Helping Sellers Earn Better Deals At The Acquisition Table

February 9, 2024

Founders have a deep attachment to “their Company” - something they have built with passion, work and personal sacrifice. So conversations about selling it, divesting a part, or exiting completely are difficult, to say the least. But in a VC-backed enterprise model, exit for Founders (and others) is a reality. And getting the best deal for everyone is the responsibility of the Founder, in more ways than one. How does one do it amidst business pressures, investor push, flagging morale and evaporating runway? In short, by starting early.

Half the battle is about getting to the mindset of “always being ready to sell”. It’s a shift in viewpoint, an added layer of objectivity in the entire conversation. And it helps immediately in squaring the preparatory work; much before the buyers and investment bankers start looking for those. And this preparatory work, to be done at the right level of quality, takes time! 

At all times, one should have -

  • Updated documentation of statutory declarations like capital tables, compensations, shareholders agreements, meeting records, etc. Last-minute scrambles for these are very poor optics
  • Clear revenue projections and forecasts, investment plans for growth (tied into the projections) and assessment of competitive risks. Segmental value proposition can be an interesting addition to this mix - can be the gotcha moment for a buyer
  • Outsourced most of the non-core functions already (or have a path to that)

This ongoing preparation not only helps the sale process; it also clarifies lots of business issues and KPIs. So this is rarely a case of wasted effort. And then the Founder does not need the team to process documents over a weekend; keeping discussions invisible.

The other half is to understand the deal from the Buyers’ perspective. Unless it’s a specific situation of a PE executing a leveraged buyout (to improve & resell), a Buyer wants to integrate the acquired company with its operations. But they can never be sure about the health of a business till it’s acquired. So they try to simulate scenarios and attach risk-adjusted corrections to business projections. They become keen to retain the management team with result-driven earnouts. At times, they try to isolate some of the unknown risks into an escrow. And finally, they put a discount hurdle of 25-30% for the returns cashflow to arrive at a “realistic valuation band”. 

There are no easy answers here and each Buyer looks at it differently. But a set of post-acquisition projections (what the business would look like within the Buyer organization), a clear statement of management team transition (including new hires) and additive cashflow scenarios help. Clarity on tax treatments is useful too. Oftentimes help from M&A professionals is worth the transaction fees.

Essentially understanding the risk framework of the Buyer as closely as possible becomes important in getting a better pre-merger valuation with a decent cash/stock split. Founders need to understand the process and support it with better information and risk mitigation plans.

Wrapping Up

We read about sale transactions every other day; and wonder about the zeroes and commas! But we do not see the hard work behind the scenes. Multiple discussions in parallel, lowball offers and unsolicited advice, hard-nosed negotiations and unending ask for documents - it is HARD. The only option for the Founder is to start early and prepare - there is no other way!

Leave a Reply

Your email address will not be published. Required fields are marked *

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.