For many startup founders, being acquired by a larger company is the ultimate goal. However, going through an acquisition can be a daunting experience for any founder, business owner, or executive. The process can be complex and overwhelming, with many important decisions to be made along the way so you can thoroughly prepare your startup for the acquisition.
Therefore, proper preparation and a clear understanding of what to expect can help founders navigate this process successfully. From assessing the company’s value to identifying potential acquirers and negotiating the deal – these are just some of the steps that you can take to prepare your startup for acquisition.
Ben Wong, a seasoned investment banker with global investment bank Moelis Australia, has taken part in more than 50 global acquisitions. According to him, the most obvious questions at the beginning of the process can also prove to be the most crucial ones.
“First, you have to understand your own motivations, as well as the ones that your shareholders have. Let’s say you are a tech company, you’ve been building a product and a business,, you’ve got VC funding, angel investors, and so on. But what do you want – what do the founders and the management want? Do you want to sell and take the cash? But most likely that won’t happen, since when most acquisitions happen, the buyers want the founders to stay on, at least for a couple of years,” Wong tells The Recursive.
Motivation is definitely one of the key aspects, the Croatian entrepreneur and chief developer experience officer at Infobip, Ivan Burazin agrees.
“Typically, the motivation is the financial benefit of the seller. Of course, there are other motives as well – sometimes it’s done to expand a vision, in the sense you that can’t get to the next step as a stand-alone company,” Burazin, whose Shift Conference got acquired by Croatian tech unicorn Infobip in 2021, tells The Recursive.
The dynamic that the co-founders have is also very much important when there is an acquisition proposal, Wong continues.
“For example, what if one of the co-founders is 35 years old and hungry, and the other one is 60 years old, and at this point just wants to sell the company? This changes the way you negotiate from the start. Then, VCs and angel investors add another layer of complexity – they’re not involved in the business, but are they willing to sell? Are they going to support you to sell? I sold a company two years ago where the shareholders didn’t want to sell, but the main founder wanted this. So, as a founder, you can find yourself in a tricky situation here – since most tech companies are risky – if you don’t take the money now, what happens if let’s say Google comes in as a competitor, what do you do then?” Wong explains.
How to figure out your value (and your price)
Thus, the first step to prepare your startup for acquisition would be to get everybody on board. After that, when everybody is aligned on the acquisition, the next question for the founders is to figure out what the buyers want from the deal.
“You need to think about what you want as a part of the sale – cash versus stock? Then you need to get ready and know who their party is. What value do you bring to them that will help you think about price? Do they want you because of their code, because of your customers, or brand? So you definitely need to know what you bring to them,” Wong tells The Recursive.
Then, there is also the competition for the potential buyers, and for Wong, this is also one very important aspect of any acquisition deal.
“The next thing you do is this about who else would want to buy you? Because then you need competition – for example, there’s Google, Apple, and anyone else who might want to buy your startup. After that, just get prepared – have your data room, have all your documents ready. And one more very important thing – know your financial model, the financial revenue, and everything else that might come up during due diligence afterward,” Wong says.
When it comes to due diligence though, for Burazin this is also a two-way street – one needs to know as much as possible about the buyer as well.
“There should be due diligence on the buyer as much as they do on the seller. Does the buyer have a history of M&A, does the buyer have a history of following through after an LOI, does the buyer have a good track record of integrations post-acquisition, and so on,” he tells The Recursive.
This stage of the process is also where the big challenges come in, and according to Burazin, there are several of them that founders need to focus on.
“Setting valuations is probably the first challenge. Then come voting rights (if they are similar in size), and the third challenge would be the cultural fit,” Burazin points out.
What happens post-acquisition?
Then, there is also the post-acquisition integration process. What happens here? According to North Macedonia-based angel investor Igor Madzov, there are several scenarios that can happen afterward.
“There are several scenarios on how the business will survive in the new circumstances: the first one is the “acquihire” that happens when the company is interested in the team and it continues to thrive in the new company. The second scenario is when the buyer is interested in the product and wants to develop it or incorporate it into its offer. And the third one is when the deal is done to buy users and market positions,” Madzov tells The Recursive.
However, the value of the employees and the team is often as crucial as the role of the founders themselves, Wong adds.
“One of the reasons that are of great importance for founders is the people. What happens to them? Do they stay on the job? Do they get cut? Does the company just take the technology and the company, and that’s it? I know founders who have not sold the company just to protect the employees – and they’ll keep going, they’ll keep getting money, they’ll keep getting funding, and keep building.” Wong concludes.
