As promised, this is the second (and final) part of the Startup Acquisition article, which will walk startup founders and leaders through the due diligence and negotiation processes. You can find the first part of the article here. Prepare a quantitative view of the business - financial statements, KPIs, and audit reports: This is perhaps one of the most critical steps to ensure that you’re representing the business accurately and in good faith to potential acquirers. The leadership team (and specifically the CFO, if you have one) should work with your accountant to prepare the historical financial statements (income statement, cash flow statement, and balance sheet) and gather the relevant audit reports. In Software/SaaS acquisitions, buyers will also focus on key metrics such as ARR growth, gross and net revenue retention, logo retention, gross margins, operating expenses, and burn rate. Most sellers also provide projected financials that show the business’ expected financial trajectory and serve as an important tool to convey the attractiveness of the business – especially if you have a credible methodology to forecast your revenue and ARR for the next couple of years based on existing sales pipeline and customer contracts.


Getting to the business end of the process – letter of intent (LOI) and due diligence (DD): Once you’ve selected a potential buyer based on initial conversations and bids, you will typically sign a (non-binding) letter of intent (LOI) that will give the selected buyer 4-8 weeks of exclusivity to complete due diligence and negotiation of final agreements. The buyer will also agree to a strict confidentiality clause as part of the LOI. In this phase, the buyer will both conduct management meetings and ask for documents / files that cover the product and technology, historical business performance (see step 4 above), key customer contracts, sales pipeline, employment contracts, and other relevant details about the operations, tax filings, and legal structure of the business. The seller typically opens a virtual data room (VDR) which is an online portal to share all these documents and answer questions from the buyer.
If you have an investment bank representing you, the bank will work with you to prepare you for the relevant meetings and collect the data. However, if you don’t have a bank representing you, the leadership team will need to work with your lawyer to gather all this information and answer relevant questions from the buyer. Note that this process is time consuming, and you might not always have what the buyer is asking for. When you don’t have the information, it’s important to understand the buyer’s intent behind specific requests and work with them to answer questions based on available information.

Getting to the finish line and preparing for what comes next: First thing to keep in mind is that the LOI is a non-binding agreement. If through the diligence process the buyer finds concerns with the business, they have the right to walk away from the transaction. Most buyers are mindful of their reputation in the M&A circles and will only walk away if there are issues that are real deal breakers, but you must be prepared for this eventuality.
Assuming the diligence process goes smoothly, about 2-3 weeks before the exclusivity period runs out, you should start working with your lawyer to negotiate a sale & purchase agreement (SPA) and employment contracts (for employees who will work for the buyer after the acquisition). Startup founders should think carefully about what percentage of their payout they’re willing to receive in stock (i.e. buyers’ stock) and how long (and in which role) they are willing to work for the buyer after the acquisition. Buyers like paying part of the acquisition price in stock because it both reduces the upfront cash payment and helps ensure that the seller has a vested interest in making the acquisition a success. M&A processes are not easy to navigate and require dealing with a lot of scrutiny and uncertainty along the way. Therefore, it’s important to be aware of what you’re getting into and prepare beforehand to make the process as streamlined as possible. Hopefully this article was a helpful start for those who are new to the process and stay tuned for more content related to startups, technology, and M&A! As promised, this is the second (and final) part of the Startup Acquisition article, which will walk startup founders and leaders through the due diligence and negotiation processes. You can find the first part of the article here . here Prepare a quantitative view of the business - financial statements, KPIs, and audit reports: This is perhaps one of the most critical steps to ensure that you’re representing the business accurately and in good faith to potential acquirers. The leadership team (and specifically the CFO, if you have one) should work with your accountant to prepare the historical financial statements (income statement, cash flow statement, and balance sheet) and gather the relevant audit reports. In Software/SaaS acquisitions, buyers will also focus on key metrics such as ARR growth, gross and net revenue retention, logo retention, gross margins, operating expenses, and burn rate. Most sellers also provide projected financials that show the business’ expected financial trajectory and serve as an important tool to convey the attractiveness of the business – especially if you have a credible methodology to forecast your revenue and ARR for the next couple of years based on existing sales pipeline and customer contracts. Getting to the business end of the process – letter of intent (LOI) and due diligence (DD): Once you’ve selected a potential buyer based on initial conversations and bids, you will typically sign a (non-binding) letter of intent (LOI) that will give the selected buyer 4-8 weeks of exclusivity to complete due diligence and negotiation of final agreements. The buyer will also agree to a strict confidentiality clause as part of the LOI. In this phase, the buyer will both conduct management meetings and ask for documents / files that cover the product and technology, historical business performance (see step 4 above), key customer contracts, sales pipeline, employment contracts, and other relevant details about the operations, tax filings, and legal structure of the business. The seller typically opens a virtual data room (VDR) which is an online portal to share all these documents and answer questions from the buyer.
If you have an investment bank representing you, the bank will work with you to prepare you for the relevant meetings and collect the data. However, if you don’t have a bank representing you, the leadership team will need to work with your lawyer to gather all this information and answer relevant questions from the buyer. Note that this process is time consuming, and you might not always have what the buyer is asking for. When you don’t have the information, it’s important to understand the buyer’s intent behind specific requests and work with them to answer questions based on available information. Getting to the finish line and preparing for what comes next: First thing to keep in mind is that the LOI is a non-binding agreement. If through the diligence process the buyer finds concerns with the business, they have the right to walk away from the transaction. Most buyers are mindful of their reputation in the M&A circles and will only walk away if there are issues that are real deal breakers, but you must be prepared for this eventuality.
Assuming the diligence process goes smoothly, about 2-3 weeks before the exclusivity period runs out, you should start working with your lawyer to negotiate a sale & purchase agreement (SPA) and employment contracts (for employees who will work for the buyer after the acquisition). Startup founders should think carefully about what percentage of their payout they’re willing to receive in stock (i.e. buyers’ stock) and how long (and in which role) they are willing to work for the buyer after the acquisition. Buyers like paying part of the acquisition price in stock because it both reduces the upfront cash payment and helps ensure that the seller has a vested interest in making the acquisition a success. Prepare a quantitative view of the business - financial statements, KPIs, and audit reports: This is perhaps one of the most critical steps to ensure that you’re representing the business accurately and in good faith to potential acquirers. The leadership team (and specifically the CFO, if you have one) should work with your accountant to prepare the historical financial statements (income statement, cash flow statement, and balance sheet) and gather the relevant audit reports. In Software/SaaS acquisitions, buyers will also focus on key metrics such as ARR growth, gross and net revenue retention, logo retention, gross margins, operating expenses, and burn rate. Most sellers also provide projected financials that show the business’ expected financial trajectory and serve as an important tool to convey the attractiveness of the business – especially if you have a credible methodology to forecast your revenue and ARR for the next couple of years based on existing sales pipeline and customer contracts. Prepare a quantitative view of the business - financial statements, KPIs, and audit reports: This is perhaps one of the most critical steps to ensure that you’re representing the business accurately and in good faith to potential acquirers. The leadership team (and specifically the CFO, if you have one) should work with your accountant to prepare the historical financial statements (income statement, cash flow statement, and balance sheet) and gather the relevant audit reports. In Software/SaaS acquisitions, buyers will also focus on key metrics such as ARR growth, gross and net revenue retention, logo retention, gross margins, operating expenses, and burn rate. Most sellers also provide projected financials that show the business’ expected financial trajectory and serve as an important tool to convey the attractiveness of the business – especially if you have a credible methodology to forecast your revenue and ARR for the next couple of years based on existing sales pipeline and customer contracts. Prepare a quantitative view of the business - financial statements, KPIs, and audit reports: Getting to the business end of the process – letter of intent (LOI) and due diligence (DD): Once you’ve selected a potential buyer based on initial conversations and bids, you will typically sign a (non-binding) letter of intent (LOI) that will give the selected buyer 4-8 weeks of exclusivity to complete due diligence and negotiation of final agreements. The buyer will also agree to a strict confidentiality clause as part of the LOI. In this phase, the buyer will both conduct management meetings and ask for documents / files that cover the product and technology, historical business performance (see step 4 above), key customer contracts, sales pipeline, employment contracts, and other relevant details about the operations, tax filings, and legal structure of the business. The seller typically opens a virtual data room (VDR) which is an online portal to share all these documents and answer questions from the buyer. If you have an investment bank representing you, the bank will work with you to prepare you for the relevant meetings and collect the data. However, if you don’t have a bank representing you, the leadership team will need to work with your lawyer to gather all this information and answer relevant questions from the buyer. Note that this process is time consuming, and you might not always have what the buyer is asking for. When you don’t have the information, it’s important to understand the buyer’s intent behind specific requests and work with them to answer questions based on available information. Getting to the business end of the process – letter of intent (LOI) and due diligence (DD): Once you’ve selected a potential buyer based on initial conversations and bids, you will typically sign a (non-binding) letter of intent (LOI) that will give the selected buyer 4-8 weeks of exclusivity to complete due diligence and negotiation of final agreements. The buyer will also agree to a strict confidentiality clause as part of the LOI. In this phase, the buyer will both conduct management meetings and ask for documents / files that cover the product and technology, historical business performance (see step 4 above), key customer contracts, sales pipeline, employment contracts, and other relevant details about the operations, tax filings, and legal structure of the business. The seller typically opens a virtual data room (VDR) which is an online portal to share all these documents and answer questions from the buyer. Getting to the business end of the process – letter of intent (LOI) and due diligence (DD): If you have an investment bank representing you, the bank will work with you to prepare you for the relevant meetings and collect the data. However, if you don’t have a bank representing you, the leadership team will need to work with your lawyer to gather all this information and answer relevant questions from the buyer. Note that this process is time consuming, and you might not always have what the buyer is asking for. When you don’t have the information, it’s important to understand the buyer’s intent behind specific requests and work with them to answer questions based on available information. Getting to the finish line and preparing for what comes next: First thing to keep in mind is that the LOI is a non-binding agreement. If through the diligence process the buyer finds concerns with the business, they have the right to walk away from the transaction. Most buyers are mindful of their reputation in the M&A circles and will only walk away if there are issues that are real deal breakers, but you must be prepared for this eventuality. Assuming the diligence process goes smoothly, about 2-3 weeks before the exclusivity period runs out, you should start working with your lawyer to negotiate a sale & purchase agreement (SPA) and employment contracts (for employees who will work for the buyer after the acquisition). Startup founders should think carefully about what percentage of their payout they’re willing to receive in stock (i.e. buyers’ stock) and how long (and in which role) they are willing to work for the buyer after the acquisition. Buyers like paying part of the acquisition price in stock because it both reduces the upfront cash payment and helps ensure that the seller has a vested interest in making the acquisition a success. Getting to the finish line and preparing for what comes next: First thing to keep in mind is that the LOI is a non-binding agreement. If through the diligence process the buyer finds concerns with the business, they have the right to walk away from the transaction. Most buyers are mindful of their reputation in the M&A circles and will only walk away if there are issues that are real deal breakers, but you must be prepared for this eventuality. Getting to the finish line and preparing for what comes next: Assuming the diligence process goes smoothly, about 2-3 weeks before the exclusivity period runs out, you should start working with your lawyer to negotiate a sale & purchase agreement (SPA) and employment contracts (for employees who will work for the buyer after the acquisition). Startup founders should think carefully about what percentage of their payout they’re willing to receive in stock (i.e. buyers’ stock) and how long (and in which role) they are willing to work for the buyer after the acquisition. Buyers like paying part of the acquisition price in stock because it both reduces the upfront cash payment and helps ensure that the seller has a vested interest in making the acquisition a success. M&A processes are not easy to navigate and require dealing with a lot of scrutiny and uncertainty along the way. Therefore, it’s important to be aware of what you’re getting into and prepare beforehand to make the process as streamlined as possible. Hopefully this article was a helpful start for those who are new to the process and stay tuned for more content related to startups, technology, and M&A!

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

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