M&A has exploded in the tech sector this year. In fact, the dealmaking – which is already at over $110 billion – is on pace to hit levels not seen since the late 1990s.
OK, if you have a startup and think a sale of the company is likely, how can you get the best outcome in the current environment? Well, here are some things to consider:
Corporate Cleanup. Most startups are complete messes. Of course, this creates plenty of doubt when buyers are considering a deal. So you really need to get your books in order, your contracts in order, your IP in order, your cap table in order and so on. Even better, you should set up a data room, such as with Box or Dropbox. This means organizing your company’s information in folders, which can make the due diligence process much faster. Oh, and it will impress potential buyers.
Minimum Viable Offer. Your team needs to be on the same page, such as on the valuation parameters and other key terms, like: What if the buyer shuts down the product? What if the buyer only wants to keep certain employees? Will your company be run independently?
Have a Compelling Vision. Hey, if you want to drive the best valuation, you need to be convincing about the growth opportunity. “Selling on existing EBITDA can only get you a valuation based on today,” said Jack Berlin, who is the CEO of Accusoft, “but if you can make the acquirer believe in the potential of your startup, you can sell for a much higher valuation. Think about what your startup can do for the acquirer and start creating a product/integration plan for post acquisition. Any acquirer would be interested to know where you can take your company in the next five years without any investment.”
Get to Know The Buyers. “If you want to sell your business,” said Marius Moscovici, who is the founder and CEO of Metric Insights, “ideally you should be thinking about acquirers at least 18 months in advance of the sale. Identify a list of potential buyers and start building relationships early so that when it is time to do the acquisition dance, you have multiple suitors who are interested in taking you to the ball.”
Play Hard to Get. Want to know the best way to reduce the valuation on the sale of your startup? The answer is simple: actively seek a buyer! No doubt, this only looks like a desperation move. For the most part, you need to have a poker face when it comes to positioning your company for a sale. Actually, a good strategy is to talk about a partnership or alliance with a potential buyer. “In the sale of my prior business, as well as the most successful exits of Mercury’s venture-backed portfolio companies,” said Blair Garrou, who is a Managing Director at Mercury Fund, “having an existing business relationship with the acquirer has led to the strongest, most stable outcomes. Again and again, we have seen the ‘biz dev to corp dev’ process drive superior results for our founders and CEOs. The relationship is built on a foundation of value provided by both parties. The acquirer knows exactly what they are getting – not just from revenue but from product, team and culture.”
Advisers. For a startup, you really do not need an investment banker (such an adviser is usually too expensive anyway). But you definitely need an experienced attorney. “Navigating M&A waters can be extremely challenging,” said Ron Heinz, who is the founder & Managing Director of Signal Peak Ventures, “and the difference between a successful close or a failed transaction can often hinge on the skill set of your advisers.”Tom Taulli (@ttaulli) is the author of various books, including the Complete M&A Handbook