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Inside the Merger and Acquisition Process for Startups

People don’t always think of small, tuck-in startup acquisitions or acqui-hires as successes. And that’s a shame, because they can still be life-changing events for founders.

The merger and acquisition process, however, can be just as challenging and complex as navigating venture capital funding. And much like VC funding, the M&A landscape is also exploding this year. The value of M&A deals globally surpassed $4.3 trillion in the first three quarters, which is almost double the amount for the same period last year, according to Refinitiv.

Even if a merger or acquisition is something you haven’t considered as a possible exit strategy, you need to keep it in mind as your company’s market and competitive dynamics evolve. In this article, I’ll explain why and share some tips for navigating the merger and acquisition process.

Laying the M&A Groundwork

The opportunity to see your vision through at a big company, and to make a bigger impact on a bigger stage, should not be discounted. These types of deals don’t get celebrated enough, especially if your deal value isn’t disclosed. But in some ways they can be more validating than raising a large venture funding round.

Startup acquisitions are all about relationships. As a founder, you and your leadership team need to view every strategic partner — whether it be a customer, original equipment manufacturer, reseller, etc. — as a potential future acquirer. Treat every relationship as if it could turn into that. Our acquirers at Dyn, for example, started off as our customers.

Being friends with your competitors isn’t such a bad thing, either. A company can be a competitor today and a strategic acquirer or a partner in a private equity portfolio tomorrow.

If you’re ready to explore the merger and acquisition process, your legal and financial house needs to be in order. Make sure your revenue recognition is accurate, your legal documentation is complete and your company is fully set up from an articles of incorporation standpoint.

Additionally, set up a data room to easily share these and other sensitive documents with prospective acquirers — and share in phases. If a company is just scratching the surface of an acquisition, provide access to phase one of the data room, which should only contain high-level documentation. If the discussions get more serious, provide access to the next phase, which includes more in-depth data, and so on.

Questions to Ask During the Merger and Acquisition Process

The next step in the process — and one of the most important — is to ensure that any merger or acquisition is the right fit for your company and your employees. Ask the following questions to get a sense of what life will be like for your company, its people and its products if a deal goes through:

What’s the company culture?

Does the acquiring company have a developer-heavy culture, or is it more about sales and marketing? How does that compare to your company culture? Understanding these differences and nuances is key for potential success.

How will your company operate?

Will you remain a separate entity, be run as a new business unit or integrate into existing teams? Think through what each of these options would mean for you and your company.

What’s the reporting structure?

Find out where in the organization you and your team will be. How senior or junior will you be, and are you OK with that position?

What about your customers?

Will your acquirer continue to nurture and support your existing customers? How it’s going to treat your customers is a big deal, and it also provides signals as to how it will treat you and your team.

If a company has completed other startup acquisitions, look at those for an idea of how it will treat your company. But keep in mind that every deal is different based on the acquirer’s specific needs.

Market Research and Startup Acquisitions

To approach the merger and acquisition process strategically, instead of reactively, you need to stay informed about your market and competitors at all times.

Is there price pressure and commoditization in your market? Are products like yours becoming a free service as part of a larger platform? If a private equity firm is buying up a lot of companies adjacent to your market, is it going to combine them and create something new in your space? It’s very possible.

These firms are super strategic, and you need to be too — by actively monitoring the health of your market.

M&A Scorecard

Our free scorecard helps you evaluate potential M&A targets so you can strategically expand your business.

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M&A Scorecard

Our free scorecard helps you evaluate potential M&A targets so you can strategically expand your business.

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