Step 1: Build Assets

Most acquisitions happen due to an acquirer wanting one of three assets: a team,
product, or revenue. And if lucky, all three. 

Nothing compensates for building a great product. Products with unique

technology command multiples. Both Oculus and Cruise were bought for billions
before they went to market.

Great technologies can still fail to be acquired. Acquisition decisions are made by
humans, and humans make decisions based on relationships. Therefore, you should
focus on building relationships with partners through technology integrations and
reach competitors indirectly through the press.

The key is to be making these technology and business investments while 

buildining your product, and before you actually decide to sell.

Step 2: Decide to sell

The first step of an acquisition is to make the mental decision to actually sell.

Like fundraising, getting acquired is a process. It is long and grueling. Based on

experience, it takes on average six months to finish, though it can go faster
depending on your pre-existing relationships in Step 1.

The process will also be taxing. Outside of a close circle of investors and advisors,
We may will not be able to discuss it with anyone — including our own employees
— for some time.

Make sure you’re committed to seeing this through.

Step 3: Create a target list

Once the decision to sell has been made, the next step is to compile a list of
contacts at potential acquiring companies.

Focus on those companies that could have a strategic interest in your product.
Every acquisition, big or small, is predicated by an acquirer asking: “How much
can I accelerate my product roadmap?” Focus on companies where you share a
user, or your technology enhances theirs. Plaid was worth $5 billion to Visa, not to
Google.

Include both public companies and startups on your list. Public companies offer
more immediate cash, while startups typically offer more future stock. Public
companies move faster once interested, given their corporate development (corp
dev) teams, while startups don’t have such functions until Series D.

In either route, the key is to find the right champion. Acquisitions are made not by
companies, but by humans making decisions — typically the CEO (at startups) or
Director of Product (at public companies). Start with them, not corp dev.

Step 4: Email outreach

With points of contact identified, it’s time to reach out. Keep emails concise,
expressing value while building urgency.

It’s a balance of enticing without divulging, considering there is no NDA in place

yet.
So start with warm intros. Email the relationships you built in Step 1. If reaching
out via a second degree connection, go through your investor/advisor, and provide
them with a one-paragraph1-para company brief to forward.

Again, it is very important to keep outreach tight. Not telling friends, family, or
employees (or the public). Premature internal communication can increase anxiety
and halt productivity, while external communication can reduce leverage in future
negotiations.

Step 5: Initial conversation

You should get a response fairly quickly if there’s interest, with an invitation to
meet up.

A surprising element of the first meeting is you don’t actually need a pitch deck.
This is a conversation, not a pitch. Your goal is to build a rapport over shared
values and vision.

Keep the conversation organic, but try to cover the following topics: 

     Personal – Sharing individual backgrounds, while emphasizing domain

expertise
     Vision – Expressing vision for the market, and ask for the acquirer’s
vision
     Product – Describing your product, in the context of the acquirer’s vision
     Brainstorm – Ideating with the acquirer on synergies between your
products

You really want the acquirer to come out feeling that you have the technology and
expertise to accelerate their product roadmap.

If it feels more like brainstorming and not talking, or play and not work, you’ll
know it’s going well.

Step 6: NDA
If there’s interest the acquirer will ask to dive deeper into technology and
business. They’ll also loop in corp dev to facilitate. Before proceeding though, ask
for an NDA.

This is important to protect the confidentiality of any information shared.

Specifically, an NDA will enable to request the deletion of any information from
the companies that don’t acquire a business. All companies are willing to sign for
this reason, as it’s in their own best interest.
Going forward, make sure all future correspondence, documents, and presentations
have a “CONFIDENTIAL” disclaimer.

Step 7: Technical deep dive

With an NDA signed, the acquirer’s CTO or head of engineering will kick-off two
sets of meetings: a product demo and architecture overview.

The product demo is standard fare. Describe who the user is, what problem they
have, and how your app solves it. If possible, sprinkle in anecdotes how the
product enhances the acquirers’.

The architecture overview should mirror the product demo. Describe the systems,
languages, and data flow at each step of your app. The acquirer will assess for
quality and scalability, ultimately trying to determine how difficult it is to integrate
your product into theirs. A whiteboard exercise is effective here, but you can send
a technical doc afterward for posterity.

The key is to position your conversation in the context of “what was difficult about
this to build.” You ultimately want the acquirer to take away that they need you to
build this product, and cannot do so themselves. 

Step 8: Business deep dive

 In parallel to Step 7, you will be asked by the CFO or head of product to provide
information on your business. The type of information requested typically
includes:

     Metrics – signups, customers, revenue, growth rate

     Business – fundraising history, business model, patents
     Product – features, roadmap
     Org – team bios, expertise

Here the acquirer is trying to assess your future value to their team, product, or
revenue. Specifically: “How many months will this accelerate our product and
hiring goals?,” and “How much additional revenue will this product bring in?”

Convey answers in person, and make sure these points come across. Be honest and
answer with integrity. The ultimate acquisition price the acquirer will offer will be
a premium, from their perspective, on future revenue acceleration or cost
reduction.

Also, know acquisitions are a two-way street.

Asking the acquirer about their business here, just as much as they ask about yours.
Cover tech stack, roadmap, financials, challenges.

Step 9: Q&A
Not all questions asked by an acquirer need to be answered. There are a couple that
seem innocuous, but can be detrimental. Namely:

 “What price are you looking for, and what have others offered?”
 “What is your cash balance and monthly burn?”

The first question is designed to ascertain an anchor. A company could offer you
$100 million, but if you tell them you’re looking for $50 million, you’ve just
anchored yourself.

And if you disclose who that offer is from, you reduce the leverage of imagination.
Google is more likely to bid higher if they believe the offer is from Facebook, not
from Yahoo.

The second question will come in the form of requesting a cash or balance
statement. The acquirer’s intent here is to gauge your runway. If they determine
you have three months left, they’ll wait two months to bid when the leverage is
less. 

The important note here is that the acquirer doesn’t actually need all this info to
make an offer. The acquisition price is a function of the future value your company
can provide, not your cash on hand.

Keep the acquirer focused on that, and push back on unnecessary requests.

Step 10: Verbal offer

At this point, a company has enough information to decide if they want to make an
offer. 

Getting a verbal offer is understandably a hard goalpost to get past. It forces the
acquirer to finally and explicitly quantify their interest. You need to convert their
inertia into qualified interest.

Remain steadfast, and you’ll get a verbal offer. It’ll be high-level, conveyed by
total deal value and percent allocation of cash/stock. That’s all you need to decide
if you want to proceed.

Step 11: Telling the team

To get to concrete terms, the acquirer will need to interview your team. This is
understandable as the intent of acquisitions is partly talent, which means you’ll
have to disclose the potential deal to your team. 

This is an important step. Your team joined your startup for a mission and placed
their trust in you. It’s your responsibility to convey that an acquisition is the best
way to fulfill that mission.

Prepare a pitch deck. Review your company’s original vision, and reframe the
acquisition as the fastest path to achieving it. Share your product roadmap again,
and explain how each acquirer could accelerate it. The goal is to get the team
excited before they proceed to the next stage.

Step 12: Interviews

The acquiring firm will now formally interview your entire team. Their objective is
to evaluate domain expertise and performance leveling, so as to inform overall deal
price and compensation.

The process will typically be the same as a normal onsite interview — one
behavioral, one technical, and one design element. But like a normal interview,
success is mostly a function of practice.

You get two weeks to prep, so use that time to help your team thoroughly review.
Have regular 1:1s to check-in and assuage any anxieties as well — controlling
nerves is half the battle.

As hard as it is to admit, there is no guarantee that the full team will pass their
interviews with each potential acquirer the first time round. So schedule your
interviews in descending order of company preference. That way by the time you
interview with your first choice acquirer, your team will have had
enough practice to will pass with flying colors. 

 Step 13: Term sheet

After the interviews, the acquirer should turn around a formal term sheet in 48
hours. The document is about 5 pages, and details one of four acquisition types

     Waive and release – a simple waiver to hire the team

     Asset purchase – an agreement to buy specific assets along with the team
     Stock purchase – an agreement to buy the company alongside the assets
and team
     Merger – an agreement to formally merge both companies into one entity
Waivers are less complex, involving less paperwork and in turn less legal fees.
Mergers have a more favorable tax treatment but involve greater complexity and in
turn higher legal fees. Most acquisitions by consequence fall in the less complex
end.

The term sheet will outline deal specifics: a) cash/stock allocation to the preferred
vs. common, b) cash/stock retention packages to the employees, c) indemnity and
liability periods, and d) escrow period for cash disbursement (typical is 90% at
close and 10% at 12 months).

Step 14: Negotiation

Negotiating the term sheet will be one of the more stressful parts of the acquisition.

The idea is to not negotiate positions, but instead align interests with facts to
negotiate. Ask the acquirer to walk you through which facets interest them (team,
product, revenue), and what assumptions they are making to assign a value to those
facets. Debate the assumptions not the positions, and use competitive offers
(without disclosing names) as an anchor.

If you don’t have other offers, that’s okay — find the best alternative. If the
acquirer says they value team retention, anchor compensation discussions with a
higher job offer. If the acquirer says they value your SaaS revenue, propose a
factual SaaS multiple of 10X for deal value. You can usually increase your offer by
20%-50%, with more flexibility the more bids you have.

You can go through two rounds of negotiation before it gets frustrating for parties.
Don’t short-change your employees/investors or argue minutiae with the acquirer
— you’re about to work with these people so be equitable. Startups are a long
game, and reputation compounds over cash.  

Step 15: Due diligence

Signing the term sheet enters you into an exclusivity period. This means you can
no longer engage with other buyers, while the acquirer conducts formal due
diligence on your company. 

The diligence stage is where the acquirer tries to validate the information you
previously shared. Not dissimilar to a financing round, they’ll typically request
official documents relating to: 

     Legal – articles, bylaws, cap table, msas, vendor agreements

     Employees – offer letters, piia agreements, census data
     Financials – balance sheets, p&l statements, tax returns
     IP – patents, trademarks, open source code

Remember it will likely take you a couple of weeks to compile and review
everything.

Step 16: Definitive agreement

Simultaneous to diligence, the acquirer will prepare the definitive agreement for
the acquisition. 

This document covers the same facets as the term sheet, but in 100+ pages of
detail. The documents are written by external legal counsel, take weeks of
revisions, and will involve frequent negotiations over legal jargon. 

Fair warning — lawyers love to lengthen this stage of the process (they are billed
by the hour). Be prepared and actively involved. If you can, try to find an
independent third party to help weigh which clauses were worth negotiating

Once you’ve agreed on all the final documents, collate them for signature. Once
signed, the deal proceeds are released by wire, and the acquisition is legally bound
and closed.

And final step is Closing.

Here the company is sold! 

But while the deal is complete, there’s still some work left to close the business.
Namely, paying off liabilities and disbursing assets.
First, the need to pay off remaining payroll and  or PTO. Next, is closing any
accounts payable (to vendors) and collect any accounts receivable (from
customers). Once accounts are settled you can disburse the proceeds from the
acquisition, file for dissolution, and pay taxes. The combination of legal fees and
taxes will total six to seven figures — so plan accordingly.

End-to-end, the entire acquisition process takes about six months. Two months to
the term sheet, one month to negotiations, one month to a definitive agreement,
and two months to dissolve.