The Marker Guide to Getting Your Startup Acquired
Get a lawyer involved from the very first moment a piece of paper is placed in front of you
Some entrepreneurs spend way too much time worried about the endgame. Others get an acquisition offer dumped into their laps and have no idea what to do next.
I’ve been acquired six times— the last two at companies I led. One of those companies was acquired by a private equity firm and the other by a corporation. I’ve also consulted several startups through the acquisition process.
Last week I got a message from a founder who got her first hint at acquisition interest. It was nothing more than a request for a meeting, but you didn’t have to be a rocket scientist to read between the lines.
That moment is usually where the deal begins. So in response to her, I offered a step-by-step plan for how to generate and respond to acquisition interest.
Step 1: Figure out if you’re a threat
While a startup shouldn’t be focused on acquisition, you should definitely know who your potential acquirers are. They’re your incumbents and your competition, your customers and other corporate entities, and your partners and other large players in your space. If your startup is funded, this list should also include strategic corporate investors and private equity firms that play in the same space as your investors.
There’s no magic formula to make your company attractive to these acquirers. Your startup doesn’t necessarily need a ton of revenue to get acquired, but the more revenue it’s generating — especially recurring revenue — the higher the valuation of the company and the better the offer.
One thing is absolutely necessary, however: You’ll need to have market share because your company needs to be a threat. Incumbents want to take threats out. Corporations want to use threats as a competitive edge. Private equity firms want to turn threats into promises and flip them or take them public.
Ask yourself if your startup is a threat. If not, forget about acquisition, and keep hitting the accelerator.
Step 2: Build relationships with potential acquirers
You can’t put a “for sale” sign on your business, but you should be tacitly courting your potential acquirers. The best acquisition offers will come to you unsolicited or in the guise of another motive. The worst offers are those that you solicit. It’s like walking into a car dealership, announcing your love for a certain model, and then asking how much the red one costs.
While you’re working with potential acquirers, communicating with them, or even just sending them press releases, always keep your intellectual property under wraps and your trade secrets secret. You’d be surprised by how little information you have to give up to garner acquisition interest, especially when you have market share and revenue.
Step 3: Get to work
If a potential acquirer doesn’t announce their intentions right away, they may hint at finding some project to work on together. This could be a test, but it might also be a way to try to validate or even reverse-engineer whichever part of your business they feel threatened by.
You should do the project, but you need to be very careful, and you should already know what they’re threatened by first. If they’re prying for more information than you’re comfortable giving up, then just politely refuse to give it up until you’ve got some protection in place.
Step 4: Protect your interests
At the very least, protection means getting a lawyer involved from the very first moment any kind of paper is put in front of you, even if it’s just an NDA. And an NDA is a must, preferably one that directly addresses what the limits are on what kind of information will be shared.
I can’t stress this enough: Keep your mouth shut. Of course, you’ll need to be transparent about the health of your company — revenue, customer numbers and data, all the things that show growth and potential. But disclosing intellectual property and trade secrets can wait for due diligence once the offer is executed.
Step 5: Let them make the offer
Don’t be afraid to talk about the possibility of an acquisition, but despite conventional wisdom, you want to be blunt, not coy. Consider these two statements:
Blunt: “I realize it makes strategic sense for you to acquire my company.”
Coy: “You know, we could be acquired, for the right price.”
There’s a huge difference between those two approaches. The first implies you know they need you, and the second is tipping your hand.
Let them at least outline the structure of the first offer, but never accept that first offer. Also remember that they will hold you to any number that comes out of your mouth. Thus, you don’t want them to accept your first counter.
Their first offer will be too low; your counter should be too high. Then the proper negotiations can begin.
Step 6: Cash is king
Every single acquisition I’ve been through has either been mostly or all cash, and the two most recent ones were all cash. Stock is risky unless the stock price is a known entity, like a public company. Anything else means you’re just trading risk for risk, which might dilute your risk — but remember that your control will be completely diluted too.
The least attractive acquisition is when the startup’s team is absorbed into the acquirer with little or no additional compensation, which is known as an acqui-hire. This either happens very early in a startup’s life cycle or when the startup is failing. You only want to go the acqui-hire route if your startup has zero revenue or is a very long shot for success.
Step 7: Document the future
During the deal, and especially immediately after, everything seems rosy and everyone is in love. This will not last forever. It might not last a week. So before the deal is closed, you and the acquirer will need to come to an agreement as to what’s going to happen with your product and your team in the future. You’ll also need to know what your company’s current leadership’s role is in that future.
How will your startup be folded into the acquirer? What’s the strategic role of the startup in year one and year three and year five? What will your current leadership team be running, and who will everyone report to? Will your product be shut down?
Finally, it needs to be difficult to get rid of you and your team. Severance is a good way to do this. Six to 12 months’ severance is a fair starting point.
Step 8: Don’t let it drag out
Look, there’s a good chance that the acquisition won’t work out. I’ve heard several horror stories from startups that put everything they had into an acquisition project only to watch it fall apart at the last minute. The lack of forward progress ended up wiping out the startup completely.
The acquirer is not serious until an offer is made, so don’t plan for an acquisition until it’s serious. In fact, become more of a threat, as if you’re counting on it not panning out. Keep in mind that the acquirer could just be trying to waste your time or slow you down.
Step 9: Are you ready?
In the first step, I asked if you were ready to be acquired, and in the last step I’m asking the same question. Be sure you know this is the right move and you’re ready for the ride to be over, because you’re about to take a completely different ride.
Make sure you can accept the fact that your startup is no longer your startup. I can tell you from experience that this will become obvious pretty quickly and you will face some regret at some point, especially if it’s your first startup.
But if you are ready, don’t be afraid to pull the trigger. You can always take that ride again. And as an added bonus, it gets easier each time.