payroll forms to contracts. This is for good reason, as the acquiring company needs to verify the accuracy of the claims made when pitching the deal.
Typically, a 60-day close period is standard, and about half of this will be spent conducting due diligence. There are no shortcuts here, but the cleaner and more organized your documents are, the easier this process will be. We recommend compiling and organizing all necessary documents in advance to streamline the process.
In terms of exits, one advantage acquisitions have over IPOs is that the valuation of the company is negotiable. Naturally, the acquirer will want to get a better deal if they can. During the due diligence process, there may be renegotiations as the acquirer finds things that could justify lowering the valuation.
5. Finalizing the Purchase Agreement & Closing the Deal
As mentioned earlier, a 60-day close period is standard, and much if it will be spent conducting due diligence. Once due diligence has been completed, the rest of the time will likely be spent finalizing the Purchase Agreement, which is what makes the deal legally binding. Purchase Agreements are long, highly-detailed, and typically require a lot of back and forth between you, the acquirer, and your lawyers.
Once all details of the Purchase Agreement have been agreed upon and finalized, it’s time for both parties to sign. Depending on how many shareholders you have, there is a good chance you will have to chase down shareholders for signatures. To keep this as organized as possible, we recommend using a service like DocuSign.
There are a lot of moving parts when it comes to an acquisition, and they certainly don’t always go as planned. As a founder, the best you can do is to make sure you’re prepared, approach buyers with caution, know your worth, and be able to back it all up.
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.