Startup founder: 4 tips to prep for an acquisition

The Blackroom Team
The Blackroom Team

Probably every founder has contemplated the situation before. 

You have been building your company for some time. The business is running, but it is not exploding, and it will likely be difficult to raise additional capital in the future. You have raised between $3 million and $12 million to this point. You're in a position where pursuing an acquisition as an exit strategy could provide a landing pad for the business. This opens an entirely fresh can of worms. 

You want to discover the optimal price, but you also don't want to be working for a company that you're not enthusiastic about. You desire a pragmatic result, but where do you even begin? 

Acquisitions are one of the more underexplored topics in company building, and they are particularly relevant in volatile markets, where fewer deal flows and an increase in down rounds create the perfect storm that compels founders to consider acquisitions as a safer bet for an exit strategy. 

People who have founded businesses exhibit a type of grit and have an ownership mentality, which is often a very good indicator of success. However, as a startup founder, you also experience existential dread almost every day. It is difficult for people to comprehend the level of tension involved in navigating something as delicate as an acquisition.

In this article, we will discuss strategies founders can use to determine the optimal price for their startup, provide concrete advice for establishing strong business relationships, and examine the psychology of a buyer at a larger company.  

Introduction: adopt the right mindset about selling your startup

The founders with the highest success percentage entering a transaction are those who fundamentally changed their perception and mindset. First, when selling a business, don’t consider that you sell it to another company. Instead, consider that you are selling a solution to another major company’s problem.

After rethinking M&A, founders are ready to sell.

1. Leverage your business relationships

If defining the role of a solutions vendor is the first step in any M&A process, then the first action item recommended is to leverage your network's most valuable business relationships. 

Ideally, you should have been laying breadcrumbs here for quite some time before you seriously considered a sale. You should always be thinking about building relationships with high-level executives at large companies Perhaps contrary to what others may believe, but these are business development relationships, partnership relationships, and yes, possibly acquisition relationships. It is not necessary to be as explicit. 

But if your first phone call to an executive at a larger company is "Hey, we're running a selling process; would you like to buy us?"’, they may find themselves in a difficult position. This is why developing networking muscle and establishing rapport with the strongest relationships in your circle should be an ongoing practice from the earliest stages of company formation. 

If you've met an executive who runs a complementary or competitive business unit to yours five or six times, or, even better, if you've established a mentor relationship with that person, you're in a much stronger position to begin with. 

Here are 3 ways for locating potential business partnerships:

  • Contact and question your VCs and investors
  • Attend business events
  • Utilize your existing network 

When you're focused on building a startup, essential relationship building can seem like a nice-to-have, not a necessity, and falls to the bottom of the priority list. But the chapter on establishing relationships with as much intention as possible cannot be skipped. 

How to discover qualified executives 

The longer you've worked in the startup ecosystem, the simpler it will be to find these relationships and the more doors your contacts will open. But for those who are newer to the startup world or do not have as extensive a good way to go is to rely on corporate M&A teams to open the right doors and guide you to the right decision-makers within the organization. 

But keep in mind that It is nearly impossible for a corporate development team to acquire a company without the sponsorship of a senior executive. Someone must raise their hand and declare, "I own this thing." 

Therefore, entrepreneurs should consider their own background and cultivate relationships with those within the organization who possess comparable skill sets in order to establish their credibility. 

2. Create a strategy to capitalize on these relationships.

If selling a company is equivalent to selling a solution to an individual's problem, then founders with strong networking skills can capitalize on the most strategic relationships in their orbit. 

How can founders, even when approaching the topic with the best of intentions, maintain the integrity of these long-term relationships while tactfully introducing a sale? Long story short, it is better to be straightforward.  Oftentimes, the company can act more quickly if you are clear about what is happening.

When the time comes to have a candid discussion about what a transaction could look like for both companies, founders should be prepared. As the seller, it is your responsibility to depict a picture of how two teams can collaborate in the future. 

3. Consider the acquisition procedure to be a job interview.

First-time founders frequently trip over a wire in the M&A process when they fail to comprehend the psychology of their buyer. Founders most frequently treat the M&A process too similarly to a fundraising round. Despite the fact that they are both transactions, the process directors have very different final objectives. 

Corporate executives are not the same as VCs

VCs have a higher tolerance for difficult founders because they don't work closely with them on a daily basis. Founders become a component of a portfolio of other wagers they are placing. Therefore, the dynamic of forgiving egocentric behavior is much stronger.

When dealing with corporate executives, they prefer to avoid dealing with odd cards. Keep in mind that they are not required to release the trigger. If a founder arrives acting entitled, condescending, or not like a team player, those executives will leave.

Examine companies for conditions favorable to founders

Regardless of the value of a transaction or the number of customers a startup can bring to the table, founders and executives will be required to collaborate for a period of time. It is uncommon for a company to be acquired without the originator committing to at least 18 months of employment with the acquirer. 

Treating M&A meetings as job interviews is a two-way street. It is also a beneficial exercise to map out the conditions you are seeking in an acquirer. 

The transition from founder to executive can be difficult. Be on the lookout for people in the company who are there to support, guide, mentor, and teach founders when they arrive.

It is absolutely essential to have a CEO who appreciates and values founders. Look for CEOs who host lunches, offsites, or any community initiatives for former founders at their companies.

People who have attempted new things and founded businesses demonstrate a type of grit and an entrepreneurial mindset is a strong indicator of success. 

4. Recognize clear purchasing signals.

Some M&A inquiries are as straightforward as a cold sales email, while others may not even mention the words "merger and acquisition". Founders must be able to recognize both explicit and implicit signals that a company is interested in a deal, given the spectrum of how corporations communicate about deals. 

Executive access. 

Time is money, and the higher up the corporate ladder you go, the more difficult it is to get calendar space. If an executive, especially the CEO, is setting up a lunch or dinner meeting with you, they are very interested.

Time on the calendar is not always indicative of how serious a company may be about a deal. Instead, pay attention to the topics being discussed at a meeting. How deep are they going in these conversations? Are they probing into what value is actually there? Do they seem interested or excited? Your radar should be looking for this.

Managing incoming M&A inquiry 

Founders who have been sourcing a deal for a while or have an attractive offering for certain buyers may be more accustomed to receiving inquiries about a potential sale. However,, there is always a possibility that founders in the early stages of building will receive offers as well. 

Remember that M&A teams are tasked with reaching out to companies in their space. It is part of their job to identify new opportunities and report back to executives. Don’t necessarily jump at every offer, feel free to schedule a call later - indicating that you are open to doing that meeting with a relevant executive for your business.

An alternative method for responding to an unwanted M&A inquiry is to use it as an opportunity to tunnel into potential company relationships and save them for the future. 

Participation of investors in the procedure 

Even founders with the most conviction about selling are apprehensive about involving their investors. Venture-backed startups may sense an implicit or explicit pressure to never give up, to continue expanding their product indefinitely on the path to a billion-dollar business. 

When the time comes to inform a startup's board or investors that an M&A process is the preferable exit strategy, be straightforward.

If you can have difficult dialogues with your investors outlining why a sale is the best option for your company, you will be in a better position than if you are evasive and information-controlling. 

The most important criterion is to not surprise the investors who have invested in your business. 

You don't lose face with a sophisticated investor by being honest and pragmatic. Investors are not happy when you tell them everything is great and that you're going to crush it, only to turn around and tell them you have an M&A deal and want to sell the company.

Blackroom is launching soon!

Secure your spot to be in our list of early adopters and benefit from exclusive perks

Join the waitlist

/ 14 days free - no credit card required - no commitment

Startup founder: 4 tips to prep for an acquisition

Startup founder: 4 tips to prep for an acquisition

Read more
Startup CEOs: when is it the right time to sell?

Startup CEOs: when is it the right time to sell?

Read more
4 steps to successfully sell your startup

4 steps to successfully sell your startup

Read more

Be at the forefront of innovation

Secure your spot on our exclusive early adopters' waitlist and co-build the future of virtual data rooms.

Apply below to be among the first to experience a seamless, secure, and innovative solution for M&A bankers and boutique firms.

Join the waitlist

/ exclusive demo - priority access - partnership opportunity

The Blackroom app is on its way!

Join the waitlist to be the first to know when it launches

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.