Yarden Amsalem is a Senior VC Associate at Ibex Investors

How to maximize your M&A potential

Ibex Investors Senior VC Associate Yarden Amsalem spoke to entrepreneurs who have been acquired in order to highlight some best practices for M&A potential

As any founder can tell you, one of the potential outcomes of a successful startup is M&A. In fact, this seems to be on everyone’s mind these days as buyers are looking to leverage the current volatility in the market to achieve better returns and outsized growth through acquisitions. However, achieving a successful exit requires planning, strategy, and a thorough understanding of the process, which begs the following question: what can founders really do to maximize their M&A potential?
Whether founders are looking to exit now or at a later point in the future, we believe that it’s wise to start preparing for it sooner rather than later to strengthen your position for when an acquisition offer is on the table. So without further ado, let’s review best practices and advice we’ve gathered from interviewing some of the most experienced entrepreneurs we know, including Idan Tendler (Co-Founder of Fortscale, acq. by RSA, and Co-Founder of Bridgecrew, acq. by Palo Alto Networks) and Ran Ribenzaft (Co-Founder of Epsagon, acq. by Cisco), among others who wished to remain anonymous. We learned so much from their experience, and hope that you’d find it useful as well.
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Yarden Amsalem Ibex Investors
Yarden Amsalem Ibex Investors
Yarden Amsalem is a Senior VC Associate at Ibex Investors
(Photo: Niv Slakman)
How can founders maximize their chances to get acquired?
Mapping out all potential acquirers and maintaining relationships with key decision-makers at those companies (i.e. the people responsible for P&L and capital allocation decisions) could really help with strategic positioning. Even if you’re not (yet) interested in getting acquired, this could help generate multiple offers further down the line, so make sure to stay of mind with those companies. However, do not make it your life’s purpose; an indication of a desire to sell could lead to discounted valuations, while excessive time invested in building relationships with potential buyers is often time wasted that should have been spent on building. Ultimately, as cliché as it may sound, good startups don’t get sold, they get acquired, so the best way for you to maximize your acquisition potential is to operate as if your startup will never get acquired and focus on generating value.
Should founders engage an investment banker in the acquisition process?
On the one hand, bankers can really help generate M&A offers, guide on negotiation tactics, terms, and the process more generally, and help balance the scale between a startup and an often far larger acquirer. However, on the flip side, bankers are expensive and could create an appearance of desperation to sell that would inherently devalue the deal. Ultimately, we’ve heard of successful transactions taking place both with and without a banker in the mix, so this decision really comes down to:
  1. Deciding whether you need a banker to help generate more offers,
  2. Telling the right story to maximize valuation (more on this below),
  3. Positioning the banker’s involvement as an act of seriousness (vs. an act of desperation), and
  4. Choosing the “best” banker based on size of transaction, domain expertise, culture fit/team, and fee structure.
How can founders maximize valuation if the acquisition happens early in the startup’s life?
Coming up with valuation for an early-stage acquisition is not as simple as slapping a multiple on revenue. Often, this comes down to the negotiation process and telling the right story. The key here is to truly understand what potential buyers are looking for and quantify your value to them. Admittedly, while demonstrating tangible value (that is, net-new or upsell opportunities) is likely the best way to get on an acquirer’s radar, we’ve heard of founders being able to double and even triple their transaction multiple just by understanding their acquirer’s position, and how their startup could elevate it (e.g. Epsagon). As a founder, some of the key questions you should be asking yourself include: how long would it take the buyer to build your capabilities on their own? How much can the acquisition expedite the process? How much money can the buyer save with this transaction? How much revenue can you generate for them X years down the line? How do you complement their existing products?
The DD period is long and stressful. What can founders do to ensure it goes smoothly?
If you’ve signed an LOI with the acquirer (yay!), you are now entering the due diligence period, which could take up to several months in which the buyer will run a thorough investigation to reveal anything that may impact the transaction. At this point, both sides want to complete the transaction, and your incentive as the target company is to shorten the process as much as possible to mitigate potential risks to the deal. Every founder we’ve talked with agreed that the worst thing that could happen at this stage is for the buyer to uncover unknown skeletons that would risk your integrity, so make sure you are brutally transparent about anything this process may find (disgruntled employee, legal procedures, etc.). Finally, keep in mind that this process is largely run by the legal team, so make sure to keep in touch with your champion to maintain the relationship and ensure continued support.
What is the one thing founders should know about the M&A process?
At the end of the day, as revolutionary as your startup is, M&A really comes down to people buying people. Invest in researching the team you’d be working with, their personalities, culture, and objectives, and talk to other acquired companies and former/current employees to better understand the individuals making the buying decision to increase your chances of success. The entrepreneurs we interviewed even went as far as describing the post-M&A integration process as an ”organ implant”, whereas two separate entities are working to become one and maximize synergies. Ultimately, your interpersonal skills and ability to communicate effectively with the buying persona could really make or break the deal, so make sure you prepare accordingly for those interactions.
Yarden Amsalem is a Senior VC Associate at Ibex Investors, a multi-strategy investment firm