Harder to arrange than a Formula One pitstop, but if you don’t get it right, you fail.
“Startups either are acquired, or they go IPO, or they die.”
So says the CTO of Adespresso, the San Francisco startup that helps media agencies evaluate and optimize their Facebook ads.
The quote was used by AdEspreso founder Armando Biondi to illustrate the importance of getting your exit strategy right. And he should know, because AdEspresso were recently acquired by social media content creation and scheduling tool Hootsuite.
And to help the start-up ecosystem get to grips with the world of M&A Biondi has written a blog post lifting the lid on the complex and fraught nature of getting a startup M&A deal over the line.
The first thing to know? “It’s terrifying”, says Biondi. OK, let’s break down the essentials, neatly summarised by Biondi in a series of “Pro-Tips” aimed at founders.
First off, you know a “deal is real” when the approach comes from the wannabe acquirer’s Corp Dev Dept., and not the Biz Dev Dept. A subtle, but important, distinction, according to Biondi.
And before you jump straight into the finer points of a mooted deal, try partnering for a spell first. It’s a great way to get to know the acquirer company better and decide if conditions truly are right for a full-scale M&A to work.
Tip no. 3? Don’t feel time pressure, founders. Discussions could, and should, be “loooooong” and involved – take the time to ensure this partnership / acquisition should really be happening. If it’s not right, customers will suffer, which ultimately means the business will too. Elementary, right?
So, you know you’re truly doing a deal when the first “LOI”, that’s letter of intent, arrives. But it won’t be the last. In Biondi’s case, he says, AdEspresso were exchanging an LOI a week with would-be acquirers Hootsuite. An LOI determines things like cash vs stock, retention versus earn-out, and key employees, says Biondi.
By exchanging LOI’s you are determining how the acquisition is going to play out.
And then the fun begins. First (Pro Tip 5), you owe it to yourself (and your board, and employees, and customers) to check and see if there may be better offers out there in the marketplace. Sounds crazy, right? You finally have the deal you always dreamed of on the table, and the first thing you do is try to find a better one – but do it you must, by appointing an M&A advisor.
Before you sign your LOI, you have something called “optionality” – wiggle room – Pro Tip 6. Once the letter is signed, the only company you will be talking to from then on is the acquirer company.
Then the due diligence starts, and it is, Biondi says, 10 times more exhaustive than raising a Series A. Let’s just let that sink in there.
You have to think about legal fees (could be as much as $350k), due diligence rounds, accountability, paperwork, travelling from your place to their place, and vice versa, paperwork (hint – there is a lot and Biondi provides a most helpful list), staying on-message, making sure you don’t fall out and a million other minutiae which if left unaddressed, could scupper any deal.
Signing and closing (2 different things entirely, apparently), must be done with Formula One like precision, concludes Biondi.
You really must read this if you are at all serious about taking your company to the next level. Because remember, if you’re exit strategy doesn’t include acquisition, or IPO, well – you know the rest.