Palo Alto, CA – July 31, 2014
There are times in the life of a start-up when it’s the right move to actively look for a buyer. Perhaps you want to make it big through an IPO, but it’s years away, or maybe there’s an interested buyer circling and you want to improve the outcome by attracting a competitive bidder.
Buyers for your company often won’t have your best interests in mind when they come knocking. Make sure that you’re in the driver’s seat by knowing these 10 rules to help you through the process of discovering a buyer, negotiating value, and retaining that value once you have sold your company.
1. Fortune Favors The Focused. Yes, your product probably can do everything — but buyers think in narrow niches. If you don’t fit the niche, you may not get the first meeting. Focus on their needs when making your introduction.
2. Be Noisy. In order to get a premium strategic acquisition price, the buyer needs to know you from a strategic perspective. Talk to analysts, influential bloggers, and media publishers to make your case. Keep your website up-to-date and put out press releases on a consistent basis. Develop friends and alliances in the market. Make it easy to find your products.
3. Build A Test Case. If you can, call the buyer’s listed customers and pitch them on buying your product. Most have at least case studies on their website, if not long lists of customers. If a buyer’s customer does not want your product — it may not be a good fit for acquisition. Use strong data to make a case for partnership, and later, acquisition.
4. Keep It Clean. Maintain clean financials; have them professionally reviewed, if not audited. Importantly, make sure employees and contractors have signed Invention and Assignment agreements, which will protect you and the value of your IP.
5. Don’t Give Away The Farm. Don’t agree to distribution exclusivity or first right of refusals if possible. Negotiate assignment clauses in key contracts so that consents and approvals don’t get in the way of a speedy close.
6. Size Matters. Often bigger IS better from a buyer’s point of view when it comes to acquiring companies. At least $10M in revenue is often required to get buyers interested from a financial perspective. If your company doesn’t have revenue and profits, make sure you have another metric that represents strong growth – for example, Monthly Active Users (MAUs).
7. Choose Your Battles. If Google, Yahoo, Twitter, and Facebook are the only acquisition partners on your list — think again. Look beyond the top 3-4 companies in your sector for possible partners. The company that is willing to pay the best price may be in the long tail – for example, someone that needs to differentiate through acquisition.
8. What Counts is What You Get to Keep. There are a number of factors beyond the valuation of the deal. Look for terms around reps/warranties and indemnification. Make sure that you get to keep the entire purchase price post-transaction.
9. Houston, We Have Revlon. Ask your attorneys about “Revlon Duties” and when an unsolicited bid may put you in play if the Board of Directors responds.
10. Stick Around After the Party. If you leave before the end of the escrow period, you can often kiss that escrow money goodbye. Buyers are focused on retention of key talent.
If you and the team leave before the end of a typical 12-18 month escrow period, buyers will often go after the escrow dollars in any way they can.
(Bonus: 11. Hire good advisors. Whether it’s strong legal support with a history of M&A deals, good accounting help focused on due diligence issues, or an investment banker that knows your sector, specialists matter. At the end of the day, each of these specialists will pay for their work with increased or retained value. And guess what? Advisors are always willing to meet a few times upfront, at no cost to you, to learn more about your company.)
Tricia Salinero is an M&A advisor at Woodside Capital Partners. She can be found on Twitter @Tisal