Developing a thoughtful exit strategy for your startup is key to maximizing your chances for an extraordinary outcome. My intent is to help folks demystify the M&A process, and also help founders achieve stellar exits. Part 1 of the series on getting bought vs sold is linked here.
Below, we’ll go through the 5 components to drafting a M&A memo: Overview, Strategy, Timeline, Valuation, and Risks. I’ve been around a lot of M&A in my career - selling rideOS, leading Uber’s first 3 tech acquisitions, and as a sell-side banker at Goldman Sachs.
Note: I love the Amazon narrative structure for framing strategic decisions for your startup. Highly recommend using this format to draft a M&A strategy.
Generated w/ DALLE
Section 1: Overview
This section outlines an overview of the current state of your business and industry. Being honest about the hits and misses of your business is important.
Here are a few common reasons for why startups start considering an exit:
Customers or strategic partners bring up M&A in commercial discussions
Joining forces w another player accelerates vision
Founders are exhausted
Business is not performing as hoped
Pressure from the board
Market is consolidating
One highly effective strategy is a dual path strategy to independence, while running a M&A process in parallel. The reason for this is because you give yourself multiple ways to win. If your business gets to the next level, that’s fantastic! If not, you are still able to take care of your team’s careers, and pay folks for their blood, sweat and tears.
Section 2: Strategy
Who are the most natural buyers for your business? What are the benefits to the acquirer by owning your business? Here, you’ll identify a list of acquirers, segment them into categories, and identify the individual at your company that is responsible for building that relationship.
You should deeply think through the business and financial value that your team and technology can bring to the acquirer. For example, for enterprise businesses, here are two examples of acquirers:
Vertical integration: acquirers that want to own your products and technology because it solves a core business problem they have.
Horizontal Integration: acquirers that want to add your product to their platform, and 10x it’s growth through their sales and distribution team.
Relationships with executives at the acquirer are key. You need a product/biz/operations executive sponsor in addition to a corporate development contact.
The business unit exec is much closer to the problems of the business, and how your products can be used to transform their business.
Corporate development dev is often a support function at top tech companies, responsible for valuing your company and negotiating the deal
As discussions become more serious, corp dev teams from acquirers will build models to value your business, which go into the offer price. It’s important for you to develop a perspective for how much your business will be worth to the acquirer, and work with the acquirers corporate development teams to help shape their views and inputs to the model.
Section 3: Timeline
Generating a timeline for a M&A process, and keeping buyers on that timeline is important to maximize their bid. The key is to generate competition. Competition is important to drive up the bid for your business.
My biggest learnings from selling rideOS were that the process took a lot longer than anticipated, and it is difficult to predict M&A timing windows. Therefore, it’s important to start the process early, ideally with 18+ months of run-way.
Here’s an example of a timeline and process. How much time you allocate to each stage will depend on the specifics of your company.
Stage 1: Form the exit strategy and get your exec team and board alignment (e.g. draft and review narrative)
Stage 2: Develop executive and corp dev relationships with potential buyers.
Stage 3: Buyers start their M&A diligence process. Ideally, you get a pro-active inbound offer for your business. However, you may also inform buyers you are looking for an exit
Typically, buyers will diligence the following topics:
Team
Business
Products
Technology
Integration
Make sure you develop custom decks for buyers centralized around the value of your business!
Stage 4: Buyers submit term sheets. A M&A term sheet is typically a non-binding document that outlines the following key terms.
Purchase price (e.g. total amount, cash/stock mix)
Deal structure (e.g. cap table vs sign on bonus vs retention)
Employee arrangements (e.g. equity $ allocated for new offer packages)
Post term sheet diligence (e.g. what would the acquirer like to assess)
Other terms (e.g. exclusivity, % of folks that need to sign offer letters for deal to close)
Note: ~50% of companies that receive term sheets close the deal. Don’t count your chickens before they hatch!
Stage 5: Definitive documents and post term sheet diligence. The following happens in this stage:
Lawyers draft thousands of pages of documents, including all of your customer contracts
Buyer and target draft new employee agreements for everyone at the company
Buyers set up a few sessions for remaining diligence items
Buyers work with you to set up an integration plan
Shareholder vote and definitive documents are signed
Announcement
Note: for tech acquisitions, a lot of the value is in the people. Therefore, buyers typically require a certain number of folks to accept new offer packages prior to closing the deal.
Section 4: Valuation
Technology acquisitions are often hard to value, but there are usually 4 components that drive valuation. You can think of it with the following equation:
Value of people (+) Value of product and technology (+) Value of customers (+) Competitive Fudge Factor (=) Purchase Price
Acquirers will also use other valuation approaches, such as assigning a multiple of your revenue or EBITDA.
Section 5: Risks and FAQ
This is where you highlight risks, considerations, and frequently asked questions.
Important note re: risks: It is paramount to limit the number of folks on the team and in your life that know about M&A to an absolute minimum. Do not tell your parents. Do not share with team members, unless they are critical to the transaction.
This is incredibly difficult for founders that operate in a space of radical transparency. However, M&A is far too distracting for the team, and deals fall apart very easily. There are too many horror stories of deals that went wrong in the 9th inning because word got leaked.
Final Thoughts:
M&A is a super stressful time for founders, the board, and the team. I have been around M&A my entire career, but when selling rideOS, there were countless moments where I felt like vomiting before critical stages like negotiations on valuation, and giving out new offer packages. In fact, I’m stressed on behalf of you just outlining this doc and thinking about the process you are about to go through.
It is critical to constantly remind yourself that you have already succeeded by taking the step to start a business and go through the highs and lows. Surround yourself with loved ones to remind yourself there is more to life than what is going on in your business. Prioritize your spiritual, physical, and mental health.
I hope that this document helped you to demystify M&A, and can help you to get a great exit for your startup.