It is generally acknowledged that acquisitions run more smoothly when the startup founders have been through the process before. Hardly surprising, right? This is true for just about every process. Things are just easier when you know what to expect.
This being the case, it is somewhat unfortunate that the first exposure many founders have to the acquisition process is when they’re actually going through it for the first time.
Figuring things out as you go while your future career and (potentially) millions of dollars are on the line is probably not optimal. So I thought it would be useful to provide a brief overview of the entire process.
While every deal may be different, there is a typical sequence of steps for any acquisition.
Getting to an offer is all the pre-deal activities that a startup can engage in, in order to identify and get to know a potential acquiring company (and vice versa). My key piece of advice here is for startup founders to be pro-active.
If an acquisition is the startup’s desired ultimate outcome, ideally, this will not be something that materializes out of the blue. Instead, it should be a natural progression in a relationship that has been actively sought out and cultivated.
The acquisition process officially starts whenever the acquiring company issues a Letter of Intent or “LoI” to the startup.
The LoI is also commonly referred to as the “term sheet.” This is a two-to-four-page, non-binding legal document that proposes, in broad strokes, the conditions under which a deal can be made. The term sheet will cover items like the price, structure, and duration of the deal, but many of the specifics will be left undefined.
This is because the company (and to a lesser extent, the startup) doesn’t yet have enough information to fill in these details. Getting a term sheet is similar to receiving an engagement proposal for marriage. Sure, the proposal is non-binding, but it should really only be accepted if both parties are confident they can work together to make the relationship permanent.
I mention valuation as a discrete step because it is such an essential deal-term for most startup founders. It is also a topic that founders would benefit from understanding better.
Valuation is a subjective process and as much an art as a science. As a result, valuation can typically be negotiated.
Just knowing not only can you negotiate, but that you are expected to is something more seasoned entrepreneurs, or those with experienced advisors, already know.
However, there are many deals done with entrepreneurs who may be brilliant engineers but have never negotiated the price of a car, never mind the price of a company. So, this is an area in which founders could really benefit from doing a little research and getting some practice.
Immediately after signing the term sheet, the company will send a due diligence request list to the startup. This part of the process is a slog. This can be frustrating for the founders as there are a lot of documents to chase down and produce, but the frustration is typically misplaced.
Due diligence is a necessary exercise in discovery.
It should be recognized that the acquirer has an obligation to understand what they are buying. Due diligence is the mechanism for the company to accomplish this. It may help founder’s stress levels to be aware that it is expected that problems will be found. Acquisitions tend to be a “warts and all” proposition.
As due diligence is taking place, the company lawyers will be creating the official deal documents. Basically, they will take the two-to-four-page term sheet and turn it into a sixty-to-eighty-page legal document. This document will, among other things, outline every possible worst-case scenario that may be encountered and how the company plans to deal with it — all in excruciating detail.
The information revealed during due diligence will help inform the main deal documents. This includes the specifics absent from the term sheet. Once a draft has been produced, it will be handed over to the startup’s lawyers for review.
This kicks off a back-and-forth process largely consisting of lawyers arguing with each other. The give and take necessary to actually agree on the main deal documents is probably the most stressful part of this whole process.
The key here is for the startup founders to make sure they have engaged a good lawyer and to manage that lawyer closely.
All deals have a momentum associated with them, and it is vital to keep moving forward and not to get bogged down.
This brings us to closing. That is when all the documents have been signed and the initial funds transferred.
It is common to consider closing as the event that marks the end of the deal. However, this is not really the right way to think about it.
Closing is undoubtedly a milestone and one that should be celebrated. But deals are not an event; they are an ongoing, multi-year commitment. The deal is not “done” until integration occurs and any milestones agreed upon have been reached.
Integration is often considered separate from the deal process itself, but the two are inextricably linked. That is why the founders need to be sure that they and the company are on the same page regarding the shared goal and the joint strategy to achieve this goal.
I would counsel that all founders insist that some integration-planning takes place before the deal closes, because a successful integration is probably the most significant determinant of any deal’s long-term success.
Clearly, not all integration activities can be defined in advance. But the broad strokes should be, such as who reports to whom, what the intent is with overlapping lines of business, and the general timeframe for integrating systems and transferring processes.
This should give you a general overview of how the acquisition process normally works and what to expect.
Click here to see the previous blog in this series, which I’m hoping will bring some much-needed transparency to the M&A process for startup founders.
If an acquisition is a potential exit for your company, check out my book — “How to stick the landing: The M&A handbook for startups.”
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