Any business that gets to $15–20M in revenue inevitably attracts some acquisition interest. Getting acquisition interest can be extremely exciting but also distracting. If being acquired is on your radar, now is a good time to research potential investors and learn more about the process. As a VC, I’ve been involved in the funding of more than 200 startups over 20 years, and here are my thoughts and advice for managing the process.
Who are you dealing with?
There are many kinds of potential buyers, each with different motivations and strategies. Here is a rundown of the three most common acquirers:
A public company:
Public companies’ M&A departments tend to be run by seasoned professional managers who have worked at and with many different companies. They’re likely thinking about extending product lines and looking for ways to offer additional value to their customers. “Build vs buy” is a dilemma commonly faced by larger businesses like Salesforce or Google: is it better to buy a company that’s already built what they need, or will they be better off doing it internally? Does an acquisition get them into a market more quickly? When looking at smaller companies, they often do what is called “acquihires” — basically purchasing teams to enhance their existing workforce, even if the revenue and successful product aren’t quite there yet. They want to make strategic acquisitions, but they must impact product and revenue, and for bigger public companies, that can be substantial. Small companies often don’t clear the bar.
A private equity firm:
Private equity firms are in the business of making money for their investors as well as profit (just like venture firms). They tend to have shorter time horizons to hold their investments compared with venture — often less than 5 years. Private equity firms tend not to be sector-specific, so they’ll look at businesses that have the financial metrics they’re targeting and aim for places where they believe there’s an opportunity to increase value, often by wringing out costs to drive up profitability. I’m sure they would disagree with me, but in my experience, private equity firms are less focused on the longer-term market or product strategy. Most of their playbooks are similar and understandably focused on the ability to grow revenue and margin because of their shorter time horizon.
A private company:
Being acquired by another private company — sometimes even a direct competitor — also happens frequently. These transactions can be tricky because it can be hard to understand relative values, since valuations are points in time and may not represent what other investors would pay for the same stock. Also, if your company has a complicated capital structure, combining with another company that has a complicated capital structure has obvious challenges, and can result in a divergence of interests. Finally, most private companies aren’t well-capitalized because of their risk profile, which generally means they’re neither willing to part with cash nor able to complete large transactions. A good rule of thumb is that whether a public or private company is the potential acquirer, their willingness to pay will max out around 10% of their market value. So if a company was valued at the last round or in the public market at $400M, don’t expect to see a transaction at values much greater than $40M; it’ll likely be substantially less.
In any case, the result of the acquiring process is that you end up having a new boss. That’s why knowing the people who want to acquire you is so important: you need to assess whether you’re going to be able to work with them. Once you sell, you’re no longer in control. You have a new reality. If that’s not what you want, then by all means don’t sell and save yourself the stress. This leads me to my next piece of advice:
Take the meeting, even if you’re not interested in selling
If you’re not interested in selling your company, you may not think it’s worth your time to take the meeting, but at some point down the road, you will be interested in selling. Knowing what about your business excites a potential acquirer and how much value a 3rd party might place on the business is always a helpful data point to have. Plus, by engaging and taking the meeting, you’ll be learning how to navigate the process for the future. Practice makes perfect.
Your objective, beyond simply learning something, is to build a relationship. The one potential exception would be meeting with an unqualified firm or someone who isn’t in a position to make decisions; in those cases, being more guarded with your time makes sense. There are many private investors who will want to meet to simply gather information — maybe because they’re looking at your competitor. They likely won’t be direct with you about this for obvious reasons, so just go into these meetings with eyes wide open. Talk with your advisors, your attorneys, and your investors: if no one has ever heard of the company or firm in question, proceed with a lot more caution.
Do your homework
When walking into a meeting with a potential acquirer, there are a few crucial pieces of information you really need to get to help you decide whether you’re ready to go ahead with the acquisition. I would advise any founder to find out the answers to the following questions:
- Does this company acquire all the time? If they have a dedicated mergers and acquisitions group, they’ll likely have a very good process, which if you want to sell will increase your chances of closing. The opposite is also true: if they’ve never made an acquisition, then it will likely be a bumpy process. In that case, it would be good to understand why.
- What’s their typical acquisition profile? If the potential investor is a strategic buyer who tends to grow by acquiring other companies, then you need to figure out if you match the profile of their typical acquisition (for example, do they want profitable companies only).
- Knowing what their typical timeline and goals are when it comes to the acquisition will help you work out if their goals and timelines match with yours.
A common mistake is mismatched timing: it usually takes months to get a deal done. If you’re running out of cash in a week, you’ll be disappointed. A buyer learns a lot by taking some time to close, and they’ll likely want to eliminate all the risks they can; doing that just takes time.
They’re not really interested in your business (point of view matters)
When you go to the meeting, have a clear articulation of why your business would be strategic to a potential acquirer and make theirs more successful. They’re not interested in your business. Spending time on why your products are so awesome is not a compelling story. An acquirer obviously cares about your business, but their point of view is critical to understand: they’re not looking to invest. They want to add your business to their company to accelerate their own. They’re interested in how your business will positively impact their existing customers, their target customers, or maybe even your customers. You need to understand the opportunity from their point of view.
Decide how much to share
While you should go totally prepared, it’s also advisable to hold some confidential or sensitive details back. I’m often asked how much a CEO should share in a meeting with a potential acquirer. My answer: only share information that will get the potential buyer excited enough about the business to ask for a second meeting. After all, you can’t be sure how serious they are at this stage. For example, private equity firms might engage with you to learn about the market in general or as a part of their own due diligence process on your competitor. If a private equity firm is interested, ask them what their target profile is rather than sharing your details, and assess whether you fit.
Don’t give out the names of customers that are sensitive in a first meeting, by all means. There should be no reason in a first meeting to share any detailed customer information that’s not already public, especially if the acquirer is a competitor of yours or an investor in a competitive company. That information can come out in time, but it isn’t required as part of any early filter. It may be common sense to some, but it’s easy to get caught up in the potential for an exit.
The reality is that most private companies will eventually be acquired. The trick for you as a founder or executive is to really think through the timing and the approach you take to the process. Being educated about the potential partners, what they’re looking for, and how to present your business in the context of theirs is a skill; like anything, it takes some practice and focus. Great CEOs are always thinking about their options: I would encourage you to do the same even if you have no current interest in selling. By being careful with your conversations, you can not only learn more about the process but also eliminate those who are out to waste your time. Follow these tips, and I’d say the odds of finding even more success are in your favor.