Alejandro Cremades - Selling Your Startup

In some cases, the talks aren't designed to lead to a closing. They might just want to take a peek under the hood of your company to see what makes it run. They may just want to tie you up in the process. In other situations, it may be cheaper to buy you as a way to take you out of the equation as a competitor. They may just buy you to shut you down.

After digging into the data and facts during due diligence, the prospect of buying your company may not offer what they hoped to find, or it didn't live up to the hype. There can be all types of issues with equity structures, debt, contracts, and other legal problems. Most founders are completely oblivious to these as well.

Not many companies and entrepreneurs have a lot of experience with M&A. They may not have an organized acquisition or onboarding process. It could be their first time. Even with larger companies, new hires can potentially throw a wrench in things.

Some say that even the largest tech companies that have completed large numbers of acquisitions aren't always competent at integrating and operating new acquisitions. They do some things really well at scale, but they may not always be great at getting the most out of a new small startup. This can be made more difficult, because those you deal with in the acquisition process may just be dumping your company in someone else's lap after the closing. They may not have the same vision, priorities, or appreciation for it.

Integration is probably the number one reason that acquisitions fail to work out well after the fact. You are marrying two opposites with completely different cultures—two companies that often have completely different values, priorities, mindsets, and systems of operating. That's challenging.

Things can change rapidly in the months it can take to close a deal. Just look at how quickly the COVID-19 pandemic altered businesses and the economy.

Factors like this can completely change the valuation and appeal for certain companies, as well as confidence and urgency in completing deals. But on the bright side, changes can also dramatically work in your favor, too.

Knowing these pitfalls will greatly help your company ace the M&A process and avoid massive amounts of wasted time and energy, while perhaps positioning the deal for an even stronger outcome.

What role do investment bankers play in M&A?

Unless you went to school to study to become an investment banker, or you did a stint in investment banking as an intern or after college, you may have had little experience with them thus far. Sooner or later, you'll probably be pitched by one if you are doing well.

So, how do investment bankers play into M&A? When should you bring them into the deal? How do you pick one, and how much do they cost?

Investment bankers can do a lot of things in finance. They can act as financial advisors, prepare prospectuses, aid in US Securities and Exchange Commission (SEC) paperwork when filing for an IPO, and advise acquirers on the best ways to structure purchases of other companies, helping them find the money to do so.

When it comes to the sell side of M&A, investment bankers can help you value your company, advise you on terms and deal structures, negotiate on your behalf, and help pitch and sell your business to other companies.

In essence, an investment banker is like an agent or broker who matches buyers and sellers and financiers for corporations.

Which cop is going to show up at your startup?

Like all salespeople, investment bankers often play good cop, bad cop. It often depends on their style and what they've been taught. Either way, their advice may not be wrong, but it may not always be offered in a style you are used to or receptive to.

They want to get the deal done. That's how they get paid. Sometimes they may try to accomplish this by trying to inspire you about what is possible with an exit. In other cases, they may try to pressure you into a deal. The pressure may appear when it comes to negotiating terms and deal structures. Of course, you don't want to be selling yourself short.

You also don't want to fall into the trap of overvaluing your company, or accepting terms you shouldn't, under the pressure of closing. Lean on your other trusted advisors for their experienced opinions, for backup when you are being hustled, or when you need to ensure (or really need to hear) that there is truth to what the investment banker is telling you.

There is another good cop, bad cop scenario to consider. Hiring an investment banker can also give you the ability to play good cop, bad cop with potential acquirers. It is an effective negotiation and management technique.

An investment banker acting as an agent and buffer between you and the other side can have a lot of advantages. It helps you negotiate better deals that really work in your favor and avoid giving in to asks that you'll deeply regret later on.

This is something we see when working with clients at Panthera Advisors. We essentially take the lead on uncomfortable discussions about terms that require tense negotiations. This way, the client is always on the positive side of building the relationship.

In addition to running interference in the middle of both parties and negotiations, and all of the time and stress this can save you, there are a variety of ways that bankers can bring value to the table.

Maybe you've become pretty good at pitching for fundraising by this point, though pitching for M&A is obviously different in a variety of ways.

Experienced bankers already have a handle on the art of the deal—at least the real dealmakers (not just your interns and entry-level analysts and associates at big firms). They've done this at least a dozen times already, and they should know what to say. They should also know the pitfalls you may be overlooking.

Established firms have teams to work on preparing M&A pitchbooks, and this may help you save time and energy so that you can spend more of your time focusing on running the business rather than being distracted.

Bankers are also experts at running valuations. They do it every day. Whether you want to use them to run the whole process, from testing the waters of the market to closing, or you and your board need a third-party valuation opinion for liability purposes, or you simply want them to check interest in additional bids after receiving an inbound offer, they can help.

Investment bankers have a whole different perspective on company value. They can see a lot of the strategic value you may otherwise be leaving on the table.

They have a big picture view of the M&A horizon. They understand what's happening in the market in ways you may not see or that haven't been reported in the media yet. At the least, it's hearing that potential version of a sale and what's possible. (Just remember their motivations.)

They can handle a lot of the paperwork. You should know your way around LOIs, purchase agreements, and so on. You want to be educated, and you want to know what to look for in the fine print and not be taken for being a complete novice.