For any startup founder, an acquisition proposal from a larger company will always look like an enticing proposition. But one needs to know, and understand, many things before jumping in.
The unexpected and shocking exit of Flipkart Co-founder Binny Bansal from the company he founded 11 years ago was unsettling for the Indian startup ecosystem, especially entrepreneurs. Binny’s resignation comes within six months of Flipkart being acquired for $16 billion by US-headquartered retail giant Walmart, which boasts of an annual revenue of $496 billion.
In light of this development, YourStory spoke to a cross-section of entrepreneurs, venture capitalists and legal heads on the key points any startup founder or co-founders should keep in mind before they embark on a potential merger and acquisition (M&A), where the acquirer is a much bigger company.
Here are some:
It is very important to build a personal connect with the head of the potential acquirer, and have that ‘gut feel’ that things will work out good. There has to be a certain amount of mutual trust and understanding even before formal talks can begin.
This plays a critical role as it defines how well an M&A process can go forward and see a successful future. One startup founder who was successfully acquired by a larger US firm says, “This is one aspect the leadership of the buying company always checks. If the culture is not good, they would not want you.”
The beginning is always rosy when the leadership on both sides talk about a merger but the real challenge begins when one gets into the various operational aspects like who will control what, or what would the roles be. These issues have to be sorted out much before any progress can be made on finalising the deal. “The talk of a joint vision between two founders is nice, but to make it happen, it requires the involvement of the other team members,” says a startup founder who had the experience of a failed M&A.
It is generally taken for granted by startup founders that the larger company will do all the due diligence. However, it is critical that even the startup founder does certain due diligence of the potential acquirer, even though it is of a larger size. There have been cases where such due diligence is blocked by the larger company but is required if the founder plans to continue after the acquisition.
Startups may not give much importance to legal processes or the financial aspect as their key focus is on increasing market share or growing the business. Hiring a good law firm will help in the entire corporate structuring, vetting of term sheets, scanning through the legal documents, etc. Simultaneously, it is important that the financial books are in order. Having a good chartered account on your side helps any young firm to keep the books in good order, save on taxes, realising a good deal etc. “No startup founder, when they start their business, ever thinks of selling their business but if a good offer comes in the way, the hygiene aspect of legal and financial plays a key role,” says an entrepreneur.
Paperwork might seem burdensome or bureaucratic for a startup founder when are they are making decisions on the fly, but this is important. The founder must ensure that everything that is spoken is put down in writing and has a certain legal backing so that either party does not stray from the path agreed upon. “The smartest thing is to complete all the paperwork, even if it is painful,” says a founder.
As a startup founder, there is always the unfettered freedom in running your firm but this will certainly not be the case once an acquisition is completed. Generally, it will be the larger company that will call the shots. An investor puts it bluntly, “The founder will have to be mentally prepared to exit the company as the acquirer will like to run it on their terms and their global plans.” This would also require certain adjustment from the founders as well as one needs to adapt to the new environment.
The core of any M&A transaction is the financial value and every startup founder should be clear on the value of their firm. One founder says, “Once you know the value of your company, it becomes very easy to negotiate.”
An M&A proposal sounds exciting for a startup founder as it looks like a validation of the business, but it is easier said than done. There are many unexpected twists and turns before one can say a deal is successfully consummated. The image of a happy partnership does not reveal the substantial hard work that goes in prior to the finale. As one startup founder says, “In the end, no one builds a company to merely sell it but a call has to be taken when an appropriate opportunity lands.”