So you’ve got an acquisition offer: Here’s what to do next (and what not to do)

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Receiving a Letter of Intent (LOI) from a potential buyer is a monumental milestone for any startup founder, especially first-timers. It’s a moment of validation, a nod to your hard work and the potential your startup holds.

Before going into venture capital at Vertex Ventures US, I was an investment banker at Qatalyst and had the privilege of helping several founders choreograph this delicate dance from start to finish. It’s natural to get excited about the prospect of creating generational wealth, but before you start planning your exit party, let’s talk about the steps you should take to navigate this phase successfully.

1. Don’t Rush — It’s a Marathon, Not a Sprint

It’s easy to get caught up in the excitement of receiving an LOI. Take a pause to remind yourself that this is just the beginning of the negotiation process. Here’s why you should take your time:

• Due Diligence is Key: The due diligence process will be thorough and can take several months, especially for strategic acquirers. Ensure your financials, legal documents, and operations are in order.
• Valuation Reality Check: The initial offer might not reflect the final sale price. Expect negotiations and be prepared for adjustments. Some studies suggest that only ~20% of LOIs actually result in a completed transaction.

Example (and there are countless others that have never been publicly disclosed): When Yahoo! was in acquisition talks with Microsoft in 2008, the initial $44.6 billion offer didn’t materialize as expected due to prolonged negotiations and strategic disagreements.

2. Keep Your Expectations in Check

While optimism is commendable, managing your expectations is crucial. Here’s how to stay grounded:

• Anticipate Hurdles: Not all deals go through (see #1). Many factors can derail negotiations from market conditions to disagreements on terms.
• Maintain Focus on the Business: Don’t let the LOI distract you from running your company. Your business needs to keep performing well throughout the process to maintain its value. A decline in business performance is a top reason deals fail to close after an LOI.

Example: The AOL-Time Warner merger in 2000 was initially celebrated but ended in disappointment due to cultural clashes and strategic missteps. Keeping a balanced perspective can help mitigate such risks.

3. Leverage the Expertise of Investment Bankers

Professional help can make a significant difference in M&A processes. I’ve seen firsthand the value a good advisor can offer. Here’s what to consider when hiring an investment banker:

• Experience and Track Record: Look for bankers with a proven history of successful deals in your industry. Their experience can provide valuable insights and strategies tailored to your specific market.
• Network and Connections: A well-connected banker can tap into a broad network of potential buyers, increasing the chances of a successful sale.
• Negotiation Skills: Effective negotiation can significantly impact the final terms of the deal. Ensure your banker has strong negotiation skills and a reputation for securing favorable terms.
• Understanding of Your Business: Your banker should take the time to understand your business model, growth potential, and unique value proposition. This knowledge is crucial for accurately positioning your company to potential buyers.
• Fee Structure: Be clear on the fee structure, including retainer fees, success fees, and any additional costs. Ensure the terms are transparent and aligned with your interests.

Example: While working on the Coupa transaction, the Qatalyst team managed to negotiate a huge increase in price. From December 9, 2022 to December 11, 2022, the transaction price increased from $73/share to $81/share, representing nearly $700 million in equity value!

4. Keep Communication Tight

Your natural tendency when an LOI is on the table is to overshare, both externally and internally. Here’s how to think about communications to buyers and to your team:

• To buyers: Most of the time, you should be playing hard to get. That means not over-sharing, rejecting non-essential due diligence requests (even if you can fulfill them), and avoiding any semblance of overeagerness to engage.
• To internal stakeholders: Most of the startup founders I know are quick to include as many people as possible when making big decisions, and for most young companies, transparency is a good default. However, for an M&A process, go to the opposite extreme. Pull as few people as possible under the tent, create an internal project name, keep calendar events private, and ensure important conversations occur behind closed doors. When gathering information from various departments, make the asks in such a way that no M&A suspicions are aroused.

Example: I’ll skip explicit examples here, to maintain the confidentiality of the companies involved. Suffice it to say that I’ve seen how gossip can severely jeopardize a deal. In many cases, particularly if the buyer needs external financing, it’s almost an inevitability that word of the deal will leak out and you should plan accordingly.

5. Prepare for Life After the Deal

Before you engage seriously, take a pause and think about life after the deal. Do you actually want your company to be sold? This is a big deal, and it’s worth reassessing your core motivations before getting swept up in the all-consuming deal-making process:

• If the Deal Closes: Consider what your role will be post-acquisition. Will you stay on, transition out, or move on to a new venture?
• If the Deal Falls Through: Have a backup plan. This might include revisiting other potential buyers, raising additional funding, or doubling down on growing your business independently.

Example: In 2006, Mark Zuckerberg famously rejected an acquisition offer from Yahoo! for $1 billion. He told the board: “I don’t know what I could do with the money. I’d just start another social networking site. I kind of like the one I already have.”

Final Thoughts

Receiving an LOI is a significant achievement, but it’s just one step in a complex journey. By not rushing and following these recommendations, you’ll be better positioned to navigate this exciting yet challenging phase. And remember, whether the deal closes or not, your entrepreneurial journey is far from over. Keep pushing forward, stay resilient, and who knows, your next big milestone might be just around the corner.

Good luck, and may the odds be ever in your favor!