Startup Acquisitions: How to Navigate an Acquisition Process as a Seller

This is the first part of a two-part discussion where I will outline how startup founders and leaders can prepare for a potential acquisition (as a seller). In this article, I’ll discuss understanding goals of the M&A process, presenting your business’ story to prospective buyers, and hiring banking and legal advisors for the process. In the second (and final) article, I’ll cover how to prepare for due diligence, negotiating valuation and acquisition terms, and preparing to exit (or stay with) the business.

Quick Intro

I have worked for over 7 years in technology private equity, M&A, and corporate strategy roles after starting out as a software engineer. Here is my LinkedIn profile in case you want to know more about me.

Why should you care about the M&A process as a tech leader?

The overall market for new tech investments and the demand environment for software continue to be tepid despite notable funding rounds for AI companies. In such an environment, acquisitions are an important exit path for startups that don’t see a path to breakout scale as independent businesses and are looking for liquidity for their employees and investors. Most startup founders and leaders are new to the M&A process, so developing a foundational understanding of M&A goals, processes, and tactics can ease the path to a potential acquisition or merger and help you negotiate an attractive exit.

What to do once you start having M&A conversations?

1. Figure out why you’re being acquired? Tech M&A deals come in many forms, including strategic acquisitions to expand product portfolio, horizontal mergers (two similar companies combining to increase market share), acqui-hires, and technology-focused acquisitions. While acquirers can have different theses, you should use initial M&A conversations to identify the two or three main reasons buyers are interested in the business. Understanding the goals of the acquisition from the buyer’s perspective will help you in two important ways:

   
   

   First, it will help you better present your story and business to potential acquirers.

   
   

   Second, if you understand the buyers’ objectives and alternatives, you can strategically negotiate valuation to get an attractive price while still being more appealing than the next best alternative.

   
   

2. Getting the right help - engage an advisor (i.e. investment bank) or decide to go solo: Deciding whether to engage an investment bank to represent you during the acquisition process is an important decision. First, it affects the amount of work your leadership needs to do to reach out to potential buyers, vet the list of buyers, and prepare due diligence materials for the buyer to evaluate the business. Second, investment banks can charge anywhere between 2% and 10% of the total purchase price (i.e. enterprise value), so the decision to engage (or not engage) a bank will have a meaningful impact on the payout for investors and employees. As a rule of thumb, if your business is generating more than $10 million in ARR (annual recurring revenue), it’s worth engaging an investment bank to help run the sale process. For smaller deals, you can get by without a bank if you’re willing to roll-up your sleeves and spend time preparing diligence materials for your buyers. If you decide to go solo, your investors can be valuable resources during the M&A process to vet buyers, help prepare diligence materials, and negotiate with selected parties.

   
   

3. Lawyer Up – hire M&A council: While you can decide to run the process without an investment bank, in almost all cases, you should retain a trusted M&A lawyer to help craft the NDA (non-disclosure agreement), prepare legal documents that buyers might request, and negotiate the terms of the final sale & purchase agreement (SPA), which will outline the details of the transaction. Again, your investors can be very valuable resources in selecting the right M&A lawyer as almost all investors retain legal counsel to help them with new investments and other legal processes.

That’s it for now, and I’ll cover the due diligence, negotiation, and exit process in the next article. Stay tuned!