Many entrepreneurs and start-up founders do not know how to value a company for acquisition or understand the steps involved in preparing for mergers and acquisitions. In this regard, an experienced M&A lawyer can be invaluable.
This blog post will cover 11 steps for acquisition of a company that you need to know and what you need to do to set yourself, your business, and your buyer up for success.
If you are in Colorado and need help preparing your start-up or operating company for an acquisition, Sequoia Legal provides highly effective and affordable external counsel.
#1: Consider Your Options for an Acquisition
When selling a start-up or other company to a larger business, entrepreneurs have different options depending on their desire to remain involved in the operation. There are three general types of acquisitions:
- Full sale: A 100% acquisition of a company allows an owner to sell their business entirely and walk away. This is an outright sale - essentially a clean break for a business owner.
- Joint venture: A 50/50 split can be more complex, but make sense for many businesses, at least initially. These deals can be complicated years down the line when co-owners are ready to sell the business and disagree about who to sell to, when to sell, and how much the company is worth. The scenario of a ship with two captains can eventually be an inevitable series of stalemates and disagreements.
- Partnership: You can sell a portion of your business to an investor. Many of the deals on Shark Tank are partnerships, such as when a shark buys 20% equity in a business for $75,000.
Deals can be structured and negotiated with numerous creative contract clauses to bridge valuation gaps, such as earnouts, clawbacks, and stock awards.
#2: Establish Your Acquisition Goals and Processes
When you first consider selling your company, think about your goals and motivations. Your purchasers may have their motivation (financial investment vs. strategic objectives). Things to consider:
- Your level of involvement: As the founder and company owner, is your goal to walk away entirely, or do you want to (or would consider) still be involved?
- Who will acquire your company: You may already have an ideal purchaser in mind, especially if an exit was your goal when you started your company. One buyer may pay far more for your company than other companies because it benefits them the most.
Structuring an M&A deal can be complicated, but fortunately, you don’t have to navigate the exercise alone. Remember your goals as you enter negotiations, and stay focused on your end-game.
#3: Get Your House In Order for the Company Acquisition Process
Owners can do their preparation and due diligence before putting their business on the market.
Your entity should be in good standing in Colorado or your state of operation, finances should be in order, state and federal taxes should be filed, and there should be no outstanding or ongoing regulatory issues that could slow the transaction or kill the deal entirely.
An M&A attorney can help you maneuver the preliminary business acquisition steps, and ensure your records and contracts are organized and accurate. Your accounting system is particularly important. While many businesses use a cash accounting system, an accrual accounting method can better portray your company’s health for a sale.
#4: Strengthen Your Team: Bring on the Experts
Experts should be in your arsenal - and you should bring them in as soon as you know a serious buyer is present. Industry consultants, tax professionals, financial advisors, and attorneys can help you position your business optimally for acquisition. Having experts working for you and with you can allow your business to sell faster and for more money.
#5: Value Your Business Properly: Determine a Realistic Price
There are several traditional and non-traditional ways to value a company based on the nature of your business and your particular industry. Your buyer may value your business based on:
- Financial statements
- Opportunities in the industry
- Opportunities with the buyer.
Valuation of your company is something you should consider early on, even before you are in communication with a buyer. Talk to an M&A attorney about the best methods for appraisal, including asset valuation, revenue, cash flow, and financial formulas.
#6: Communicate Openly: Be Transparent with Your Team
The acquisition process is a period of transition, but you have to keep operating your company right up until your deal is closed. Your management team and employees are a major reason your company has succeeded, and they can help you get to the finish line.
Preparing your team for the acquisition gives them the chance to prepare for any impact on their personal and professional lives, while simultaneously helping you hand over the controls to the new business owner. As you negotiate your transaction, consider ways to ensure that the new buyer will respect the culture and values you’ve created. However, if any of your employees may resist a transition or cause problems in the deal process, you may want to delay notifying them of the transaction until the last possible moment.
#7: Negotiate Everything and Follow Contracts Best Practices
Even if your buyer seems “perfect” for your business, their goals for the business acquisition are likely not the same as your goals for selling. Your buyer may discover known and unknown issues with your business during the review period.
For your protection, follow contract best practices for negotiations:
- Never rely on verbal “handshake” deals, no matter how much you trust the other party. Put everything in writing.
- If any aspect of a deal is agreed to over the phone, follow up the conversation with an email summarizing the main points.
- Send important emails with reading receipt questions and mail via certified mail.
- Keep detailed records.
You should also be prepared for the possibility of speed bumps and a promising deal falling apart.
Example: Negotiations Stalling Over Claims
Elon Musk’s much anticipated 2022 acquisition of Twitter is one such deal that will be discussed in M&A MBA classes for years to come. The $44 billion deal hit a major stalling point in May 2022, when Musk accused the social media outlet of not providing the information he asked for on the number of Twitter accounts that were fake or spam bots (Twitter had claimed early on in the deal that less than 5% of Twitter accounts were fake).
#8: Secure Major Partnerships and Clients
Your customers and clients are your “book of business” and represent a major component of your startup’s value. Depending on the potential buyer, nature of your business, and related deal structure you should consider keeping your clients and customers in the loop and prepare them for the acquisition. Along those lines, the buyer of your business may want assurance that the customers will not abandon the ship. These are matters that are best discussed with experienced legal counsel.
#9: Finish Strong: Set Your Company Up for Success
After the acquisition process is complete, it’s time to celebrate! While the aftermath is very much in the new company’s hands, your actions leading up to the deal can set the stage for a positive integer, for your former team members and your clients. Your team should know before the acquisition what aspects of operations will stay the same, and what will be different. In this regard, a goal in the company acquisition process should be to help everyone get to “the new normal” as quickly as possible. For example, if a new company will be processing payroll, work with the buyer to ensure this is set up before you leave so that the transition is seamless.
#10: Know Your Company Narrative
Even if your company is relatively large, be prepared for your transaction to be covered in business journals and news. If you are acquired by an industry giant like Google or Amazon, your company may get more news exposure than it has since you founded it.
You may wish to establish your narrative by issuing your statement or press release. Depending on your objectives for your career post-sale, the public perception of your transaction can influence your value in future endeavors (either as an entrepreneur with a new business, as an advisor, consultant, or even as an executive at another company).
#11: Prepare Yourself as a Founder
Whether you walk away from the company entirely or stay on in some capacity, your role will change significantly. You should prepare yourself for what comes next, and remind yourself why you made the choice to sell.
Although the company acquisition process is a business deal, these transactions can be emotionally difficult, as founders must let go of the major achievement they’ve been working on non-stop for however many years, and move on to something else. If you do stay on as an employee, the transition from leader to a team member can be difficult.
Contact Sequoia Legal about Your Startup Acquisition
Sequoia Legal is a Colorado business law firm offering experienced and knowledgeable legal counsel for entrepreneurs and start-ups. Many entrepreneurs contact us early in their business development and ask “how do company acquisitions work for my industry?”. We have extensive knowledge of relevant local and international M&A laws and regulations and can explain this process (specific to your industry) and so much more.
Our legal team can provide you with cost-effective solutions for all stages of the company acquisition process. If you’d like to see how we can help you reach your goals and navigate legal challenges, contact us for a free consultation.