I recently read a great blog post by a CEO who went through a six month acquisition process that eventually fell through. I also watched an interesting video of various biz dev execs of big companies talking about acquisition strategies. But before I send you to these posts, you have to go through my thoughts.
While most early expansion stage software CEOs aspire to hit the IPO nirvana, the reality is that most early stage ventures end in one of three outcomes: an acquisition, a wind-down, or a non-event.
Regardless, both an IPO and acquisition require significant preparation. And the longer you wait to prepare, the more complicated and expensive it gets. I recommend that CEO start laying out their company exit strategy 18-24 months before a desired event.
Assuming you’re CEO of an early stage company, here’s a sequence of steps you should start with sooner than later:
- Hire a CFO: I won’t dwell on this point, as I’ve written about it here.
- Get your financials in order: get your financials GAAP ready. Time to say goodbye to Quickbooks and cash accounting.
- Build your economic model and operating dashboards: More on that here.
- Get a financial audit by a reputable accounting firm: there’s nothing like an audit to ensure your compliance with basic financial accounting. Make sure to dive deep into the audit firm’s assessment of your financial operations and processes for areas that you can improve upon.
- Get a legal audit by a reputable law firm: in an acquisition, your company will go through a super extensive legal due diligence audit which will uncover all sorts of issues. These issues will delay the closing of the deal. A mini-version of this due diligence typically happens when a company raises an institutional VC round. But in the case of VC audit, companies typically don’t do much with the due diligence findings after the investment is done. I encourage companies to do their own audit with their own law firm, and use the findings to make process and documentation changes to clean up their legal infrastructure.
- Start taking investment banking meetings: there’s lots to be learned from bankers that cover your space. For one, investment bankers have a wider lens to your market, to the larger companies in it (acquirers); and the competitive landscape around you. As they get to know your company, they are more apt to bring it up in their discussions with potential acquirers.
- Get your board of directors in order: more on that here.
As you get closer to being ready for an acquisition, make sure that you allocate at least 12 months to getting there.
- Pick a banker that best covers your market: use that relationship to get a perspective on all the possible acquisition prospects, their priorities, their appetite, and how best to engage them.
- Start building relationships with prospects – start with product integrations: the most effective way to get a perspective acquirer’s attention is to demonstrate how an incremental revenue stream can be built for them around your product. So get a product integration built first.
- Start building relationships with prospects – follow with joint selling: once you have an integrated solution, start marketing and selling it. Then engage the prospect’s sales team in the process.
- Retain the banker for a “soft sell” process: retain a banker to go out and solicit interest in a partnership or “strategic” funding. It provides the banker with an excuse to reach out and have the conversation, without giving the impression that the company is actively looking for an exit.
- Take an inbound offer and shop it: This is where it gets tricky, and why you need to have all your ducks lined up before you get to this point. The cliche of “great companies are bought not sold” holds very true. And what I say is that “greater companies are bought in a competitive bid.” Ideally, you would receive an inbound offer for acquisition and – assuming the offer is not perfect – you take that offer and use your banker to shop it around. Which would ideally create a bidding situation that maximizes your outcome.
Here’s an interesting and relevant video posted in Techcrunch with business development execs discussing acquisition strategies. They’re from Cisco, Facebook, Google, Microsoft, Twitter and Yahoo. The video runs an hour, but it’s well-indexed.