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Start-up Owner? Be Ready for a Predicted Mergers & Acquisitions Phase

12 October 2022

The kinds of headlines predicting bleak times ahead for acquisitions and venture capital began roughly 2007 lasting through the financial crisis until 2010. The latter has never gone away. While some now familiar names emerged in those times, most venture capital firms struggled.

In These Times, Venture Capital Seek Market Leaders

The same is true again with venture capital down by 30% in the second quarter of 2022 against 2021. This is now seen as a 50-year low. As such deals slow down, money spent on venture capital tends to gravitate towards market leaders in each area. This means other venture-backed enterprises are starved of money. Some survive and even thrive in this environment. Others seek merger and acquisition opportunities (M&A). It is often slow, and sometimes this slows along with venture capital. As shown in 2010, such annual deals went past $30 billion in 2010, then remained steady until 2014 when it passed $70 billion USD.

Seeking M&A? What You Need to Know

Whether your enterprise is seeking a buyout, or looking to buy out another enterprise, you should understand that a merger & acquisition process can take anything between 12 and 18 months. However, with a current slowing of venture capital investment, a merger & acquisition phase is anticipated in line with what normally happens post-recession.

Start-ups who are in such a position that they might attract such interest should begin positioning for acquisition right now. It’s important to realise that many such moves will be distressed, but you can avoid this with the right steps.

How Will a Buyer Evaluate Your Enterprise?

In most cases, a potential buyer uses a scorecard to evaluate your enterprise’s suitability. These will include terms of a deal, gaps in competition in their own organisation, whether you’re a strategic fit, whether work cultures are compatible, the positives of acquisition, and the ease or otherwise of integration.

Most of this is about their perspective on your organisation – not something you can directly influence or change. The last item is another matter though. You can improve your business desirability. But to do so, you need to understand three points about your organisation.

System scalability

Firstly, understand that what you consider scalable may differ from what a potential buyer or partner might think. Their perspective will typically mean that they could grow your enterprise within their framework without widespread investment, even if it meant simply funnelling sales and pipeline to your team.

Things like systems, IT infrastructure, logistics, supply, are all secondary and may or may not be part of an integration, their primary concern is whether a hands-off management can still facilitate growth.

The simpler this idea is, the lighter the lift will be, and the more desirable your enterprise.

Scalability can also include increasing capacity as well as growth, correcting problems beforehand, and of course, audits. All these issues should be ironed out before the merger or acquisition takes place.

Finally, deal with any problematic shareholders who may make the issue difficult, especially those who take up a lot of time. Do so early so that issues don’t come up later.

Getting your enterprise into the M&A process

Getting the right potential merger or acquisition partner to even look at you is difficult enough. However, if the market is unaware of your enterprise or its story in the market (or worse, does not have a desirable story), or your product, you will almost certainly get passed over.

There are two steps you could take here:

First, arrange meetings with a handful of investment bankers who know your industry and have experience with M&As. Breakfast meetings, invitations to visit, and regular phone calls will not only help your process but alert them to your desire to hire advisors.

Such advisors will need to understand everything about your enterprise, and what you would ideally like to happen. They will then alert buyers and properly explain your story. You may never instigate any such relationship, but what you share now will be useful later.

A second step is through improvements to the board. Such new appointments to your board could take advantage of anyone in their network with relevant experience. This is one of the fastest and most cost-effective ways to leverage access to partners and acquire experience.

Is my company considered a good business partner?

Important note: potential buyers look at multiple potential investment opportunities at the same time. Also recognise that you’re dealing with people, subject to all that means. They will focus their efforts on those who take the process seriously and willing to complete on the transaction.

Questions to consider:

What is the current state of your operating plan?

Do you have both a detailed plan for this year, and a 3–5-year plan on a higher level?

Do your plans set out hiring and design strategies?

Is the investment plan in a digital format at fully scheduled?

It is always a good policy to maintain a high-quality virtual data room regardless of whether you seek investment, or merger & acquisition, or neither of these. When kept up to date, your enterprise will always have this information to hand without putting it under any stress, or risk underperformance as resources redirect.

It's also good policy for CEOs to keep a ready list of the following:

  • Talent they’d ideally want to hire
  • Potential acquisitions
  • Potential acquirers
Keeping these lists as ideals to strive for can be the difference between getting your best targets and settling for one that is less than ideal.

Another important note: often, weaker competitors will get taken up by bigger enterprises during a downturn because they had good preparation, leaving bigger otherwise more desirable enterprises standing.

Many of the steps above will help you get through economic difficulties. It isn’t inevitable that you will be acquired, but it’s best to always be prepared for that eventuality. Create the option through proactive steps to make your enterprise more desirable.

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