The global mergers and acquisitions market skyrocketed in 2021, with a total of nearly $6 trillion in deals recorded that year. The pace of deal-making slowed somewhat in 2022, but the market is again picking up steam, with large acquisitions making up 28% of total deal value last year.
Now that the M&A market seems to be back on track, it’s important for startups to be aware of the red flags to look for when they’re considering selling. After selling my first startup in 2020 during adverse economic circumstances, I found there were several things I wish I had known before I took that route.
Key ideas to remember when selling to a corporation
You’re more likely to succeed on your own
Big corporations usually consider how they can incorporate and develop a potential acquisition target within their established organization.
This isn’t inherently bad, but it’s important to remember that this often means they can (and will) change the core of your company if it suits their purposes.
You won’t be in control
When you’re acquired, it’s common for the CEO to stay on for a few years to ease the transition. However, you won’t be the real decision-maker anymore, and you might lose the ability to create.
Buyers who can’t give you a transparent picture of your company’s future after the acquisition likely do not have your best interests in mind.
You’ll be a manager under other managers who have different priorities, and you may have to watch your company go in a direction you don’t like.
Your company’s growth may not be a priority
This is a hard truth that nobody talks about: Your startup is probably just a stepping stone for scaling someone else’s business or to boost stock prices.
Public companies are rarely concerned with your company’s operating efficiency and health. Sometimes, big companies acquire small ones to eliminate competitors or because it’s cheaper than trying to hire and train a new team for a project. Unfortunately, none of this may include further development of your product.
Even if a company offers more money, it’s important to find out if they plan to simply fire your team and take the technology, or if they have concrete plans to further your brand.
Happiness is optional
Corporations are not obligated to try to make you or your team happy once you’re under their umbrella. They have their own agenda, which may or may not include giving your company the freedom to grow and improve.
This doesn’t mean those big companies will make the acquisition experience bad for you; it’s simply important to remember that there’s no requirement for them to please you, especially if it goes against their plans.
You’ll have a lot of capital, but then what?
It’s easy to fall into the trap of thinking that you’ll have all this cash after the sale and immediately be able to do something great with it. Is it possible? Sure! Is it likely? No.
The pitfall here is not having a plan for what you’ll do with the money after you sell. Some founders jump too fast into a half-baked idea once they have the money, and others may hesitate for months or years as they ponder what to do next. Both scenarios can lead to poor outcomes.
If you’ve considered these situations and still feel ready to sell, it’s essential to know how to choose the right buyer and when to stop a deal that doesn’t seem best for your startup.
Set uniform deadlines so you’re not left empty-handed
Once you start getting offers during the buying process, it’s important to understand deadlines.
Every buyer should have the same deadline so you don’t miss out on a potential sale because you’re waiting to hear from another buyer. If you don’t enforce this, you may miss out on opportunities and end up with nothing.
Get to know your buyers so you understand how to be indispensable
When possible, position your company as a vital part of the buyer’s business plan. If you understand the buyer’s strategy and make it so they “can’t live without you,” you’ll not only get a better price, you could also wrangle more favorable deal terms.
5 warning signs that a buyer isn’t right for you
Startups with the opportunity to sell and raise more money must first remember to balance their short-term finances and ambitions with their long-term results. When your company hits a ceiling, the buyer who can fix the problem usually wins the sale.
However, here are the warning signs I look for before agreeing to sell:
They don’t have a dedicated in-house liaison
It’s a red flag to me if a corporation doesn’t assign a person to interact with the startup.
Without a dedicated contact with fixed KPIs and clear goals, it’s a recipe for a failed acquisition.
Your point of contact doesn’t have decision-making authority
Corporations should make sure all interactions happen at the highest levels of authority during the buying process so everyone involved can make critical decisions.
If they send someone who has only a small role in the company to discuss terms, it’s far likelier that they are not the best buyer.
They don’t have a separate venture arm
There’s a clear trend of corporations building their own venture investment arms (called CVCs) to satisfy both strategic and financial goals. Corporations with venture units allow startups to be distinguished as separate entities that can take on more risk — an important distinction that’s good for growing businesses.
This adds a layer of separation from the larger, slower “machine” of the corporation, giving startups leeway to explore new ideas and innovate while limiting risk for the corporation.
Lack of a clear post-acquisition plan
Buyers who can’t give you a transparent picture of your company’s post-acquisition future likely do not have your best interests in mind. I’ve learned to press for the sure knowledge that my project will be smoothly and successfully integrated into the corporation’s overall business model.
It should be clear that your existing team will stay together to support and ease the transition. The company should be willing to let your business continue pursuing its primary mission. Otherwise, you’re likely to be relegated to the “company guinea pig” pool with no real future.
They aren’t ready to buy right away
When negotiating with potential buyers, make sure they’re all in. If they get 20% through the buying process and then stop and other suitors no longer want to buy, you’ll be left in a bad spot.