Preparing for M&A: Your Exit Strategy

Preparing Your Tech Startup for Mergers & Acquisitions

Although significant attention is often given to large-scale mergers, initial public offerings, and the expansion of Special Purpose Acquisition Companies (SPACs), the majority of tech startups are more likely to achieve an exit through smaller transactions. Throughout my three decades of experience in M&A at firms like White & Case, Barclays, and Ascento Capital, I’ve observed numerous startups lacking adequate preparation for a sale or merger.

The Landscape of M&A Activity

Global M&A activity reached unprecedented levels in the second quarter, totaling $1.5 trillion in deal value. However, these substantial deals are significantly outnumbered by smaller transactions.

Data from FactSet indicates that the U.S. experienced 16,672 deals in the year concluding June 31st. Only 583, representing a mere 3%, exceeded a valuation of $1 billion.

While the IPO market has regained strength, M&A continues to account for the vast majority of exits. According to CB Insights’ Q2 2021 State of Venture Report, there were 503 IPOs compared to 5,203 M&A deals so far this year.

Following the SEC’s announcement in April regarding potential new guidelines for SPAC IPOs, the issuance of new SPACs experienced a substantial decline of approximately 90%.

Focus on Practical Exit Strategies

Aiming for a billion-dollar sale, a successful IPO, or a SPAC transaction is commendable. However, it’s prudent to proactively prepare your startup for a more realistically sized transaction.

Recommendations for M&A Readiness

Here are several key recommendations to position your startup for a successful M&A exit:

• Data Room Preparation: Begin assembling a comprehensive data room early in the process. This should include all essential company documents.
• Financial Statements: Ensure your financial statements are audited and readily available.
• Legal Due Diligence: Conduct thorough legal due diligence to identify and address any potential issues.
• Customer Contracts: Organize and review all significant customer contracts.
• Intellectual Property: Secure and document all intellectual property assets.

Proactive preparation in these areas will significantly streamline the M&A process and increase the likelihood of a favorable outcome.

Monitoring Mergers and Acquisitions Within Your Industry

Establishing a Google News alert focused on M&A activity specific to your industry segment is a proactive step. This allows for consistent tracking of relevant developments.

Setting Up Targeted Alerts

For instance, if your company operates within the IoT sector, a search query like “IoT acqui” will effectively gather news reports concerning acquisitions in that area.

It’s crucial to save this search within Google News. This enables convenient and regular monitoring of emerging trends.

Competitor Analysis Through News Tracking

Beyond general industry activity, closely monitor your direct competitors via Google News. Pay particular attention to announcements regarding company sales.

Observing competitor exits can provide valuable insights into market dynamics and potential opportunities.

Understanding these transactions can inform your strategic planning and identify potential consolidation trends within your subsector.

Regularly reviewing these alerts will keep you informed about the evolving landscape of mergers and acquisitions.

Identifying Potential Acquirers

Developing a roster of potential buyers for your startup is a crucial step in any exit strategy. This compilation should encompass both national and global entities.

Broaden Your Search

Don't limit your focus to strictly tech-focused organizations. Consider companies operating in seemingly unrelated sectors that might benefit from your technology or market position.

Key Acquirer Categories

• Private Equity Firms: Research firms specializing in acquisitions and their existing portfolio companies.
• Venture-Backed Companies: Identify companies that have received venture capital funding and are actively expanding.
• Domestic Companies: Focus on businesses within your country that could strategically integrate your startup.
• International Companies: Explore opportunities with organizations based outside your country.
• Non-Tech Industries: Investigate companies in traditional industries that may be seeking innovation through acquisition.

Stay Informed

Regularly monitor these potential acquirers through Google News. This will help you stay abreast of their activities, financial performance, and strategic priorities.

Tracking acquirer news provides valuable insights into their potential interest in companies like yours.

Consistent monitoring allows for timely engagement when opportunities arise.

Pursuing Simultaneous Strategies

When preparing for your next funding round, it's advisable to proactively engage with the ten most probable acquiring companies. Receiving both merger and acquisition (M&A) proposals and venture capital (VC) term sheets concurrently empowers your board with diverse strategic options.

A strong understanding of M&A trends within your specific industry, coupled with a clear identification of potential acquirers, can significantly enhance your appeal to VCs and bolster your funding prospects.

The Benefits of a Dual Approach

The ability to secure funding as an alternative to an outright sale strengthens your negotiating position with prospective buyers. Effectively managing a parallel track – simultaneously investigating an M&A exit and seeking VC financing – creates a beneficial cycle of opportunity.

These two paths are not mutually exclusive; rather, they complement and reinforce each other, providing greater flexibility and control throughout the process.

Enhancing Company Value for Mergers & Acquisitions

Establishing an international presence, for example by launching an office in a global hub like London, communicates to prospective buyers your company’s growth aspirations. This demonstration of international ambition can positively influence the potential M&A value.

A thorough assessment of customer and vertical revenue concentration is also crucial. Significant reliance on a single customer or industry sector can lead to a reduced valuation due to heightened risk. Diversifying your customer base and expanding into new verticals should be considered.

Intellectual Property and Code Quality

The strength of your company’s intellectual property, particularly the patent portfolio, represents a significant asset for potential acquirers. A robust patent collection can substantially increase your company’s appeal.

For companies with software offerings, comprehensive code documentation is essential. Well-documented code facilitates due diligence and demonstrates a commitment to quality and maintainability.

Key Considerations for Valuation

• International Expansion: Signals growth potential.
• Revenue Diversification: Mitigates risk and boosts valuation.
• Patent Portfolio: Represents valuable intellectual assets.
• Code Documentation: Demonstrates software quality.

Addressing these areas proactively can significantly improve your company’s attractiveness to potential buyers and maximize its M&A value.

Comprehensive Due Diligence Preparation

Many emerging companies frequently misjudge the thoroughness required during the due diligence process conducted by potential acquirers. Establishing a centralized data repository on your company’s network is crucial, and it must be consistently updated.

A template for organizing this data room can be accessed through this link. Maintaining meticulous financial records, adhering to GAAP standards, is paramount.

The company’s capitalization table needs a careful review to ensure complete accuracy. All equity grants made based on verbal agreements must be supported by formal, written documentation.

Legal Documentation and Contract Review

Ensure all legal documentation is current and properly organized. A detailed examination of customer and vendor contracts is essential, specifically focusing on “change of control” clauses.

These clauses should be assessed to confirm they do not necessitate seeking approvals, which could potentially impede or even terminate a merger or acquisition. Furthermore, verify the absence of any exclusivity provisions within resale agreements.

Key Areas for Scrutiny

• Financial Statements: Confirm adherence to GAAP.
• Capitalization Table: Ensure accuracy and completeness.
• Legal Contracts: Review change of control and exclusivity clauses.

Proactive preparation in these areas will streamline the M&A process. It will demonstrate a high level of organizational readiness to potential buyers.

Understanding the Mergers & Acquisitions Landscape

The efficacy with which an M&A process is managed directly impacts the value ultimately realized by shareholders. A diligent approach is crucial, necessitating the engagement of reputable legal and accounting professionals.

Specifically, securing a law firm and accounting firm with demonstrated expertise in technology M&A transactions is highly recommended.

Key Advisors and Their Roles

An experienced investment banker, specializing in the tech industry, should be appointed to oversee the entire process. This advisor will be instrumental in coordinating activities, enhancing negotiation strategies, and optimizing deal structure and valuation.

Their expertise can significantly influence the final outcome of the transaction.

Critical Areas of Focus

Thorough investigation into working capital requirements and the implications of earnout structures is essential. These elements can substantially affect the final value received by shareholders during an exit event.

Understanding these nuances is paramount to maximizing returns.

Due Diligence and Legal Considerations

Comprehensive research into prevailing market standards for representations, warranties, and indemnification clauses is also vital.

According to the Global M&A Intelligence Report 2021 published by DLA Piper, these clauses are frequently negotiated and can have significant financial consequences.

• Familiarize yourself with standard legal language.
• Understand the potential liabilities associated with each clause.
• Seek expert legal counsel to navigate these complexities.

Proactive preparation in these areas will contribute to a smoother and more successful M&A process.

Capitalizing on the Mergers & Acquisitions Landscape

Generally, the initial companies within a specific industry segment to pursue a sale tend to secure the most favorable valuations. Conversely, those selling later in the cycle often receive comparatively lower offers. The current period of heightened activity across venture capital, private equity, initial public offerings, special purpose acquisition companies, and mergers & acquisitions is not sustainable indefinitely.

Evidence suggests a cooling trend in the SPAC market, and a subsequent deceleration in M&A activity is anticipated. Should a significant market slowdown occur, preparedness for a period of reduced deal flow is crucial. Historically, the M&A market typically rebounds several years following a broader economic recovery, as larger acquiring entities regain confidence.

Recent Transaction Highlights

A recent transaction facilitated by Ascento Capital concluded several weeks ago. This involved the acquisition of Proant, a Swedish Internet of Things (IoT) firm, by Abracon, a U.S.-based company supported by The Riverside Company, a private equity firm.

The achieved valuation notably surpassed initial client projections. This success was driven by the intense M&A activity within the IoT sector and a competitive auction process. This case exemplifies the benefits of executing a sale during a favorable M&A window to maximize outcomes.

Key Takeaways

• First movers in a sector often realize premium valuations.
• The current high level of M&A activity is unlikely to persist.
• Strategic timing is critical for optimal sale results.

Private equity firms are actively seeking acquisitions, creating opportunities for business owners. Understanding market cycles and preparing for a transaction during peak activity can yield substantial benefits.

The Advantages of a More Focused Acquisition

A strategic merger or acquisition (M&A) can significantly accelerate a startup’s product development and market reach. Securing successive funding rounds, while common, generally represents a more protracted path to widespread product adoption compared to an M&A event.

Successfully navigating a company sale is a noteworthy achievement for a founder, often leading to enhanced career opportunities within the acquiring organization or attracting investment for future ventures.

Key Benefits for Founders

• Accelerated Growth: M&A provides a faster route to scaling than continuous fundraising.
• Career Advancement: A successful exit enhances a founder’s professional profile.
• Investor Confidence: Demonstrated success attracts future investment opportunities.

From a professional standpoint, a founder who has successfully completed the sale of a company demonstrates a valuable skillset. This accomplishment frequently unlocks new career possibilities at the acquiring company or generates interest from investors for subsequent startup endeavors.

We wish you the best in your decision-making process and encourage thorough preparation.