Startup founders are constantly seeking ways to gain a competitive edge and secure their place in the market, including positioning their company as an attractive acquisition target from the very beginning. While building a company with the goal of being acquired requires careful planning and execution, it can lead to significant opportunities for growth and success.
The first half of 2023 has been a slower period of mergers and acquisitions than anticipated. A recent article by McKinsey reports that the estimated value of companies undergoing M&A in Q1 2023 fell by 49% from a year ago to $562 million. This could be attributable to various factors in the economy and the world we live in, e.g., climbing interest rates, inflation, geopolitical events, and the market’s confidence in the economy. On the other hand, critical players in the M&A world are reporting greater optimism for the balance of the year. It is also generally believed that investment funds are sitting on significant piles of dry powder for deployment. A recent article by PWC estimates that private equity firms in the United States are sitting on about $1.1 trillion of dry powder. With an anticipated uptick in M&A activity, the second half of 2023 should prove an ideal time for startups to position themselves for acquisition when the time is right strategically. Below are some key tips for putting your best foot forward.
Develop a Strong Value Proposition
From day one, focus on developing a unique value proposition that sets you apart. Clearly articulate how your product or service addresses a specific market need and provides a solution that stands out from competitors. Conduct marketplace analysis to demonstrate how you are outperforming your competitors. Discuss with your financial advisor the best way to present and evaluate your enterprise value using the various models and formulas. A strong value proposition attracts customers and captures the attention of potential acquirers seeking innovative and differentiated offerings, product adjacencies, and growth accelerators.
Demonstrate Growth Potential
Startups that can show great growth potential will deservedly attract more attention from both investors and buyers. Showcase your startup’s growth trajectory by consistently achieving milestones and exceeding performance expectations. Highlight key metrics such as revenue growth, customer acquisition rates, and market penetration. A track record of sustained growth and a clear path to profitability make your startup a more attractive proposition for acquisition.
Build a Scalable Business Model
Startups with scalable business models have greater potential for rapid growth and are more attractive to buyers. Design your business operations and processes in a way that can accommodate increased demand without significant increases in costs. This scalability makes your startup more appealing to potential acquirers and positions you for sustainable growth.
Focus on Intellectual Property
Intellectual property (IP) is a valuable asset and can form a moat around your castle. It can significantly enhance your startup’s attractiveness as an acquisition target. This means it is critical that you protect your innovations through patents, trademarks, copyrights, and trade secrets. A robust IP portfolio demonstrates your commitment to innovation and can provide a competitive advantage that appeals to acquirers seeking to enhance their product offerings. From an early stage, you should work with your legal advisors to develop an IP strategy that protects your intellectual properties in a cost-effective manner. You should also ensure that all of your current and former employees and contractors involved in the development of your technology have validly assigned their IP rights to the business entity. Data privacy compliance concerns also tend to attract much attention from buyers in due diligence processes. Properly strategizing and executing IP protection can make you more marketable and help ensure smooth deal execution.
Engage Trusted Advisors
Consider engaging trusted advisors from day one of running your business. Having trusted M&A advisors will not only connect you to potential buyers but will also give you advice on how your business case can fit into these potential buyers’ deal theories and how an acquisition could bring about synergies to the potential buyers. They will also be available to guide you and ensure the deal is executed efficiently.
Cultivate Strategic Partnerships
Forming strategic partnerships and collaborations can boost your credibility and visibility in the industry. Aligning with established companies or industry leaders opens doors to new markets and increases your startup’s perceived value in the eyes of potential acquirers. These partnerships showcase your startup’s potential for integration and collaboration in a larger ecosystem.
Foster a Talented Team
Invest in building a skilled and dedicated team experienced in your particular field and in running an emerging growth business. Create alignment between your team members and your startup’s mission and vision. Acquirers often value a strong and capable workforce that seamlessly integrates into their organization. Develop a company culture that attracts top talent and fosters innovation, collaboration, and adaptability. Many potential buyers, especially strategic buyers, pay much attention to cultural compatibility when evaluating an acquisition, that sometimes gets overlooked by potential sellers.
Ensuring good housekeeping from inception and at every step of your journey can speed up a due diligence process, reduce negotiations on representations and warranties with potential buyers, ensure a smooth representations and warranties insurance underwriting process, and generally promote better deal execution. There are a few matters that you could be frontloading:
- Obtaining an audit on your financial statements, and quality of earnings analysis
- Understanding the third-party consents required under your various contracts and whether these contracts contain restrictive covenants that could potentially make an acquisition less attractive to a buyer
- Revisiting prior equity grants and sales to ensure that they complied with the stock plan and the various securities laws exemptions and that the cap table accurately reflects the stockholding of the company, especially if part of this process is handled in-house.
- Ensuring that your employees and independent contractors are properly classified as such and as either exempt or non-exempt.
- Understanding the tax implications of an acquisition on your business and your team.
Positioning your startup as an attractive acquisition target requires a combination of strategic planning, focused execution, and a commitment to innovation. The more strategic founders can be from the start, the better they can pave the way for a successful acquisition and propel the company toward new heights of growth and achievement.