From NDA to LOI: What really happens when your startup is being acquired?

What does an an acquisition process look like?

There are two kinds of acquisition processes: planned and opportunistic. A planned process is where a company looks for a suitable buyer for their business, whereas an opportunistic process is initiated by a buyer.

In either case, the process begins with first building a strong list of potential acquirers, as covered in Part 1 of this series. Then, it’s a sprint with those potential acquirers that (hopefully) results in Letters of Intent.

Getting acquired is a legitimate strategy for building your business

From there, it’s time for due diligence, which can last several weeks. With some luck and a lot of hard work, the deal will close and you’re on to post-acquisition integration.

The shopping sprint

In an opportunistic process, an acquirer approaches a company it wants to buy.

If you’ve been approached and decide to pursue an acquisition, you have a short time frame to continue that conversation and reach out to other companies on your potential acquirers list.

In your initial conversations with the active buyer, you can expect to learn how much they intend to offer, as well as set up a framework for the process.

In a planned process, you control the timing, but you have to think about a triggering event at your business that creates some time-bound pressure.

In opportunistic processes, the triggering event is being approached by an active buyer. For venture-backed companies in a planned process, the triggering event is often a funding round. You might become interesting to the companies on your list if they think they can acquire you at today’s valuation versus at a higher valuation after you’ve raised another round.

That’s when things get hectic.

The road to an LOI

Regardless of how the process started, you, your board and advisers have a few short weeks to negotiate with all interested parties. As a founder, you’ll either reach out to potential buyers yourself or will ask board members to do so on your behalf.

Buyers will often want to work with a founder/CEO directly, but you can’t avoid running in parallel. Realistically, the entire process from start to a signed Letter of Intent (LOI) could be over in up to three weeks.

The goal of these short, stressful weeks is to get the best terms possible in an LOI from one or more potential buyers. Companies that are active acquirers will move fast and respond in a day or two with interest. Then, you will negotiate to determine the price, timing, team retention and other high-level terms.

When you are working toward an LOI, keep in mind that you are determining the next phase for your company and team. Even if the sale price isn’t going to break records, this is an opportunity to create a successful outcome that will maximize your long-term impact.

The shopping sprint ends when you sign an LOI, putting you in “no-shop” mode. This is when the due diligence process with the selected buyer begins. An LOI is not a legally binding agreement; it does not guarantee a sale. Generally speaking, either side can walk away by simply letting the LOI expire.

Note: This is not an open-air auction. There should be NDAs in place throughout the shopping sprint. You are not sharing details with buyers about who else you’re in discussions with or how much others are willing or likely to pay. This is to both secure current offers and to optimize the price of any potential offers.

Bring in bankers?

Potentially, yes.

Acquisition processes can be run with or without bankers. The more complicated the situation, the more a banker will help drive the process.

The variables here include timing, cost, the competitive landscape, your company’s momentum, and the public and private markets. Your board and advisers should be helpful for deciding if you want to bring a banker on board.

Diving into due diligence

Buyers will often have a defined due diligence process. The goal of this phase is for the buyer to get to know the company from various angles.

They’ll ask hard questions and discover discrepancies — many of which exist not because of deficiencies, but because no two companies are set up the same. As CEO, it’s your duty to have all the needed information ready and organized to expedite the process.

The diligence process is as much for the buyer’s full M&A team as it is for the deal owner — the relevant business/product executive championing the deal internally.

It’s the deal owner who will convince the rest of the stakeholders to proceed or walk away from the deal. This is also the person who will, on the “day after,” take on the acquired company and wear its success or failure.

Defining “day one”

After the LOI has been signed, you will decide details around employee retention, team integration and reporting structures.

There can be a tendency to over-index on the deal terms and not spend enough energy on the integration or “day after” experience. As CEO, you should work just as hard to understand the “day one” experience for your team.

For your team, successfully navigating an acquisition depends on how many certainties you can define and deliver. Focusing on the minutia now sets you, and your team, up for success in the next phase.

Questions to consider:

• What are the buyer’s expectations for the success of the acquisition? What would be your business targets?
• Who will you and your team report to? What is your team’s charter, and who defines it?
• Who on your team stays? Who goes?
• What does the compensation structure look like? Will there be parity in benefits?
• Where does your budget come from? Is there room for headcount growth?
• How integrated will you be with the “mothership?” Or will you continue to operate independently? It’s important to understand this from both a product and business, as well as cultural, frame of reference.

The goal is to build a roadmap for your team that reflects what the next one to three years will look like. Ideally, these conversations will result in integration plans that everyone can be happy with. These important details aren’t usually written into the deal itself, but they are crucial to integrating the team and product smoothly.

You’ve been acquired!

These two articles are just a thumbnail sketch of what happens during an M&A process. The goal is to spark thought and conversation way before any M&A activity.

With experience of being on both sides of the table, we know the best outcomes happen when strong leaders of good companies have planned for all eventualities.

While IPOs may get more headlines, a well-timed, well-planned acquisition can mean even larger opportunities for you, your team and the technologies you’ve built.