Generating a startup acquisition process
When it comes to selling a startup, most sellers have goals that go way beyond the purchase price. These goals could include the opening of premises, keeping staff on board, or permitting the seller to continue to participate in the startup. Selling a startup is much more complex than the average financing with a safe note. Here’s how to generate a startup acquisition process.
Depending on the seller’s goals, what constitutes a “best” buyer will differ significantly. It’s critical for a seller to identify their goals and then target the most likely buyers to accomplish those goals.
Select advisors that will focus on buyers who will help you achieve your goals and not theirs.
Working with a qualified merger or acquisition advisor with a broad buyer network is crucial if you want to find the best buyer for your startup. Your investment banker should work for you, the seller, first and foremost.
In many circumstances where the best bidders fall outside of their narrow circle of favoured buyers, investment banks with limited geographical reach sell primarily for private equity funds may face conflicts of interest.
Ultimately, finding the right buyer for your startup is more about targeting than attracting. The most successful strategy to identify the buyer for your startup is to engage in an active, competitive sale startup acquisition process involving many possible buyers.
Determine your startup’s value
The bottom line for both the seller and the buyer: “what is the startup’s true value?” This is exactly why the valuation stage of the selling process is so crucial. A vital step in attracting multiple and quality prospects is establishing an acceptable value and supporting that value with data and statistics.
Because many buyers are often concerned about the future, you can’t just have a three-year or longer track record of profitability. You should be able to highlight your vision of the future by providing clear potential for both near-term and long-term growth.
You should structure this in a way that buyers perceive your startup’s future as bright and positive. Also, ensure that they understand that they are purchasing not only the last few years of your startup’s performance but also what it will do in the future.
Fix any flaws
Humans are afraid of taking risks. It’s a problematic concern to eliminate, so you can count on potential prospects to go over every inch of your startup with a fine-tooth comb, searching for weaknesses that may indicate risk.
As a seller, it’s essential to spot the defects and do everything you can to fix them. Things to be concerned about include:
- Environmental issues and permits
- Product liability
- Pending lawsuits
- Outstanding workers’ compensation claims
- Patents and intellectual property difficulties
What you can do to attract multiple potential buyers
When it comes to selling a startup, many entrepreneurs are concerned that they may sell prematurely or possibly wait too long, missing an opportunity to sell at a higher price. Whether you have a 90-day or 900-day timeframe, time management will maximize your startup’s value to potential buyers, which can convert into higher profits.
More approaches for entrepreneurs to make their startups more appealing to potential buyers:
Understand your potential buyers: Who would be your possible buyers if you put your startup on the market? A potential buyer could be anyone. Employees, suppliers, customers, or competitors might all be potential buyers. The more buyers you have, you improve your chances of getting a good deal on the startup. Knowing your current potential buyers allows you to take steps to broaden that audience if needed.
Buyers are typically categorized into two categories: strategic and financial buyers. Strategic buyers consider how well your startup fits into their long-term ambitions. This might be your competition or a huge corporation looking to enter a new market or introduce a new product. Strategic customers will often pay you more than other sorts of buyers if you have what they want.
The profitability and stability of your startup are more important to financial buyers. Companies or people with money to invest could be among them. Others may specialize in turnaround situations and aim to buy a startup that they can modify to profit. In contrast, others may prefer a robust and well-managed startup that requires little management.
Consider yourself to be a buyer: What would persuade you to pay more for your startup? On the other hand, what might cause you to question whether the selling price is too high? Your client base, management team, and proprietary products and services are all key value drivers that you can work on today to influence buyer opinions tomorrow.
Keep key staff members: Team players are crucial to a new owner’s success. Losing them during a sale might be a deal-breaker. Keep personnel in place for potential buyers. Maintain confidentiality before considering a deal to avoid fear and unexpected turnover and help assist the buyer in keeping workers on board after the sale.
Cast a wider net: If your startup is well-known, simply announcing that it is for sale may be sufficient. However, you’ll almost certainly need to cast a larger net. You may reach out to people you know, leverage existing investors, or in the case of small businesses you could consider brokers and business brokerage websites.
Make an excellent first impression on potential buyers: Selling a home differs from selling a business. However, much as home sellers stage their homes to make them more appealing, you must first get your business in order before approaching possible buyers. For potential buyers to review your financials, they should be in order. Have a current and three-year profit and loss statements, comprehensive tax returns, and balance sheets on hand before going to market. Include future profits predictions in addition to assets and financial details.
What to do with your multiple offers
You may receive several competing offers to buy your startup. You can discuss various negotiating methods with your M&A advisor. The following four options will be available to you:
- Accept the “best” offer
- You can inform all potential buyers that other offers are “on the table” and encourage them to put their “best” offer in
- You can “counter” one offer while placing the others on hold while you decide on your counter-offer
- Counter one offer while rejecting the others
Recognize that each one of these methods has benefits and drawbacks. Patience may result in a better offer. Asking bidders to submit their “best” offers may result in a better one compared to those “on the table” – or may deter buyers who believe they’ve already made a fair offer, causing them to abandon negotiations and explore other startups. Your M&A advisor will go over the advantages and disadvantages of these negotiation methods with you. The choices, on the other hand, are yours to make.
The startup acquisition process could take anywhere from a few months to several years. Meanwhile, the secret to the perfect sale is to retain and develop value so that when that buyer comes knocking, you can get the best price possible.
Finally, buyers and sellers should be aware that only one offer will be approved in multiple offer circumstances, and the other buyers may be unhappy if their offers get rejected. While little can be done to alleviate that disappointment, fair and honest treatment during the offer and negotiation process and fast, continuous, and open communication can increase the likelihood that buyers, whether successful or not, will feel treated fairly. Don’t forget your board plays a major role in this process too and will be instrumental in this decision, and the outcome.