Exit planning: How To Prepare Your Startup For Acquisition

Whether you like it or not, most startups will end in two main scenarios. Either the startup has run its course and ends up going under or, in a more fortunate path, gets acquired. All founders hope for the latter which means putting forth a deliberate effort sooner rather than later on planning for a potential future exit. Like all things, a little bit of deliberation and planning early on (about a year’s time frame) can increase chances of a successful outcome.

There are many complex factors when going through an acquisition. The process starts with finding the right buyers, building interest, negotiating the right terms, handling due diligence, and asset transfers (only if it’s an asset purchase as opposed to a sale through stock). Through every phase, there can be legal risks associated with legal documentation or certain terms that may be misused. All these risks have the ability to interrupt a deal and potentially even kill it. Buyers expect transparency and hate surprises, so if you’re not prepared to be open about your business, they’ll move on.

Most successful acquisitions viewed from the outside look like the target companies were lucky to be the right product at the right time. But as they say, luck is what happens when preparation meets opportunity, so if you want to be one of the ‘lucky’ startups to get acquired without any major setbacks, start prepping now. Below, are steps to follow when priming your startup to be acquired. It includes some reasons why you should set acquisition goals prior to engaging a buyer, how to market your startup, and how to prepare your startup data for acquisition.

Setting Acquisition Goals

Ask yourself this: What will you do after your startup is acquired? Is it the sandy beaches of retirement, starting another venture, or maybe it’s staying with your business under the new owners. Answering this simple question can determine how to position your company for acquisition. If it’s retirement, you’ll likely want to get an all cash payout. This may sometimes impact the buyer pools as not all can handle cash deals. Negotiations may take a more restrictive turn and can impact the composition of the acquisition deal.

On the other side of the coin, if you’re planning to start a new venture or hoping to stay on, then cash upfront may not be as important. Accepting a down payment and then financing the rest through a seller note (a debt instrument where a buyer owes you) or earnout (where you get paid when your startup hits certain milestones) could be the best option. Being open to financing usually opens the door for a bigger buyer pool. These factors impact your ability to find the right buyers that align with your acquisition goals and can either speed up or slow down your plan to exit.

Finding The Right Buyer

What types of buyers will your company attract? Strategic buyers look for different things to financial buyers, for example. A strategic buyer acquires companies to increase their existing business (they may acquire talent, specific IP, or to accelerate growth into a new market) but a financial buyer mainly wants to generate a return on investment. Financial acquisitions are more common, whereas strategic acquisitions are usually the ones that make the big news headlines.

Thus, these different buyer types care about different things. Drawing interest from a financial buyer most likely means showing steady revenue and profit growth with strong future projections. However, if you’re looking to get acquired by a strategic buyer, you might need to consider being more deliberate on what products to develop, what key markets you prioritize, and even your overall tech stack. Making improvements to financial performance is usually easier than your overall operations strategy, so consider the extra time and effort that will be a factor in the exit plan.

Reflecting on Strengths and Weaknesses

As a founder, you need to recognize that you will have strong emotions about your startup. Like a proud parent, you were there during the earliest stages of getting your first customers. You most likely wore all hats from writing content, launching paid marketing, doing customer support, and fixing bugs. All this to say that you may have a proclivity to downplay your startup’s weaknesses and overvalue your strengths. But when going through an acquisition, you’ll need to take a more objective and honest approach to analyzing your business, much like a buyer would when reviewing any business for an acquisition.

Understanding what makes your business uniquely lustrous will help you market it to the right buyers. Whether it’s your stellar reviews and testimonials, a robust community of evangelists, better features, or just a top-notch customer support experience, pinpoint what makes your startup different from the competition. Solid financials? Multiple revenue models? Great. The key is to be able to express these strengths in a way that will manifest thoughts of positive returns of investment to any buyer reviewing your business.

But don’t discount your weaknesses as only negative points during an acquisition. A growing subset of buyers look for under-optimized parts of a business that match their skillset as an operator. These are buyers that see opportunity in your so-called weaknesses because they have the solutions to overcome it. Therefore, revisiting your weaknesses with a different perspective and being able to present them as opportunities can further attract the right buyers.

Documenting for Transparency

When dealing with buyers during an acquisition, it’s customary to be asked a barrage of questions about your business that demand evidence along with your answers. At the early stages, it can be simple questions around domain ownership, aggregate financial metrics, and a pitch deck. On certain platforms, like MicroAcquire, you can choose who to reveal this information to when you sell your startup. Most of this data is easy to add when selling through a platform but as talks progress, you’ll need to set up a data room.

A data room is a permission-based, virtual folder where you can store everything applicable to your acquisition- similar to a shared Dropbox or Google Drive folder. To keep things clean and easy to access, these folders are a better alternative than email attachments and is standard practice during an acquisition. The beautiful thing about data rooms is that you can get started way before you find an interested buyer and it’ll behoove you to do so rather than waiting for the last minute.

Buyers who are ready to engage with you in an acquisition will most likely expect answers in a prompt and accurate manner. This means any associated documents or collateral should be presented when necessary. By leaving it to the last minute, you can come off as unprepared and, furthermore, risk delaying the process that could give the buyer second thoughts. If nothing else, think of gathering your information in a neat data room as a due diligence trial run. Gathering contracts, HR records, licenses, P&L, and so on, will allow you to find any complications ahead of time and resolve them at your own pace rather than in the heat-of-the-moment when dealing with a prospective buyer.

Hiring The Right Experts

Adhering to the tips above may help you achieve a smooth acquisition. But if this is your first foray into acquisitions, or if your business is expected to sell for millions of dollars, you should look into hiring specific acquisition professionals to help you reach your optimal outcome. If nothing else, you should hire legal counsel to help with drafting legal documents and reviewing terms of the offer, letters of intent (LOI), purchase agreements, and other binding documents. With life-changing money on the line, don’t attempt to tackle this yourself.

One of the most helpful professionals to hire is a mergers and acquisitions (M&A) advisor. The job of an M&A advisor is to act as the coach of a championship sports team. They’ll know which strategies and plays that can help you market your business, drum up the right buyers, reach the maximum price, and negotiate the proper deal structure for your goals. On top of that, all M&A advisors have their close circle of experts they can tap into for more nuanced topics like tax liability upon close.

Perhaps the most advantageous factor of hiring an M&A advisor is that they understand the market dynamics. They have knowledge of valuations for startups like yours and can position your asking price properly. You may think it’s similar to real estate transactions where you can pull comps similar to your offering but only the biggest acquisitions make headlines whereas most smaller acquisitions are never disclosed. It takes an M&A advisor who is ingrained in the market, has the right connections, and can draw from her past experience to help determine a realistic asking price that can both increase buyer interest and help during negotiations.

As you can tell by now, positioning your startup to get acquired needs a bit of preparation. You’re set up for failure if you leave everything to the last minute. You could potentially squash a perfect opportunity after attracting the right buyer. Nothing is stopping you from starting to prepare now. You may learn new facets that make your startup more attractive and which weaknesses are actually your strengths.