Someone wants to acquire your company. Now what?

Unicorns dominate the headlines, but the vast majority of M&A deals are sub-$100M transactions that can be life-changing for founders and early investors.

I was recently approached by a founder who had turned down a $10 million acquisition offer for his 3 year old startup. He wanted $30m and the buyer walked away. This was two years ago. His company was now running out of steam, investors wanted to cut their losses and he was considering pulling the plug. He was contemplating re-approaching that buyer or contacting others.

This is not an uncommon situation, but unfortunately people don’t talk enough about lessons learned from failed M&A. Understandable perhaps, but this creates an information vacuum for entrepreneurs. To help fill this vacuum, below are some of the key considerations for startup founders who receive an acquisition offer.

So how should you be thinking about an acquisition offer that you have just received? Here are a few important things to consider:

1. Understand what the offer says about your business
   An acquisition offer is a strong signal regarding the prospects of your company — at least from the perspective of that particular acquirer. Understanding this signal can inform your negotiation tactic or next move: An acquihire implies that the company’s talent is more valuable to the acquirer than the product. If the acquirer wants to re-purpose your product, a pivot could be value-creative. And if the acquirer is a direct competitor or partner, then you may actually be on to something.
2. Give the offer a fair chance
   Before you accept or reject an offer, make sure you solicit competing offers and negotiate properly. When I meet founders who don’t do this (or do it half-heartedly), it is primarily due to lack of M&A experience. A structured process with multiple bidders can be undertaken relatively quickly and can help ensure you are getting the best deal possible.
3. Don’t let the headlines distort your thinking
   If the offer is not life changing then it may be best to turn it down. But don’t let Silicon Valley’s unicorn mentality distort your thinking… Take a moment to consider the offer’s real impact. For instance, a $20 million purchase price might seem small compared to Facebook’s $3bn offer for Snap. And you may be tempted to put yourself in Evan Spiegel’s shoes and turn it down, hoping for an 8x larger IPO. But if that $20m is e.g. cash shared between two first-time founders, it can mean i) a first successful exit and ii) freedom to pursue the next opportunity without financial worries.
4. Determine whether it is better to wait
   The acquisition price reflects the company’s perceived future growth and earnings potential. You should hold off if you do not yet have a track record that convincingly demonstrates what you believe is your company’s potential. But if you can negotiate a purchase price that reflects the net present value of this potential, then it may be worth exiting now. Or perhaps you can hedge your position by negotiating an upfront payment plus earn-outs based on future performance. In any case, remember, promise is often worth more than profits. It is better to exit at the on-ramp, when you have options and leverage, than at the off-ramp.
5. Don’t screw your investors
   The valuation of your previous funding rounds can derail what might otherwise be a very good offer. For example, suppose you previously raised $5m at a $60m valuation… A $50m cash acquisition would be an 8% capital loss for your investors. Blocking rights aside, does this mean you should reject the offer? Not necessarily. You can structure a back-to-back transaction whereby you buy out your investors e.g. for $15m (a 3x return for them) and sell the company for $50m ($35m proceeds to the founders). Similar arrangements can be made for employees with stock options, for whom you can negotiate e.g. one-time or deferred bonus payments.
6. Consider life post exit
   This is an important consideration for many entrepreneurs and clearly a very personal topic. If you can’t see yourself doing anything else and the company is sufficiently profitable, you may decide to stick with it as a cashflow business. Or maybe you feel this is your only opportunity to swing for the fences. If you opt to sell, your post-exit life might involve staying on with the acquirer for a while, moving on to the next entrepreneurial venture but with an exit under your belt and a cushy bank balance, going the VC route, mentoring, etc. In any case, consider what comes next before accepting or rejecting a bid.

Acquisition offers, even relatively small ones by Silicon Valley standards, can be life-changing for both founders and early investors. So it’s worth giving them proper consideration.

About the author: Georgios Markakis is Managing Partner at Venero Capital Advisors (www.venerocapital.com), an independent corporate finance boutique providing mergers & acquisitions, strategic and ​capital raising advice to high growth companies in the UK and continental Europe.