Matthew Duke is a San Antonio-based transactional business attorney specializing in mergers and acquisitions. Follow Duke on Instagram, Facebook, and LinkedIn as @Stxbusinesslawyer and @STXbusinesslaw on Twitter.
Financial professionals and lawyers like me can negotiate every detail of your proposed deals. But how exactly can a founder ensure that their startup is ready for an acquisition? This simplified checklist can guide you on what it takes to be acquisition-ready.
What exactly is M&A?
Mergers and acquisitions (often referred to as M&A) is an approach startups can use to buy cash flow, revenue, and other companies’ traffic. Founders can potentially gain a larger share of markets with the right kind of M&A deal. It’s also a way entrepreneurs can pivot, consolidate, and experiment with elements of their value proposition.
An acquisition is the deliberate strategic move of one company to either buy another company completely or gain a majority stake in it. That said, no two acquisitions are the same. Experiences will vary depending on the size of the company and the legal complexity of the agreement.
Many founders don’t know how to get started with M&A. The prospect of your company being acquired can be exciting, but this can quickly give way to the anxiety that inevitably comes with months of negotiation and due diligence. The more you know before starting negotiations, the better your position will be since businesses are more often bought than sold.
Here are eight things you need to know before starting your first acquisition deal negotiation.
1. Be clear on what you want in your M&A deal
Before entering any discussion with a prospective buyer, make sure you have a game plan. Ask:
- What purchase price is acceptable to you? Are you willing to be flexible about this?
- How will this price be paid, with cash or equity?
- Will payment be made all at once or over an agreed period?
- Do you want to remain with your company as an employee?
- How strongly do you feel about the buyer retaining your existing employees?
- What is the buyer’s vision? Does it align with yours?
Ensuring clarity and strategic alignment in purpose and outcomes will ensure a smoother transfer.
2. Tell your employees or stick to “business as usual”?
When an acquisition seems like a realistic possibility, there are two different schools of thought about whether you should tell employees about the deal before it’s finalized.
Not all acquisition negotiations end in a signed deal, so if you’re looking to minimize employee stress, you may choose to wait to tell them until the transaction is almost completed.
On the other hand, keeping employees informed from an early stage means they can help with the acquisition process. Once they’re in the loop, they can also be reassured about their interests, and continued employment in the company is prioritized.
3. Know your finances
It is imperative to know exactly where you stand financially. Important growth metrics to know are:
- Monthly Recurring Revenue (revenue earned every month)
- Annual Recurring Revenue (revenue earned on an annual basis)
- Churn Rate (a measure of how often you lose customers)
- Lifetime value of customers (how much has any given customer spent)
- Customer acquisition cost (how much does it cost to acquire new customers)
If you don’t know your numbers once you start negotiating your deal, it can convey to the prospective buyer that your business “house” is not all in order. Much like buying a home, your business’s “curb appeal” should reflect a well-run company with no hidden financial issues, which can scare off interested buyers.
4. Audit accounting, corporate governance practices, and policies
How does your company look to outsiders? Make sure you have good accounting policies and practices in place. Ensure that all business statements like your monthly statement, income statement, and balance sheet are regularly drawn up and updated. All registrations, licenses, employee contracts, and non-compete agreements must be well documented to minimize legal trouble because your buyer will ask to see your paperwork.
Finally, consider paying for an independent financial audit. While pricey, it can minimize buyers’ risk and makes businesses look more attractive to prospective buyers. If a company has a board of directors, good corporate governance practices will dictate regular, documented meetings.
5. Polish your social media strategy and content
In a world dominated by digital marketing, having a social media presence can work wonders to build your company’s reputation. Make sure all significant accomplishments are shared across various social media platforms. This requires some amount of discretion, based on how much you want to divulge about your company’s progress in any M&A negotiations.
6. Get to know your buyers
Before even receiving an offer, do some research about what category of businesses in general and what businesses, in particular, might be interested in buying yours. This in-depth knowledge of your competitors will be valuable should one of your competitors approach you (because, as I’ve said before, businesses are more often bought than sold).
Form professional relationships with significant decision-makers in these companies to gain valuable contacts and propagate a positive image. Try to understand why potential buyers would want to acquire your company. Analyze their buying history from publicly available sources. Once you have your first offer, you can use that to your advantage to encourage a bidding competition amongst other potentially interested CEOs. At this time, it might also be wise to reach out to other entrepreneurs for advice or mentorship- you’ll be surprised at how many people would be happy to help for free!
7. Hire expert assistance
Once you have a serious offer on the table and a letter of intent, it’s time to hire experts. This is even more important if the company acquiring your business is larger than yours because, in that case, they will surely have access to the best M&A lawyers money can buy.
Remember, your buyer’s legal team will try to drive the purchase price down. Consult with competent legal counsel and invest in valuation services to know your way during the negotiation process.
8. Have a timeline for your exit
Acquisitions are often lengthy and drawn out, which helps to have an exit timeline. Your business goals and projections can act as milestones you want to reach before you exit. Ensure that you have both liquid cash and a credit line available on hand until funds are transferred to you. Finally, make sure you leave the company in good shape, so your customers are largely satisfied with your services. The buyer will be making inquiries, and you don’t want anything to change their mind!
Acquisitions can be overwhelming, especially if you’re experiencing them for the first time. However, you can experience a streamlined process with the proper guidance and research. Ultimately, the goal is to make the decisions that achieve the best possible outcome for you, your company, and your employees. This is a delicate balance to achieve, but with the right approach, you can do it.
The featured image is of people working at a desk with papers and laptops. Photo by Scott Graham on Unsplash.