M & A Basics

M & A Basics

Posted by: Gillian Muessig & anne Kennedy on Monday, January 6, 2020 at 11:15:00 am

Let’s talk today about M&A. Mergers and Acquisitions.

Every entrepreneur dreams of selling the company and cashing out, don’t they?

Like a boat, the happiest days of an owner’s life are the day they buy it and the day they sell it. Seriously, it is almost a trope that founders need to have their exit in mind from the earliest days of their startup. True, but that may be different for some startup founders. Many are on a mission to solve a problem and make better ways to live and work together. This is valid, and even noble.

BUT the business of business is business, i.e. making money for the owners. If you have investors, they expect a return on the money they put in your company. Sure, they have gambled on a highly risky asset class, but they do so anticipating gains on their money. If making money is not part of your mission, go start a non-profit.

Of course many startups have a double bottom line, the second being social impact in which you are doing good by doing well.

Let’s also keep in mind that the moment you take in investors, especially venture capital, you have agreed to sell your company, or exit via an IPO.  Either way, investors get paid back, and they expect a return on their investment.

What start up founders must know

When to sell.

  1. The first and obvious answer is when you have a buyer.
  2. But maybe not. Many start ups get inquiries as to whether they are interested in an acquisitions, often long before they have thought that through. They may not even have a valuation or price in mind, and even less thought on how to defend it.

How to pitch a deal.

  1. Learn what your buyer wants and needs, and speak to that. What pain point might they have that your company is ideally suited to solve?
  2. Do they have the resources to buy your company? Is your solution a ‘nice to have’ or a ‘need to have’ for the prospective buyer’s business.
  3. Is your deal an “Acqui-hire”, which means acquire and hire? The compensation can be cash plus stock, often staged into an ‘earn out’ in which compensation tied to achieving specific benchmarks over time. It is critical to make sure the earn out factors are one you have in your control, in other words, tied to your activities, instead of management decisions by the buyer.
  4. Most important, do your company’s mission and goals align with the buyer’s? Where do your products fit into their development plans?

In every interaction there is a buyer and a seller

Usually buyers hold all the power, EXCEPT when what they want to buy is scarce. This was true in the early days of SEO. Which is your company? We all think we are unique, but look closely at your vertical. Are they many in your space? Are there companies solving the same problem differently, such as advances in treating cancer with immunotherapy rather than radiation?

Always have your company ready for sale. Know your valuation and do not undervalue your company. Calculate the long-term impact of your product or service on a buyers’ bottom line, and how long and how much it took you to build it. If you bootstrapped your start up, as many do, stop and calculate how much it would cost your buyer to arrive at the same stage, presumably not on a shoestring. Keep in mind time is money too. What is most valuable to your buyer: having the product in six weeks or six years?

Top Tips for M&A Basics

  1. Always be prepared to answer the question “Are you open to acquisition?” with your current valuation and your optimal deal thought out.
  2. Make sure your product aligns with your buyer’s mission, goals and product development
  3. If your deal is an ‘acqui-hire’ which is very likely, make sure the benchmarks for your deferred payout are variables you can control.

Bonus Tip: It goes without saying, keep your books tidy and ready for due diligence inspection by a buyer.

Till next time!


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