Going public was once the "holy grail" of entrepreneurship. In fact, an average of 311 companies per year accepted IPOs from 1980 to 2000. However, within the last decade, that number has plummeted by nearly 80 percent. While some analysts attribute this decline to tighter government regulations, recent trends indicate that, for many tech founders and entrepreneurs, acquisitions serve as better exit strategies.
Last year, several major acquisitions occurred within the tech industry. For instance, Apple acquired Shazam for $400 million and Atlassian acquired Trello for $425 million. Additionally, Target purchased Shipt for $550 million, their largest acquisition in company history.
"Had you asked any startup founder what their exit strategy was just a few years ago, most would have shared their dreams of taking their companies public," says Kieran Powell, SVP at Channel V Media. "But recently, this dream has shifted, and getting on the radar of companies like Amazon and/or Walmart has taken precedence over the IPO route."
Are you preparing for a major acquisition? Before you sign the dotted line, it's important to ask yourself the following key questions.
Prepping for Acquisition: 4 Questions Tech Startups Must Answer
1. Is Now the Right Time to Sell?
Just because someone is interested in buying your company doesn't mean you should sell it. In fact, Snapchat CEO Evan Spiegel turned down a $3 billion dollar offer from Facebook in 2013. Additionally, Spiegel is rumored to have also turned down a $30 billion dollar offer from Google in 2017. For Spiegel, the decision to keep the company came down to his personal beliefs and motives.
"If you sell, you will know immediately that it wasn't the right dream anyway," said Spiegel. "And if you don't sell, you're probably onto something. Maybe you have the beginning of something meaningful."
Unfortunately, many companies simply run out of money. In this instance, the decision to sell is obvious. However, if your company is profitable or breaking even, selling the company might not be your best option. Before selling, teams will need to evaluate what's happening in their industry, company, and personal lives. To decide whether now is the right time to sell, consider the following:
- Am I running the startup effectively?
- What does keeping and/or selling the company mean for the future of my business?
- Do I feel passionate about the company or am I exhausted?
- Do I have a viable business model in place?
- Is the buyer legitimate?
- Will the sale really solve all my problems?
Remember, it's easy to get swept up in the excitement surrounding a major acquisition. However, it's critical to weigh the pros and cons of the sale thoroughly.
2. Are Your Financial Records Organized?
When preparing for an acquisition, it's important to have your financial records in order. Before making an official offer, companies will want to see detailed financial records. Founders need to prepare and organize these documents long before an acquisition is ever an option. As such, founders should keep track of liabilities, revenue, and expenses. Maintaining a clear financial picture allows founders to avoid overvaluing or undervaluing their startup when pricing. The pricing process is similar to purchasing a house: Sellers frequently overvalue while buyers undervalue.
"Proper acquisition preparation can help," says David Ehrenberg, CEO at Early Growth Financial Services. "All your accounting records should be in order, prepared in accordance with generally accepted accounting principles (GAAP). Your corporate governance, legal records, HR, and employee documentation should also be in order and easily sharable."
Creating a solid financial blueprint will streamline financial complexities faced in the acquisition process.
Are you having some difficulty getting your financial records in order? You're not alone! Learn how the world's most successful tech startups use community to hurdle these and other roadblocks in the Power of Ecosystem.
3. Have You Considered Legal Counsel?
Merger and acquisition contracts can be complicated. In fact, Carol Leaman, president and CEO of Axonify, came across several unfamiliar legal intricacies when selling her company, PostRank, to Google in 2011. In this instance, Leaman relied on an experienced legal expert.
"I wasn't sure how to interpret certain clauses and there was a lot of money involved," said Leaman. "If I had a less competent lawyer, some things could have easily slid through."
For this reason, it is crucial to partner with an experienced M&A counsel. An experienced lawyer can explain the implications of specific legal complexities and help you to negotiate better terms. Before selecting a lawyer, however, analyze their knowledge of state, corporate, contract, and fiduciary duties. Knowledge in these and other areas is a clear indicator that the lawyer is well-equipped to help you navigate the complex acquisition process.
4. Have You Met With Management Teams?
One common mistake made when rushing into acquisition is failing to protect management teams. While an acquisition may be a good fit from a financial standpoint, it might not be from a cultural standpoint. Company culture consists of several factors including personal values, management styles, and employee mindsets. After acquiring NeXT in the mid-1990s, Apple had to confront the challenge of blending company cultures. Steve Jobs reportedly placed his former NeXT management team at the company’s senior levels, hoping to inspire a more entrepreneurial spirit.
“The two companies’ cultures were completely at odds,” says Steve Lance, a former Apple employee. “Apple was very staid and losing market share every day. NeXT had lots of younger people who were nimble, fast, and who thought very much outside the box. People who had been at Apple for 15 or 20 years didn’t understand why someone 10 years their junior, and who had run a much smaller company, was being put above them.”
Culture needs to be part of your discussion with potential acquirers and management teams early-on. Consider interviewing the acquirer's employees to get a better sense of what it's like to work within that organization. With that information, create a clear roadmap to inspire and unify the workforce.
To Sell or not to Sell?
Deciding to sell a company is never easy. When you put blood, sweat, and tears into building a startup, the last thing you want is to sell it prematurely. When the time is right, organize your financial records, hire top-notch legal counsel, and keep management teams involved to avoid controversy down the road.
At RocketSpace, we maintain a uniquely curated ecosystem of top tech founders and partners. Many of our startup founders have successfully navigated the acquisition process, many with the help of our partners. If you're going through an acquisition of your own, use their special insight and knowledge to guide your efforts. Additionally, RocketSpace provides a variety of growth-oriented resources and amenities geared toward fueling startup success. The RocketSpace community is designed for high-growth tech startups that are eager to change the world.
In fact, RocketSpace has supported industry-leading tech startups including Uber, Zappos, and Spotify in achieving billion dollar valuations. Are you ready to scale like the tech elite?
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