What can I do to position my startup for an acquisition?

QUESTION:

My startup is still young, but I’d like to know what I can do to position my company for an acquisition down the road? Any advice would be much appreciated.

ANSWER:

Naomi Kokubo

Naomi Kokubo

by Naomi Kokubo, Cofounder of Founders Space

If you want to eventually have your company acquired, here’s what I suggest:

DOs:

  • Position your business so that it’s worth buying.  Honestly, some businesses will never be bought, at least not for much money.   Your business needs to provide a product or service to a large enough market to make it worth something.  Check the size of the market you are in and its growth potential.  If these are pretty small, you may want to consider repositioning your business.
  • Do some research and find out if there is a history of acquisition in the market you are in.  If there are a lot of acquisitions, that’s a good sign.  It means the chance of your company being purchased is much higher.
  • Do some more research and find out the dollar value of these acquisitions.  This is key.  If the dollar value is low, an acquisition strategy may not make sense.
  • Bring on board the right team.  Many companies are purchased because of their team.  In many cases, one of the key team members knows the acquirer and there is a business relationship there.
  • Execute on your business plan.  This is easier said than done, but if you have an excellent team, your chances of success will be higher.
  • Be strategic about who you target for an M&A.  Don’t take a scatter-shot approach.  Find what companies truly value your product or service, and understand exactly how your product or service plays into their long-term goals.
  • Next, approach these companies early.  Don’t wait until the day you want to sell your business to form a relationship with these potential acquirers.  Begin talking to them the day you can add value to their business — even if it’s just knowledge sharing.  Offer to provide something free for them, so they can understand your business, and you’ll be on their radar.  The earlier you build relationships with potential buyers, the better.
  • Align the objectives for the key managers on your team.  You don’t want to be working at cross-proposes.
  • Keep records of everything.  Digital records are best.  When the magic moment happens and you get that first acquisition offer, you want to be prepared.  Too many companies don’t keep good records, and when the due diligence process begins, they wind up with a giant mess on their hands.  Everything from stock purchase agreements to NDAs to assignments of intellectual property need to be handed over to the acquiring company, and if things aren’t in good order, the deal could easily fall apart.  Don’t let this happen.  Keep everything you need digitized and organized from day one.
  • Plan the integration process ahead of time.   Many entrepreneurs are so thrilled to be acquired that they don’t properly plan how their business will be integrated into the acquiring company.  Your employees and team members need to know what’s going to happen to them once the acquisition is completed and how they will fit into the larger organization.  Make sure you’ve thought this through in advance and discussed it with the acquirer.

DON’Ts:

  • Don’t be tied to your original plans and objectives.  Be flexible based on the market and acquirer needs.
  • Remember, playing hard-to-get is a good idea.  Don’t seem desperate to sell.  No one buys a desperate company for much.
  • Don’t overly focus on your technology.  Technology acquisitions are usually far less lucrative than acquisitions based on revenue and brand.   More important than having the best technology is being the market leader in your space.  Market leaders are the ones who get bought.
  • Don’t say too much too soon to potential acquirers.  Remember, you hold the cards, and they shouldn’t see everything until there’s a solid offer on the table.
  • Don’t work too hard to meet the needs and demands of the acquirer if it doesn’t fit your overall goals.  Your business’s overall goals have to be taken into consideration.
  • Never go it alone — get help from consultants, accountants and lawyers, who have been through the M&A process many times.  This is money well spent.

I hope this helps!

Comments & Advice:
  1. Budha Has says:

    Humm… Sorry for talking too much about indian matrimonial scenarios. but the parallels are striking. The question translates to “What should I do to get a good, rich father in Law”? 😀

    Well, you need to appeal to his daughter (i.e., some team in your acquirer) should really like you, since you add such incredible value to it. You're so awesome, and there's no one else like you! Great package (only mean product), great team, great value which validates the acquisition, great traction (oh, you're gonna be rich too someday), etc…

    But yeah, they will check on your family and your background (read, due diligence), so please have your papers in order (previous share purchases, loans taken, contracts signed, employee contracts, licensing, exclusivity given/taken, legal time-bombs, termination clauses in your long-term client contracts, rights of previous investors, board structure, dilution clauses, drag and tag along rights, everything.

    Look good (better still, be good) both, in (paperwork) and out(how you interact, follow up, what others think of you. Remember, discussions can fall-out at any point before the sign on the dotted line, and can take ages sometimes. So, be prepared. Do not say something that turns out to be false later on. Its a deal breaker. Be as upfront and open as you can – of course, don't shed your clothes too much that you're naked. Doesn't help you or them.

    Plus have a mutual-non-biased lawyer do the due diligence.

    Have a happy and long acquired life 🙂

  2. One more piece of advice…

    Companies don't get sold, they get bought. It's extremely hard to go out and sell a company on short notice. You'll usually wind up with no offers or low offers. The best strategy is to build a solid business, focus on the long-term value, and connect with potential acquirers along the way.

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