How To Prepare for a Startup Acquisition

Selling your startup is no easy feat. Knowing how to prepare your startup for the acquisition process can make a real difference in your journey.

When done correctly, acquisitions can benefit both the buyer and the seller. Selling a startup can provide new founders with financing, allowing them to scale their business or build new ventures more quickly. 

Meanwhile, those acquiring a business with solid financials and a strong product line can gain access to new resources and top talent, as well as the opportunity to expand to new markets. 

What Is a Startup Acquisition?

A startup acquisition refers to the process of a new owner buying a company. Typically, smaller startups are purchased by larger and more established companies — in cash or with stock.

Selling startups follows a process similar to selling established businesses. However, since startups often don’t have significant business history, it may be tougher to find buyers. Roughly, this is how the process goes:

• The owner decides to sell the startup
• The business organizes internally to get it ready for sale— this includes documenting
• systems and processes, getting books in order
• Business executives work to identify potential buyers
• The owner solicits and reviews offers
• Once the owner has selected a potential buyer, negotiations ensue
• When everything is in place, and both parties are satisfied with the terms of the sale, they can start closing the deal

Reasons for Startup Acquisition

There are several different reasons a buyer might want to buy a startup:

Obtaining IP: Startups can be acquired for their intellectual property (IP), which covers the unique processes and ideas that underpin a startup business. However, IP deals can be legally complex due to the amount of paperwork needed to address fears of post-sale infringements.

Eliminating competition: In some cases, your startup and the buyer have the same product/service and customer base, and acquiring your business removes a competitor and increases their number of customers. Social media giant Facebook’s acquisition of Instagram is a good example.

Expanding the product base: You and the buyer have the same customer base, but you provide a different product or service those customers find appealing. An example would be HubSpot’s purchase of The Hustle.

Making an acqui-hire: Sometimes buyers are primarily interested in the team that makes up the startup — in which case the deal will mainly focus on retaining top talent. This deal is commonly referred to as an “acqui-hire,” and is typically entered into by two companies that have previously worked together. 

Usually, a bigger company will look to enter into acqui-hire deals to bring on integrated teams of quality talent.

How To Prepare Your Startup for Acquisition

Focus on Growth

Even though preparing your startup for acquisition is a full-time job,  it is essential to keep running your business as usual. Focusing all your energy on a potential sale might result in core operations taking a hit — which could lead buyers away.

Acquisition offers aren’t set in stone until everyone signs on the dotted line. In the meantime, keep expanding your business and focus on reaching your business goals.

Tidy Up Your Books

Consult your legal, HR, and finance departments to ensure all paperwork is in order. Buyers will audit your business and look for discrepancies.

Ensure that permits and licenses are legally up to date, contracts with clients and vendors are secure, employee compensation is accurate, taxes are paid on time, and financial statements can be presented without any red flags.

Hire Professionals for Due Diligence

It can be helpful to hire experienced professionals to do due diligence, which entails thoroughly examining potential issues that may affect the business and its impending sale. This may include having a startup independently valued, as well as preparing financial documents. Services you hire might include: 

• Valuation firms: Get your business independently valued to assess your worth as a startup. This will help you determine a reasonable asking price for the sale and give buyers an idea of what to expect when submitting offers.
• Legal teams: A legal team will be responsible for contracts and legal documents that the buyer may request, as well as communications with the buyer’s legal team. You may also want to hire a legal adviser specializing in acquisitions to gain insights on the process. 
• Financial/accounting services: This team will prepare financial schedules, pro forma statements, revenue reports, and any other reports or statements that reflect the financial health of the company. Even if you have an in-house accounting staff, the amount of extra work needed to prepare your business for acquisition may be overwhelming and lead to costly mistakes.

Identify Buyers and Solicit Offers

The first step in identifying potential buyers for your startup is creating a buyer profile. Get started by listing the qualities you want in a buyer, such as what industry they’re in, their management style, their net worth, or their location.

The next step is to find potential buyers that fit this criteria. You can use online resources such as databases, websites, and social media platforms to find companies that may fit your buyer profile.

If you are an investment-backed startup, you can start with your investors, board of directors, and/or advisory board. They almost certainly will have a network of qualified buyers.

When the time is right, solicit offers from these potential buyers. You can try to get contact through personal networking, or turn to your network for referrals.

Once you have a few serious contenders, screen and vet the company and the individuals you’ll be dealing with. To ensure a smooth process, make sure you do the following to get ready:

• Prepare a strong set of financials and audited books
• Create an effective verbal pitch and pitchbook that communicates the benefit to the acquirer 
• Have the right representation (i.e., “lawyer up”). Go into negotiations with the proper legal representation to ensure there are no state or federal issues with the purchase
• Have effective professional tax representation. The last thing you want is to be hit with a huge tax bill — or worse, fines or penalties because there was some form you didn’t properly file or tax you didn’t pay
• Propose trial partnerships or deals to demonstrate how your startup can fit with their business

What To Do With a Startup Acquisition Offer

When you have an offer in hand, negotiations can begin. When evaluating an acquisition offer, review all details and ensure that terms, conditions, and expectations are spelled out.

Consider your financial needs as well as the unique value of your business. Have your legal, tax, and business advisers review the offer and give you insightful feedback.

You don’t have to say yes to the first offer you receive — and don’t be afraid to negotiate (or even walk away) if the deal doesn’t meet your expectations. Most of the time, serious buyers will take it upon themselves to meet you halfway and present you with a better offer.

Don’t Be Afraid To Negotiate

Keep in mind that every stage of the startup acquisition process is a negotiation. Before going into it, have a solid strategy in place. 

First, establish a BATNA (best alternative to a negotiated agreement). A BATNA is simply the option you can take and feel comfortable with should negotiations fail. Examples of solid BATNAs could include offers from other buyers or a valuable IP that could be licensed to a third party for a significant fee.

If your buyers know you have a BATNA, that could improve your leverage. Your best BATNA may be as simple as the willingness to walk away from a deal to ensure the health and growth potential of your company.

Understand the Buyer’s Values and Culture

Get to know the values and culture of the potential buyer. Learn as much as possible about the company and its mission, vision, and goals to ensure that there will be a good fit between both entities. 

If you have doubts about whether your startup would be compatible with the acquirer’s operations, it may be better to look for other potential buyers.

Address Your Employees

There are two schools of thought regarding handling employees when preparing for a sale. One option is to keep the process under wraps until the negotiations are finalized. Alternatively, you can address your company transparently at the beginning of the process.

Photo by Antenna on Unsplash

Employees are an essential part of your success, so having them on board with any potential changes early on can be beneficial. Whenever you decide to make the announcement, make sure to address concerns about job security, wage changes, and other crucial details in relation to the acquisition.

Final Steps

During the final stages of negotiation, your shortlisted buyers will likely give you a verbal offer, send you a formal offer letter, or pull out of the deal.

There is no standard amount of time negotiations can last.  It can be for as short as a week or two, or stretch on for multiple weeks, even months, depending on whether there are a lot of complexities to the deal (e.g., intellectual property ownership, consulting agreements, number of locations, real estate, etc.)

Once you’re happy with the proposed acquisition price and deal structure, you can then select your preferred buyer and sign a letter of intent (LOI), which is the formal offer to acquire your startup. 

You may opt to verbally agree on a sale price and conditions with a buyer and then move on to the LOI stage before negotiations are done, which signals that you’ll be cutting contact with other potential buyers.

Overall, preparing your startup for acquisition requires a great deal of effort. But by securing professional help, creating clear acquisition goals, and keeping your books tidy, you can ensure a smooth sales process.