Seven Things To Do When You Get an Acquisition Proposal
You started your startup a few months ago. Things have been fun for the most part and, at the same time, you’ve had your fair share of tough days. It’s taken some time, plus a whole lot of grit, but you’ve been preparing yourself to go all the way and build something epic.
Out of nowhere, you get a call from a contact you’ve known for a while. They’re from a big company that wants to buy your business.
What should you do?
I have been involved in twelve Exits to date. Three as an entrepreneur and nine as an investor. I cannot count the number of times that I, or one of my partners/colleagues, was approached regarding an acquisition of a related company. So much has been said and written about running a startup — but hello? — what should you do when you get approached about selling your baby?
Here are seven things you should do when that call comes:
- Take a deep breath.
This is the time to think deeply and focus on the big picture. What are your chances of building a truly epic business? I’m sure you thought your business could be huge when you started. But now, a few years later, you have more data. You know what customers think about your product, you know the strength of your team and the abilities of the investors you’ve gathered. You know so much more about the competition. So, what do you really think now? If you believe that your odds are better going for the long run, don’t let tactical issues sidetrack you. For example, if you are short on cash, that’s not a reason to sell your company — instead, approach your investors and ask to sell some of your shares in a secondary sale.
- Talk with your partners.
It’s not just about you, it’s about your co-founders and your investors. You have to share the news with them. If you’re still uncertain of your own position, be careful not to send the wrong message (the last thing you need is your partners getting ready for an Exit that you don’t want..), be informative and collect as much input as possible. At the end of the day, this is a team game and whatever your partners want will impact your decision.
- It’s not about the specific proposal.
The specific proposal may not be the right one for you but getting it is an opportunity to explore your own views on Exits. Experience has shown me that when you get an M&A proposal, it’s a great chance to get better proposals from the same — or different — players. Assume you could roughly double the price and improve some of the other parameters; in that case, would you consider taking the Exit?
If your decision is to not sell, communicate it openly with the other side. Do this in the right way and you’ll win lots of positive points that may serve you well in the future (saying ‘no’ to a lot of money displays a lot of strength and stamina). If the proposal is coming from a potential strategic partner, you may want to leverage these new scenarios to cement a partnership that provides you with value.
- Get help.
But what if the decision is to go ahead with the Exit? In this context “go ahead” does not mean “sign a deal now”. It means “Let’s look into this seriously” or “Let’s see how we can improve this before making a decision”. If this is the case, the first thing you need to do, in my mind, is to find someone to help you. It’s always good to reach out for help but in this case, it’s necessary for a few reasons. First, you likely have not done this before, and you need the help of someone who’s done it before. They have gone through the process and know what to look out for, etc. Second, if you do everything yourself, you might come across as too eager or even dishonest. Third, you have a company to run (remember that?) and the last thing you want is to lose focus on your business right now.
- Create alternatives.
The key to improving your position in negotiations such as this is to create alternatives. As long as you haven’t signed a LOI containing a “no shop” clause, you can — and should — explore alternatives. Since time is a factor, it will likely be difficult to reach out to companies that you (or your ‘help’) don’t know well already (hence the advantage of using well-connected ‘help’). Reach out to them directly, drop hints that you are considering a proposal, and get their reaction. If they are positive, your life will be much easier.
A good alternative can also be an upcoming round of financing. Your potential buyer knows well that if/when you close your next round of financing, the window of opportunity will close (or at least, the price will go up dramatically). If needed, leverage a potential financing round to improve your positioning.
- Optimize but focus on the important points.
Just like in every negotiation, you want to improve your position, but you must focus. You will never be able to get everything you want. Make a conscious decision; What is really important to you and what is just “nice to have”? Be ready to show flexibility to get something in return. Remember, selling a company isn’t like selling a used car. You will likely work for the buyer for years to come and you’ll have a business relationship forever, so it’s in your best interest to understand and be flexible in regard to their needs as well.
- Make your choice.
This is undoubtedly a life changing decision and it’s definitely not an easy one. Your career is on the line, but it’s more than that — the lives or your co-founders and employees are on the line too. This is a critical decision for your investors and for the vision itself, the one that got you all started. Still, after the discussions, negotiations, and optimization, you need to make up your mind. The worst thing that could happen is to continue deliberating while losing focus from running your business. As I said before, this is a long, time-consuming process. Imagine a bad quarter that happens thanks to your lack of focus. A quarter like that could get you into a much unwanted downward spiral. So, make a decision. And if you say ‘no’ and continue to run the company with your full attention, you are likely to get additional — most likely better — opportunities in the future.
Throughout my career I have seen many entrepreneurs face this dilemma. I really have seen it all; founders that say ‘no’ and regret it and founders that say ‘yes’ and wonder forever if it was the right decision. Whatever you choose, my final recommendation to you when getting an acquisition proposal is:
Rejoice. Building a company isn’t easy and the odds were very much against you from day one. Most startups fail and close shop after burning through their investors’ money and their own time. You wouldn’t have gotten the proposal if you weren’t doing something right. I’d say that that’s a great reason to feel proud. No matter what your decision and the final outcome are, be proud of everything you’ve accomplished!
For more information, contact this blog’s author: Kobi Samboursky
Co-Founder & Managing Partner at Glilot Capital Partners