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The 4 Best Ways To Help Your Startup Get Acquired Fast
How can we get acquired fast?
This is one of the questions I’ve been asked the most since Grovia.io was purchased by Acceleration Partners after just two years of running it.
To be clear, the quick exit isn’t for everyone. Founders and investors that are dead-set on going for the “moonshot” may sneer a bit at the entrepreneur building to sell. That’s okay, we can let those folks continue diluting their shares in new funding rounds year after year.
This article is for early-stage founders who
- Have been very cautious with their equity. These founders may be bootstrapped entirely, or perhaps they have some funding from angels or non-dilutive sources (such as Pipe).
- Do not want to spend 5-10 years on one project. Variety is the spice of life.
- Have (or want to have) differentiated products or services. In other words, your startup has established (or aims to establish) a unique value proposition that is difficult to replicate.
If that sounds like you, then you’re in the right place.
In this blog, learn how to:
- Tidy up your legal, tax, accounting, and governance documents
- Partner closely with target acquiring companies
- Hold on to your equity and avoid institutional funding
- Understand how your companies in your industry are valued
Tidy up your legal, tax, accounting, and governance documents
It’s boring, yes. But, it’s the first point because it’s so important and so easy. Put all of your operational documents in a highly organized folder. This should be a priority for anyone building a new business, but it is especially important for founders looking for a quick exit. Why? Well, you will need to produce all of these documents in the due diligence process of the acquisition. Having all of this in order will make your acquisition process so much easier. Please trust me on this one – it’s worth the time investment. Oh and if you haven’t already done it, get a lawyer and tax accountant immediately. This should go without saying. Errors will cost you big time in the due diligence process. You need professional help.
- Every contract you ever sign. Seriously, every single one.
- All of your tax forms.
- All of your legal business entity forms (Certificate of Incorporation, Business License, etc.)
- Every employee offer letter, contractor agreement, and partnership agreement
- Financials, Sales Decks, Pricing, Employee Census, Partners, and Customer Lists
If you keep these organized from day one, maintain professional help from your lawyer and accountant, and follow basic good business principles, you’ll be in great shape when it’s time to share your due diligence documents with your potential buyer.
Partner closely with target acquiring companies
Okay, this point is a bit more exciting than #1, and probably the most insightful advice I have to offer on this topic.
Companies love buying startups that are building solutions complementary to their own products…especially when they partner with them long before M&A even comes into the conversation.
In the early stages of your product or service development, build a target list of acquirers that offer a complimentary service or product that you do not plan to directly compete with. From there, begin building partnerships with these companies with the objective to genuinely help them and their customers. They will likely have some great feedback about your product or service, so use them as sounding boards for your solution development.
At Grovia, much of our early product design was heavily influenced by our target acquirers. We went out of our way to build features and services that they were missing in their own solutions – so they had an incentive to send their existing customers over to us to fill that need.
If the relationship progresses, these companies will gladly help you connect with their customers, establish product-market fit, build integrations, and they may even invest. Not only will this help you create a valuable partner for generating leads, revenue, and better tech, but you will establish an early pathway to acquisition.
By developing this working relationship early, you remove the barriers for future M&A – the team already knows and trusts you, you have shared customers, and most importantly: you are actively filling a demand that the target acquirer no longer needs to build themselves. As such, you cement your company as an acquisition candidate, and it’s only a matter of time until M&A is brought into discussion.
Hold on to your equity and avoid institutional funding
I know, I know… giant VC raises at massive valuations appear glamorous. For some companies, accepting VC-cash is the only feasible way forward, but if you can avoid the venture path, you should.
The reality is that no venture fund will ever let you sell quickly on your own terms. They want you headed straight for the moon, and they will insert mechanisms into your business to ensure you do not sell until they get the return they want.
If you sell your equity to an institutional investor, you become beholden to them. Remember, what is best for a VC is not always what is best for you. A life-changing acquisition offer may look like pennies to a VC.
So, if you’re aiming for the quick exit, hold on to your equity with diamond hands. If you need funding, look at non-dilutive options like Pipe. If non-dilutive funding is not an option, look at crowdfunding or reach out to angel investors in your network and be clear about your intentions for a quick exit. This will also help you maximize your startup acquisition payout.
If you decide to take a dilutive funding route, you do not want to be overvalued if you’re looking for a quick exit. You want to make sure you can produce fair returns for your investors in a short period of time.
Understand how companies in your industry are valued
It’s important to know how your company is valued, so you can understand what financial targets you need to hit to meet your desired outcomes. This can help you build a timeline for acquisition.
In the world of digital marketing services, valuations are all about EBIT (or earnings before interest and tax). To value a marketing services business, there’s a simple formula which is: Business Valuation = EBIT x multiplier. Whereas, for a VC-backed SaaS company, the formula is often: Business Valuation = Recurring Revenue x multiplier.
So, the next question is, what’s the multiplier? This is where it becomes a bit more complicated. Depending on your business it might be a bit of a guessing game based on information from advisors, investors, partners, and online sources
In general, it’s a combination of a few factors
- Age of business: the longer your business has been around, the higher the multiple
- Growth rate: the faster your revenue is growing YoY, the higher the multiple
- Competitive differentiators (technology, community, first-mover advantage, etc.): the more significant the competitive differentiate, the higher the multiplier
In the realm of marketing services, these factors can take your business from a 2.5x EBIT multiplier to a 20x EBIT multiplier (and in some cases, even higher).
If your goal is a quick exit, having a strong grasp on your startup’s valuation model upfront will ensure you’re always making decisions that optimize your valuation – plus it will help prevent surprises when you start receiving your first offers.
In conclusion
Building a company for a quick exit is seen as a bit controversial in the startup world, but it’s a powerful model for the right entrepreneur – one who maintains their ownership, builds differentiated solutions, and enjoys variety.
It’s never too early to start thinking about your exit strategy, but it can certainly become too late. These steps listed in this article will help you increase the likelihood of an early exit, but of course, there’s a lot more to getting a startup acquired than what’s discussed here.
If you want to schedule a chat – feel free to request a call with me here.
