Your company is young, and you are busy putting everything you have into growing it. So, it might seem too soon to even think about the day you sell. But the truth is, every founder should be positioning their startup from the beginning to be an attractive merger or acquisition target. These four tips will pay off not only when it comes time to sell—they will also make your business stronger now.
1. Leverage What Is Special and Unique About Your Startup
Founders should think about what makes their company sustainably different from others. Sustainably is the key word, because your business must resolve a market challenge for the long term and be able to maintain its differentiation against competitors over time to be successful and eventually have a favorable M&A.
Is your company’s differentiation based on specialized expertise, intellectual property, or key partnerships? Many founders tend to overlook their most key market differentiations, meaning they do not focus enough on what a potential acquirer would value most in their business.
Consider the following example: A founder had started a software company to provide an ERP system to small businesses in a certain vertical. The founder had previously owned and operated one of these small businesses before moving to the technology-vendor side. While there were already competing solutions, the founder nevertheless launched the company. But the business was successful because it was differentiated by how much industry knowledge and best practices workflow were built into the solution because of the founder’s significant industry experience.
Understand your company’s “secret sauce,” which is the ingredient only it has that makes it stand out from its competitors.
2. Form Relationships with Key Industry Players (They May One Day Buy Your Company)
Strategic relationships with large players in an industry can often take time to negotiate. This is because many have byzantine partnership approval processes that involve long reviews by legal and compliance.
Despite this, it is advisable to form partnerships with several of the top players in your industry when you can. Such partnerships hold the potential of not only increasing a company’s revenues now, but also broadening its pool of future potential acquirers.
3. Have Your Financials Audited
You may be wondering why a small company should get its financials audited. First, it is simply better to do things correctly from the beginning than to have to correct mistakes.
Having accountants audit your financials also helps avoid problems that can derail an acquisition down the road. The most common issues with unaudited financials are that revenue recognition is incorrect or liabilities such as sales tax are not properly accrued.
For instance, one SaaS company had to change its entire financial history because it had never been audited and had been recognizing revenue incorrectly for years. Unfortunately, this issue was brought to the company’s attention in the middle of an M&A process by the potential acquirer, who ultimately decided to acquire a different company.
Wouldn’t you rather be talking to the large company interested in buying your business about strategic matters, rather than discussing whether you have recognized revenue correctly? The money spent on getting your numbers right early on will be one of the best investments you make.
Also, be aware that one item most accounting firms do not address is proper presentation of the financials. Talk to a banker as to the appropriate industry standard format for your sector so that investors or acquirers can easily compare your audited financials with other companies in the industry.
4. Seek Counsel from Trusted Advisors
It is critical to have long-term relationships with trusted advisors who can provide counsel as your company grows and help navigate key decisions. Such advisors can offer the most value when they have been part of your company’s journey from the beginning.
Investment bankers are often brought into a relationship much too late, leaving little time to make some of the desired changes ahead of an M&A transaction. It is a common misconception that a company must be ready to sell before it starts having a dialogue with investment bankers to get advice. Nor is it necessary to sign an engagement letter prior to having discussions with an investment banking partner. Most investment bankers are receptive to establishing an informal relationship that can potentially pay off for both parties down the road.
While selling your company might currently seem like a far-off prospect, time flies when it is built growing a successful business. Heeding these tips now can put your company on the path to an easier, more advantageous exit when the time to sell finally arrives.
Stephen Day is Co-Founder and Managing Director of Navidar, an investment-banking firm focused on M&As and capital raising for SaaS, e-commerce, IT services, and tech-enabled companies.
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