Any founder worth their salt will have an exit strategy built into their startup’s journey — whether it’s a long-term goal of going public or a past goal of being acquired by a bigger player. The latter really took off in 2021, when VC-backed startups exited through more than $55 billion worth of mergers and acquisitions (M&A).
Selling your startup can be lucrative. Sieved inventory of Status of European M&A in 2022 so far revealed that the average (disclosed) acquisition price was €97 million. Startups that have exited so far this year had raised an average of €9.75 million at the time of the acquisition, suggesting companies are being sold at a relatively early stage – taking an average of seven years from inception to sale, with the most common pre-judgment rounds are Seed and Series A.
But deciding to sell your startup can be a daunting task – where do you start? What is to be negotiated? And what happens when the buyer and seller teams are like chalk and cheese? For any founding team looking to exit in 2022, here’s what the experts say you need to do to master the process.
Preparing before diving into conversations is key to ensuring you’re making the right decisions for your team and your organization from the start. The power of a carefully chosen partner cannot be underestimated; even before you consider a sale, build relationships with potential partners who you think are a good fit and share your company’s vision – a CEO should spend 20% of their time networking, thinks timothy armoo, the founder of influencer platform Fanbytes (which was sold to digital marketing agency Brainlabs earlier this year for an undisclosed eight-figure sum).
If you have a few potential buyers in mind, it’s worth writing them down a general idea of your terms so you can go into the meetings with a clear idea of what your company expects from the transaction. Once the discussions get serious, get your numbers in order. Have your company valued – M&A banks can help – and organize your data room with all your financial, legal and HR information.
With all of your first thoughts and numbers ready, Armoo recommends that you look at acquisition as your biggest sales endeavour: get your best salesperson on the job, usually the CEO, and get into negotiation mode.
negotiation of a takeover
So you’ve prepared and had some promising conversations with a potential partner: now what?
To learn how to negotiate a takeover is vital to ensure both parties get the best of the deal and the first step is to ensure that the two companies being merged are actually a good fit. Consider matching the goals, vision and attitudes of both companies as this will make the post-sale transition smoother.
Jimmy Fitzgerald is COO of Paddle, a startup providing payment, tax and subscription solutions for SaaS companies. The company recently acquired Profitwell, which provides financial reporting tools for SaaS companies. He recommends researching the company you may be working with before negotiating.
As a buyer, “you have a lot of information at your fingertips — for example, on Glassdoor, which shows you customer reviews and employee ratings. But you can also learn a lot from word of mouth,” he says. While experienced from a buyer’s perspective, founders of acquired startups should conduct similar due diligence. Has the buyer acquired other companies? How did your employees or founders find the process? How does your management team work?
Efficiency and transparency are the key words in this phase. Both sellers and buyers should come to the table with an acquisition number. Fitzgerald also advises buyers to limit themselves to requesting essential information at this point — information like customer lists, a financial history, and employee turnover records — so as not to slow down the process. A company aiming for a takeover should therefore enter into negotiations with these documents ready to be passed on.
This is also the point at which important terms should be agreed. Will the seller’s leadership team remain and in what capacity? Will there be new tasks for them or will they leave the company completely once the deal goes through? These are all questions you need to ask yourself as a seller. Also, write down any non-negotiable points you want to hold on to and make them clear when speaking with a buyer so you can ensure the points you care about are agreed early on.
Internal communication management
knowledge what to say to your team When an acquisition is on the table, things can get tricky, especially when talent is often a key reason for a buyer to sign on the dotted line: the last thing you want is for your key players to back out and the deal to fall through as a result.
Dag-Inge Aas, former co-founder and CTO of telehealth platform Confrere – which was acquired by US platform Daily in June – advocates transparency: “Be honest from the start – tell [your team] You conduct acquisition calls as you begin arranging them.
Explain what the acquisition means, what the role of the founders might be, and mention if the buyers are interested in keeping the talent as part of the deal. You may find that you can’t give them any updates for a while after that initial conversation. This can be due to non-disclosure agreements or simply because nothing new is happening. But keep the communication going, “even if it’s just, ‘We don’t know yet,'” suggests Aas.
However, be sure not to disclose any information that you are not authorized to share. For example, if you are dealing with a public company, rumors about the agreement could affect stock prices and be considered illegal insider trading. Rumors within the company can also be damaging, so get your middle managers on board first and give them time to process what’s going on before helping you inform the rest of the workforce.
Communication within the team is crucial to address concerns. Set aside some time for the team to talk without management involvement and a session where they can ask senior management questions. Aas recommends that Parabol.co collect and sort responses anonymously.
While retaining your star employees is ideal, especially if your buyers are interested in the talent, be prepared for employees to leave even after you’ve explained the benefits and addressed their concerns. “Satisfied graduates are great brand ambassadors,” Aas points out, so don’t try to entice uncomfortable employees with expensive loyalty rewards; Instead, keep money set aside to support those who don’t get a job when they take over or decide to leave.
For those who stay, consider any skills or terminology they may need to adapt to the new environment after acquisition. Ask employees to report knowledge gaps anonymously and set up workshops to practice them so your team feels ready for the new roles.
Integration of teams after acquisition
So the deal’s confirmed and we’re good to go – time to celebrate, sure? Well, not quite: simply signing the papers doesn’t signal a successful acquisition. About 70 to 90% of the Acquisitions fail worldwide, often because the acquired team and the company that bought it don’t get along.
A company’s culture can change drastically after acquisition, so Promote a smooth transition for all employees reduces the risk of feeling annoyed or forgotten in the process.
Mads Fosselius, co-founder and CEO of Dixa, which counts Australian knowledge platform Elevio, French customer intelligence AI startup Miuros and German customer automation AI platform Solvemate among its acquisitions, tells Sifted that it’s important immediately afterwards is that you implement it “the 48 hour rule”. This includes introducing the acquired company’s team to the acquiring team within 48 hours of the IPO, “building personal, human connections from day one.”
Without it, he warns, “you run the risk of alienating the people and talent you’ve acquired and creating a fragmented workforce to turn against you.”
Kinda Dalla, Vinted’s M&A integration manager, which bought Dutch competitor United Wardrobe in 2021, shares this sentiment: “Involve the acquired company’s founders in all workshops and discussions about the new team mission, organizational design and approach to integration make sure they contribute throughout the process.” So if you’ve just been acquired and it’s not happening, ask why.
If you’re on the new team, you should also get involved in communicating concerns from management. Ask questions, raise concerns, and if the answers you get don’t fit well with your career, find out if financial assistance is available while you look for a new job.
If the newly merged workforce ticks happily and efficiently, then yes, You can celebrate a little. Bring your teams together and combine workshops and training with social events to mark the beginning of a new phase that with all this advice will hopefully end successfully.
Sadia Nowshin is an editorial assistant at Sifted. She tweets from @sadinowshin_