Back to Blog

Why It's Critical to Prepare for M&A from Day One

    
group of professionals in business meeting

In March of this year, we hosted the webinar “Start with the Exit in Mind: Building M&A Value from Startup to Exit,” helping small businesses make the most of their opportunities in mergers and acquisitions. During the webinar, it was mentioned that knowing how you want to exit is almost as important as knowing how you want your business to operate.

Preparing for your exit early doesn’t mean that you’ll necessarily make an early exit—it means that you’ll be ready for an M&A deal whenever it arrives. In this article, we’ll discuss 3 reasons why you should get a jump on the M&A planning process as soon as possible.

1. The Odds are Against You

You might assume that in the early stages of your startup, it’s better to go full speed ahead on growing your business, without spending too much time on strategic planning. After all, if you build a great company and solve your customers’ problems, M&A opportunities will naturally follow, right?

The answer is yes and no. Whether you’ve just launched your business or you’re almost ready to sell it, M&A must be a crucial consideration. This is largely because of one pivotal fact: only 16 percent of startups are ever acquired.

Of the rest, only 3 percent of startups ever reach an IPO. The remainder—a full 80 percent—never get off the ground, struggling to attract the capital and talent they need. What’s more, 60 percent of startups have already been acquired by their Series A funding round, while 80 percent have been acquired by Series B.

Although it might seem counterintuitive or unnatural, it’s more important than ever to plan out how you want to make your exit, with the odds already stacked against you from the get-go. It will be much easier for you to engage in M&A discussions if you’ve already made arrangements for this process early on, rather than having to radically adjust your operations when the time comes.

2. You Might Not Know What You’re Doing

If you’re lucky, you’ll get a seat at the M&A bargaining table—but what happens after that? Sitting across from you will be various executives, financial professionals, and legal experts who handle M&A topics for a living on a daily basis. Meanwhile, this may be your first experience running a business, let alone selling one off.

With only 1 in 6 startups getting acquired, as discussed above, it’s highly unusual for startup founders to have the upper hand in negotiations. After all, promising startup investments come around at regular intervals for buyers, while founders may only have a single shot at making it big.

Even the bankers and agents who are advising you don’t necessarily have your best interests in mind. Like real estate agents who want to earn their commission, investment banks are often motivated by the fees that they’ll receive when the M&A deal closes. In addition, banks see startup buyers as a more promising long-term partner than startup founders, who may only ever sell a single business.

As a result of these complications, startup founders need to understand their potential M&A “customers” just as well as they understand the customers who purchase their products and services. Figure out how to appeal to your potential buyers, and make the business case that the acquisition will bring the buyer value in terms of new customers or added revenue.

3. You Have a Lot of Things to Prepare

Potential buyers want transparency into your business from top to bottom. Being unable to provide this transparency—in the form of a clear, well-organized portfolio—is an all-too-common dealbreaker.

Assembling all these documents will be challenging and time-consuming, so it’s best to get started as soon as possible. The contents of your portfolio should include (but are not limited to) documents such as:

  • Organizational charts

  • Business plans

  • Employee records

  • Quarterly and annual financial statements

  • Corporate tax returns

  • Capitalization tables

  • Signed board minutes

  • Lists of shareholders

  • Supplier agreements

  • Licenses and approvals

  • Proof of intellectual property ownership (such as patents, copyrights, and trademarks)

  • Confidentiality agreements

  • Any pending litigation

Practicing good corporate hygiene is an essential part of M&A. Tools such as virtual data rooms make it dramatically easier to securely store and share the documents that you need for the M&A process.

Sign up for your free trial of SecureDocs.