Last year we saw 17,713 M&A transactions in North America alone, up from 15,776 deals in 2019. Meanwhile, the average time-to-IPO for startups has averaged 7.43 years over the past decade. Your company might want to be ‘due-diligence ready’ at all times for M&A acquisition talks.
If an unsolicited acquisition offer came tomorrow, would you be ready?
The best way to prepare is to THINK like a BUYER. When we help companies and CEOs to position for M&A, we start by running them through our ‘valuation audit.’ Below are just a few examples of (non-technology) questions that Buyers may ask when evaluating your company for acquisition:
Ask yourself, what procedures and initiatives do you need to deploy now in order to answer all of these questions (and more) with confident and convincing responses:
- Governance questions: If an acquisition offer came today, who are the stakeholders who would need to be involved in the deal? Where are all your board meeting minutes kept, and are they ratified & signed? Do all employees have valid contracts? Do the founders have employment contracts? What is your average employee turnover? Glassdoor ratings? These are some of the questions that help buyers figure out if you have built a well-run company, or if things are still done seat-of-the-pants.
- Unit economics: What is the core revenue model, and how do you maintain pricing power and margin control? What sales metrics are tracked? What unit economics are tracked? How solid is your Quality of Earnings (QofE)? These questions help Buyers figure out if your company can continue to scale profitably.
- Sales questions: How many deals are in your pipeline? What is an average deal $ size, and what is your win % rate? What is your cost per customer acquisition? What is the LTV:CAC ratio? What is your customer retention & churn? These are all metrics that you should know immediately, and should try to optimize before you seek acquisition.
- Marketing questions: If you don’t have the largest marketshare, does your company have the dominant share-of-voice? Is your CEO a recognized thought-leader in your sector? Is your corporate vision unique and defensible (and memorable)? Does the strength of your company brand allow for premium pricing and/or accelerated sales cycle times? Buyers are attracted to the sector leaders, and M&A-focused marketing is a variable that can contribute significantly to creating strategic valuation.
- Customer questions: What are the current customer personas, and what adjacent markets can the company grow into? Are customers under contract? Are they on annual subscriptions? Are customers concentrated in one sector? If so, how healthy is that sector? Buyers are looking for stability and growth here.
- Legal & IP issues: When an M&A buyer does their due diligence on your company, they are going to assign a value to the IP that you legally and defensibly Does your code base include open source? Those contract developers you hired before your Series A… did they all sign release waivers? Can you establish the monetary value of your patents? Founders often assume that M&A buyers will immediately recognize the value of their intellectual assets during due diligence, but it’s incumbent on you to highlight IP contributions to your valuation.
–> I’ll be on webinar panel of M&A experts to do a deep dive on this topic. It’s April 27th from 12:00 noon-1:00pm PT. Click here to view / register <–
Bottom line: If you are crushing it on all these questions and metrics then the lawyers will love you, your acquisition talks will proceed briskly, and your negotiating power for higher exit valuation will be strong. However, if the due diligence phase uncovers a lot of issues and ambiguity, then negotiations will drag out and your strength and valuation will weaken. Time is your enemy.
So start preparing now so that you will be ready. We can help.
XROCKET.io is a new breed of sell side advisory that works hands-on with entrepreneurs to position and optimize for acquisition — well before you hire an M&A banker. If you know a company that is considering M&A in the 1-2 year future, reach out to me directly at email@example.com.
 Time from initial VC funding to filing of S-1. Source: https://www.statista.com/statistics/320793/median-time-venture-capital-exit-usa/ & https://about.crunchbase.com/blog/startup-exit/
#investors #startups #privateequity #mergersandacquisitions #ceocoach #exitstrategy #duediligence #patents #GAAP
The most valuable advice is to “think like a buyer”. Most if not all entrepreneurs “think like a Seller” and are not prepared to respond to a buyer in a transparent and engaging manner. I went through a challenging process of creating the story that would engage a potential buyer and lead to the next step.