Startup Acquisition: How to Attract Potential Buyers
A couple of questions on Quora about whether there’s a “buyer wanted” listing service for startup owners who want to sell their businesses prompted me to write this post. To my knowledge, there isn’t one (yet), but the questions got me thinking. What can entrepreneurs do to increase the appeal of their startups for potential acquirers?
People start businesses for lots of reasons: hopefully visions of a huge payout at exit aren’t the primary motivator to pursue entrepreneurship. But given that planning for an eventual startup exit is something founders should address from day one, and since most exits are through acquisitions, it makes sense to keep that possibility in mind and to avoid any screamingly obvious blunders that could close off one route to exit.
How to think about startup acquisition
1. Pick the right market.
Target one that has significant growth prospects in a field that has existing competitors and/or potential entrants. Not only is it extremely unlikely to find a market where no competitors exist, but if you happen to stumble across one, chances are that no one’s playing there for a reason: i.e., it has limited potential for profits. Just make sure the market you choose isn’t too crowded with large entrenched competitors that will be difficult to outmaneuver.
2. Choose the right team
In the early days, when you’re short of funds it can be hard to attract the right talent. But from a business and funding perspective it matters, a lot. Many investors view the startup management team, who’s on it and their track records, as the number one or number two factor on their list of funding criteria.
Other than your cofounder(s) if any, and other critical talent like developers, you should outsource as much as you can for as long as you can. Once you start to show traction and have some cash coming in, you’ll have a better chance being able to attract the right in-house talent. And that just might get the attention of a potential acquirer.
3. Focus on execution.
This should be obvious, but be good at what you do. That means your business addresses a key pain point, with a unique and clear value proposition and that you are successfully executing on your milestones in terms of attracting customers and growing your market share, as well as showing traction on your key financial metrics.
4. Run a tight financial ship.
Your accounting records should be in order, prepared in accordance with generally accepted accounting principles (GAAP). Your corporate governance, legal records, HR and employee documentation should also be organized and easily shareable.
5. Keep your capital structure clean.
Though it might seem like overkill to document things from day one, it’s impossible to anticipate what will happen in the future. Allocate and document how founders’ shares will be split when you first incorporate, and have a lawyer draft a written agreement spelling out what would happen in a sale, founder exit (voluntary or involuntary), or other scenario.
And don’t take on lots of small investors or create too many different classes of stock. It’s a nightmare to sort out and could greatly restrict your flexibility whether you’re trying to raise funding, sell the company, or make an acquisition
6.Protect your IP.
If technology’s your key differentiator, make sure you lock yours down. That means having clear documentation as to ownership and registering your IP, among other things.
You’ll notice that all the actions above are the same ones that will build a sound and successful business: which if you’ve chosen to enter the startup arena should be your primary focus. Planning for an exit is hugely important, but it shouldn’t drive your decision-making. It’s just too tough and risky to be an entrepreneur without having real passion, belief in yourself—the business you’re building and the market you’re serving—plus commitment.
If you lack those motivators, your worry won’t be how to attract an acquirer for your startup, it will be how to stay in business.
Have questions or need help with your financial strategy? Tell us about it in the comments section below or contact us at Early Growth Financial Services for a free 30-minute financial consultation.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides early-stage companies with accounting, finance, tax, valuation, and corporate governance services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.
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- Preparing Your Startup for Acquisition