11 Key Things to Consider Before an Acquisition
As a startup owner, you’ve either dreamt of creating the new Amazon or you’ve waited for the day for your little startup to get noticed by the big wigs in the industry and start talking about acquisitions.
Yet, getting acquired in a good deal is more complex than your regular business deals, with traditional stipulations.
Whether you’re an old hat at entrepreneurship or you’re a first-time startup creator, every acquisition comes with its own problems and challenges.
If this has been haunting your every waking moment, no worries. You’ve come to the right place. Keep on reading to learn all about the eleven key factors you’ll want to understand before starting your acquisition process.
1. Setting Up a Good Deal 101: The Mergers and Acquisitions Edition
The very first step you’ll want to understand is your business narrative. This is a fancy term used to refer to your business story, its origins, and triumphs, as well as the challenges it faced on its way to success.
Don’t underestimate how important it is to fit your acquisition into your brand message as an appropriate new chapter.
Does the acquisition make sense, especially when it comes to your customer base and products or services? If the answer is no, you’ll want to take some time to find a better fitting deal.
After all, you don’t want to be seen, especially by your customers, as a sell-out who only cares about money.
2. Do Your Math Homework First
You’ll want to ensure that you’ve done your homework, and made sure that your numbers are making sense.
Start by bringing in a firm to audit everything you have. Afterward, go in and audit everything yourself and make sure they match up.
Having your deal going sour because of a mix-up in the numbers and the actual value of your startup is the best way to get blacklisted in your industry.
Bring in a reputable special purpose acquisition company to do the legwork for you, and you’ll be good to go.
3. Check On Your Non-Compete Provisions
You don’t want your potential buyer to find out that there might be a non-compete restriction that might sabotage your deal.
Non-compete restrictions can either involve a specific time period or a geographic scope.
It’s an essential step to study the market when it comes to a competing venture, and how would selling your startup affect your business and customers later on.
4. Nail Down the Costs of Selling Your Business
Seeing the lump sum amount that the buying company will give you can blind your eye to the future worth of your little company.
You need to sit down and crack the numbers. How much is it going to cost you to operate your business for the coming year or two?
Take that number and compare it to how much your company might be valued a couple of years from now. These are the necessary calculations required to figure out whether it’s the right time to sell your business or not.
You might be better off waiting a year or two.
5. The Company Culture Fit
At the end of the day, this will be a merger, where your buyers’ employees and your own people will work under the same flag.
Do your values and visions for the future fit or clash together?
Depending on the answer, you’ll either want to go ahead and truly combine both forces, or you’ll have to keep some borders and limitations to avoid unnecessary friction between the two rather different cultures.
6. Figure Out the Right Price Range
It’s preferable to have a solid idea about your desired price range before even starting your negotiations.
You can start this process by inquiring about your potential buyers’ pricing models, and figuring out whether they align together or not.
Generally speaking, it’s a lot easier to sell additional products to your existing customers, than it is to introduce a new product to a whole new customer segment.
The more familiar the pricing and business strategies between the two companies, the better and smoother you’ll be.
The same rule applies to your acquirers. They’ll be searching for the right companies to add to their list of existing products, or at the very least, add a complementary service to the ones they already offer.
Unfortunately, if the pricing models are too different from one another, then the process can only get more complex as you go.
For example, if your customer is used to having a permanent license for your software, you can’t expect them to pay for the same service twice, just because your company has been acquired by a different firm.
The same goes for trying to ask them to switch to a subscription-based service, instead of the existing model.
Basically, it’s rather tough to align billing and pricing structures when they’re originally on either side of the spectrum. Having similar structures will ease the integration process and create a well-oil machine for a larger business.
7. Going For Cash or Stock?
You’ll want to crunch your numbers and figure out your preferred payment mixture before the negotiations start.
Do you prefer getting everything in cash, or all stock? Or would you rather play it safe and go for a balanced mix of both?
Sadly enough, the right answer will depend on your specific situation and your acquirer.
You’ll find a well-balanced view presented by ex-startup owners of both. Some regret holding on to all the stocks, and others are crying about the lost opportunity when they got paid all in cash.
Take your time to figure out the right payment method for your needs.
8. Air Out Your Legal Issues and Baggage
Of course, it’s much preferable to have none. However, if you have any outstanding legal issues or baggage, you’ll want to be forthright and honest about them from the get-go.
Your acquirers will be conducting their own investigations and background checks, so you might want to perform your own. You’ll want to avoid any unpleasant surprises popping up in the middle of your negotiations.
Remember, no company is perfect. By getting ahead of your weak points, you’ll only appear stronger, not weaker.
9. Practice Due Diligence
Whether your potential acquirers are newbies to the scene, or they’re a well-established Fortune 500 company. You’ll want to conduct your own research and practice due diligence before signing any paperwork.
It’ll be a disaster for you to appear ignorant when you’re sitting at the negotiating table. A bad result can be having to renegotiate your contract. The worst-case scenario is losing the trust of your potential buyers and the deal falls through.
Thus, you’ll want to do your homework and have as much control over the situation as possible by being the most knowledgeable person at the table.
10. Figure Out Your Post-Acquisition Plans Early
You’ll be one of two types of entrepreneurs. You either can’t wait for the sale to finalize to move to an exotic beach and sip on mojitos for three days straight. Or, you’ll be heartbroken that you gave your baby away, and you couldn’t stay on for a little longer.
The good and bad news is as follows: you’ll probably be asked to stay on a bit longer to ensure a smooth transition in management and have your former business thrive in its new form.
You’ll want to keep your own preferences in mind and remind yourself that this will be temporary. Some entrepreneurs detest having to work for someone else, and others will want to stay on a bit longer and they’re enjoying the 9-5 experience.
Make sure you’ve given some solid thought to your plans after the acquisition is done to prevent facing a depressive episode or an ex-entrepreneurial slump in motivation.
11. Keep an Eye on Your Stress and Focus Levels
In short, if you’re not selling your startup directly to google, we’re here to tell you that this is going to be an emotional rollercoaster with a ton of speed bumps along the way.
Every single piece of documentation, deal you’ve made, the decision you’ve taken will be called into question. Even your own ability as a leader will be nitpicked by strangers.
Prepare yourself for the personal questions, and having to take calls at all times of the day (and night).
Moreover, might have to deal with the opposite problem. This would be having your buyer go silent for weeks on end.
You’ll need to have healthy coping mechanisms and your therapist’s number on speed-dial.
Are You Ready to Sell Your Business?
We know how overwhelming it can be to just think about nailing a good deal and selling your business to the right acquirer.
It’s a different flavor of stress than the one you’re used to being an entrepreneur and starting your own business.
Hopefully, our guide has shed some light on the main eleven factors you’ll want to keep in mind before starting a smart acquisition process.
If you liked our explainer, you’ll want to check out additional tips and strategies that are available to you in our business section.