7 tips for founders to control their own destiny and get a better M&A outcome
For many startups, getting acquired is a time for celebration. The hard work and sleepless nights paid off, and now the founders and their team get to reap the rewards. But not all acquisitions are created equal, and startups can find themselves in a situation where they have to sell for less than they were hoping to a company they never wanted to work for.
At Vertex Intersect ’24, our annual gathering of technologists, investors, CEOs, and founders, we brought in the experts to share their tips for how founders can set themselves up for a successful exit by acquisition. With Walter Pritchard, Senior VP of Corporate Development & Investor Relations at Palo Alto Networks representing the corporate buyer’s perspective, and James Kim and Michael Hughes of Qatalyst Partners giving the investment banker POV, they shared their thoughts on how M&A really works from the inside in a discussion hosted by Vertex’s Dom Perri.
Some of their advice for founders to follow to make the most of their M&A experience:
- Build a strong company: This may sound obvious, but stronger companies generally have stronger outcomes. Teams with a unique approach to a market, a strong product, a clear vision and roadmap, competent leaders, and significant market traction will always be in a better position with would-be acquirers. Conversely, startups that give the impression of lacking focus or drive will have a harder time when it comes time to find an exit, the panelists agreed.
- Play the relationship game: The seeds of a successful M&A deal are often planted years before. As early in a startup’s lifespan as is feasible, founders would do well to start a commercial dialogue with decision-makers at any company to which they think they might one day want to sell. The worst case is that you might end up with powerful friends in your market, and it gives you someone to call for a potential counteroffer if someone else tries to acquire you down the line.
- Keep it classy: As a corollary to the previous rule, you want to be seen as an upstanding leader in your field. You should show your partners and customers that you do what you say, and say what you do. That also means being cautious about trash-talking competitors, especially the largest ones — you may find yourself across the deal table from them one day. On the other hand, if you treat them as a worthy, honorable opponent, it’ll reflect well on you as a leader and pay dividends down the line.
- Educate the market: Startups often work at the bleeding edge of the market, selling products or services with no obvious analogue. You should take every opportunity to educate not only prospective customers, but also other technology companies: Larger acquirers may not know they need your product in their portfolio until they get a first-hand look. In those situations, they’ll care less about your financial details and more about what you can bring to the table in terms of technology.
- Don’t hide your skeletons: Any reasonable M&A advisor or banker will be reasonably tolerant of any skeletons in a startup’s closet. The panelists say that the issue comes when the founders don’t disclose those skeletons until late in the M&A process, jeopardizing the outcome. If you’ve had a lot of churn in the product organization, or a key sales leader left, don’t hide it — instead, being upfront about those kinds of hiccups makes you seem more trustworthy and committed to a mutually beneficial outcome.
- Be thoughtful about strategic investments from tech titans: The panelists agree that whether or not it’s a fair assumption, taking money from a tech giant’s corporate venture firm sends a message that your startup has already chosen its most desirable buyer. It doesn’t necessarily mean that you’re totally off limits to other potential buyers, they say, but it does make them less likely to proactively start an M&A dialogue with you. That’s neither good nor bad, but it is a strategic consideration, they say.
- Don’t overplay your hand: Sometimes, founders will try to speed up a deal process by setting arbitrary deadlines, threatening to walk away if a deal isn’t signed by a specific date. But then, when the deadline comes and goes with no offer…nothing happens. That kind of behavior signals to a would-be buyer that you’re in a weaker negotiating position than they may have thought, and could harm the outcome. It’s tough to wait through the lengthy sale process, but if you keep up a calm, competent, transparent posture during that time, the buyer will be that much more willing to work with you.
Ultimately, the panelists agreed that if there’s a real secret, it’s that CEOs need to ride that fine line between advocacy and shameless self-aggrandizement. It’s important to stand up for your team and push for your ideal outcome, but you want to be seen as having integrity, too. After all, your buyer may be your new boss in the end.
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