Many entrepreneurs create startups with the hope that in the future, their business will be acquired. For young companies, an acquisition is an incredibly exciting achievement. It is a time in which you are assured that the startup you imagined, built and nurtured was, in fact, a successful business venture. Your years of hard work and perseverance through the hurdles and the doubters has brought you to the thrilling realization of your business being valuable and sought after.
However, behind the excitement of this momentous event lies a number of challenges in the process of selling your company to someone else. Here are some things you should keep in mind during your company’s acquisition:
- Don’t take the due diligence process personally: There will be many questions raised during this process and you have to approach them from the acquirer’s position. Because you have dedicated your life to this business, it will be easy to take any issues the acquiring party will find to heart, but remember that they simply want to cover all of their bases, as they are vesting a lot of trust and faith into your work.
- Your whole team may not be acquired along with the business: When someone acquires your company, they may not take your employees with them. Make sure you are prepared for this. Also be prepared that some of your employees may not be interested in working with the company under its new ownership.
- The culture of the company will change: With someone new at the helm of your business, be prepared that the culture of the company will change. A startup company has a different “vibe” to it than a larger company does, in both good and bad ways.
There is no learning experience quite like the process of an acquisition. A large piece of that learning experience will lie in reviewing the mistakes other startups have encountered during their acquisition. It is key to learn from other peoples’ mistakes in order to bring the greatest success to your company’s acquisition.
Below are eight of the most common startup acquisition mistakes for you to review and avoid:
1. Not being clear about who is going to run things after the acquisition
During the acquisition stages, many startups don't discuss who will run the company two or more years down the road. Oftentimes, the employee structure may not even be obvious. However difficult it may be, it is best to set these decisions into place immediately following the acquisition.
It may make sense to allow the current leadership to continue making decisions on behalf of the company until the acquisition is finalized. Their familiarity and tenure will allow for an easier transition when employee restructuring does take place. Once the acquirer takes over completely, they can change the structure as they choose.
2. Not taking document security seriously
When working on M&A transactions, different individuals at different organizations need access to different types of information. It is crucial that this information is stored and delivered with security in mind. Your startup has been in your hands and under your control from the very beginning but now you're passing your invaluable ideas off to someone else. Make sure these ideas don't make it into the wrong hands. SecureDocs has a flexible “role” feature that provides a simple way to share sensitive documents during the buy and sell-side process. With the ability to specify multiple levels of user access, each user in the data room will only have access to the information necessary. This added security will keep your confidential deal information unreadable by unauthorized parties.
3. Not aligning incentives properly
By making sure everyone is on the same page with incentives, you can avoid some crippling problems. Creating a type of matrix reporting structure for everyone to use will ensure that both parties know exactly where everyone stands.
Also central to the success of your startup under the new ownership is giving the acquired team some control, but not complete control. With partial integration into peer groups rather than full integration, you will be able to maintain alignment of your company incentives. Additionally, you should work to create a mix of longer-term incentive structures – ones that align with larger enterprise goals as much as specific ones.
4. Not having clear ownership of your intellectual property
Employee Proprietary Information and Inventions Agreements (EPIAs) are a necessity to your company’s acquisition. If you brought anything with you from your prior employer or college studies, you’ll want to make sure that the party acquiring your company can’t make ownership claims to anything important. Written agreements with contractors/consultants should assign all resulting work product to the company.
5. Not knowing where your development team has used open sourced code
While a smaller company may be able to use of free, open source code, a larger company likely will not. Big, developed companies with large legal departments are greatly concerned about the violation of OSS (open source software) licensing because it can lead to significant financial problems. Large firms are already the target of many lawsuits, and OSS does not make that situation any better.
With your company being acquired by a larger company, you will need to pinpoint where your company has used OSS so that the larger acquirer can know where it needs to make the switch to different, licensed software.
6. Not being aware of patent violations
Patents can be a great benefit to startups, and here are a few examples of how:
- help a startup defend itself against rivals
- help a startup protect its products/ideas from being stolen by larger rivals
- help a startup have the freedom to operate
- increase the chances of a startup’s acquisition
- establish the long-term success of company’s products/ideas
- help a startup prepare for an IPO
- help a startup turn into a much bigger business
It is crucial that you are aware of any patent violations before the acquisition. Holes in your patents can lead to issues down the line.
7. Not taking tax implications seriously
Immediately following talks of acquisition, call up your personal tax accountant and determine the implications of exiting the company for you and your family. You will want to find a way to structure the acquisition such that you benefit, but the economics for the buyer are not changed.
8. Not thinking past the closing
Selling your company means suddenly receiving a large sum of money that you did not have before. Be sure to have a “cooling-off period” where you do not waste your new wealth on unnecessary things. Reward yourself for this achievement, but only after you’ve paid off debts. It is best to wait 30 days before making any major purchases. If you still want it at the end of 30 days, consider buying it.
Additionally, selling your company also means that some of the employees that helped you get to this point may not move forward with the new company, whether by choice or not. Work to provide a safety net for your employees through the transition so they don’t feel abandoned by your sale.
Also, talk with the buyer of your company about what his/her plans are for the future of your product/idea. Because this is something you have put your heart and soul into, you want to be sure you can be comfortable with the plans of the acquirer.
The majority of acquisitions fail due to lack of strategy. As with any acquisition, both buyer and seller should share a strategic vision for a successful acquisition. There is no full proof way of being certain that by following the advice above, the road to an acquisition will be an easy route. However, if you've successfully managed your due diligence and sale process, the day the deal closes on the acquisition of your startup is among the most satisfying in business.