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Navigating Mergers and Acquisitions

March 9, 2021
Amanda Castleman

Once a startup raises funds, investors expect a meaningful return on that investment. In most cases, the investors expect a liquidity event (most commonly called an “exit”) where the investor will receive many times more (referred to as a “multiple”) than their original investment. The multiple an investor receives and the timeline to the exit depend on the industry: payment fintechs average four years, while B2Cs typically take seven, SaaS companies nine, and hardware firms eleven years, according to Crunchbase.

An exit usually takes one of three forms. Unicorns and heavyweight VC-funded companies often move faster and opt for initial public offerings. Some investors may have an opportunity to exit through a secondary sale of their shares to other investors. But 88% of startups exit via mergers and acquisitions. Here we explore curve balls in the process and what can help mitigate those challenges and risks.

Seller Beware

The Institute of Mergers, Acquisitions, and Alliances estimates around 49,000 deals happen annually, totaling $3.8 trillion in value. Recent high-profile transactions include Square purchasing Afterpay and Amazon acquiring MGM earlier this year.

A seller’s pain points often include:

  • A weak grasp of competitors and market comparables.
  • Talking with prospective buyers without a well-crafted non-disclosure agreement.
  • An inadequate virtual data room to store and transmit sensitive information.
  • Not creating a competitive sales process, as multiple bidders typically yield a higher price and better terms.
  • Signing the first draft of a term sheet. In fact, you can negotiate for better terms—and consider hiring a financial advisor or investment banker to help with this.
  • Failure to set a complete disclosure schedule in the acquisition agreement, detailing insurance, essential contracts, intellectual property, related party transactions, employee information, any pending litigation, etc.
  • Neglecting day-to-day operations because of the merger or acquisition workload, which can be substantial. A dip in value can negatively impact—or even kill—a deal.

Another common stumbling block is underestimating the timeline. Mergers and acquisitions (M&A) typically take six months to several years. Regulatory approvals can lengthen the time required, especially for global deals. But sellers should expect scrutiny on many fronts, including balance sheets, customer demographics, market shares, operational procedures, staffing, and supply chains.

Once the two companies reach an agreement, they determine whether the sale will happen via the purchase of assets or stock. Shareholders on both sides of the equation then evaluate the proposal. Note: closing times have risen 31 percent since 2010 to deal with legal considerations, according to Gartner, Inc., the technology research and consulting company.

Set a Strong Foundation

Understandably, founders often hyper-focus on building their product or service in the earliest days of their company. By the time they get to an acquisition, that piece is probably in pretty good shape. But they may have neglected some less thrilling things—like books and records—that could take up 80% of their time in the last month of a deal.

Every step of the way, financial records, such as reporting and valuations and board minutes, grow more important, and ensuring clean and complete records gets more expensive and time-consuming. Many founders who exited report they could have saved pain and effort if they’d spent additional money upfront for more thorough documents and a legal firm that could have been with them the entire way.

Make sure to tap your network—and your lawyer’s too, especially if they don’t have mergers and acquisition experience. Often the other party wants to move quickly, which can be in everyone’s best interest. But you also want to be thorough and well-informed.

Don’t overlook your board of directors either. They can be an incredible resource. Also, get the right insurance—and correct levels of it—in place post-haste, if your startup’s coverage isn’t already dialed in. None of these tasks are the most exciting, but they’re necessary during M&As. No one wants to buy an unknown liability!

Seek out Synergy

Ninety-five percent of executives say cultural fit is essential for successful integration, according to management consulting firm McKinsey & Company. So as you move closer to an M&A, focus on the partnership’s potential, recommends Riggs Kubiak, who co-founded a SaaS real estate company—Honest Buildings—in 2012. A leading provider of construction management software, Procore, bought the company six years later. Kubiak remained onboard, but now helps other proptechs scale their businesses. In a recent Fast Company article, he reminded founders to ask: “In other successful acquisitions that you have completed, how did you incorporate the founder, the team, and the product into your company?” This will reveal their familiarity with the process and whether they value talent-retention or a more quick, clean-slate, transactional approach.

From the first meeting with Procore, Kubiak and his team felt valued. The two companies worked to “bring the two products together collaboratively, achieving a true 1+1=3 result, which is what we set out to do. I know from many of my founder peers that this is not the norm,” he says.

Good chemistry and teamwork is essential, agrees GhostBed founder Marc Werner, who has handled several transactions over five decades. He sold his family’s business—industry leader Werner Ladder—and invented the digital bathroom scale as CEO of the Borg-Erickson Corp. He helped that company get acquired, then served as Chairman of AmeriQuest Tech, an aggressive roll-up of computer companies which grew its revenue from zero to over $1 billion. Werner assisted in its 1995 sale, preserving positions for its 100-plus employees.

“Numbers always look good on paper,” he says. “But you need to really look at the product and issued patents. As my grandfather always used to say: ‘focus on quality and profit will follow.’ Buy and sell with companies that hold the same honest integrity that you both can profit from.”

And don’t forget your own team’s needs during the transition. There’s a certain joy and liberty in a startup being able to choose its own systems, policies, and work habits. But you will almost certainly need to align with the tools and systems of the acquiring company. And change can be frustrating, even if it’s something as simple as giving up an email client you liked or the cycle of when you have meetings.

Strong leadership can help overcome these frustrations. Founders should set the tone and remind everyone: we’re all working in the same direction, even when things get lively. Nick Gaehde, president of Lexia Learning, experienced that as the company was sold to Rosetta Stone in 2013, which was then acquired by Cambium Learning Group in 2020 for nearly $800 million. (The company sold Rosetta only a few months later, but kept Lexia and combined it with Voyager Sopris Learning. Gaehde now oversees both.)

“Yeah, it was certainly a lot to take in. I mean, being acquired and then with Rosetta being sold within a very small period of time was a lot of change,” he told TechCrunch+. But the integrations went smoothly. “It was an open and collaborative process.”

The workload of M&As may be intense, but most founders wouldn’t change a thing. Many even liken the experience to the intensity of raising children, where day-to-day moments can be overwhelming, but the good memories and sense of accomplishment make it all worthwhile.


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