10 Lessons Learned after $5B of M&A

Over the last few years, I’ve been lucky to work with founders and management teams to sell about $5b of startups. During that time, I’ve observed a few things about M&A. Here are 10 of my learnings:

1. Most acquirers have built a relationship with the acquisition target. Suitors introduced during a sale process wrestle with doubts of understanding what they don’t know about the space, the team, and the business. Leaders should build relationships with partners and potential buyers if M&A may be in the company’s future.
2. Startups are sold to individuals, not to companies. The champion - often a product leader, the CEO, or a general manager - risks their career by buying a startup. The deal sponsor must construct a business case, forge trust with the startup’s team, and amass enough conviction to overcome inertia and internal friction to consummate the sale.
3. Be wary of first-time acquirers. They may lack the internal know-how to complete a transaction. Acquisitions require significant cross-functional alignment. Mustering consensus can be problematic during the ordinary course of business, and it’s even more challenging under duress.
4. The deal isn’t done until the money is in the bank. I’ve seen acquisitions fall apart the day of close, out of the blue.
5. There are three types of sales: team, team & tech, and team, tech, & traction. Each one is more valuable than the last, provided the company grows. The greater the revenue, the more likely the acquirer prices a target on a revenue multiple.
6. Should a management team and board decide to sell, they should understand the buyer’s motivation. As Simon Sinek would say, start with the why. It will inform how to weave the most compelling vision of a union.
7. The startup can exert maximum leverage immediately before signing the term sheet. Once the term sheet is signed, the startup’s leverage vaporizes. The startup must plod through the days or months of maximum weakness: the exclusivity period between the term sheet signing and the definitive agreement. Negotiate the crucial points before signing the term sheet.
8. The essential components of a merger term sheet often include:

• price: the amount and the structure (cash vs stock; merger or asset purchase)
• executive compensation: especially equity revesting
• escrow terms: percent of the consideration in escrow, length the escrow, insurance
• net-working capital: is the purchase price cash-free/debt-free?
• no-shop period: how long is the exclusivity?
• fundamental representations and warranties: the key assertions the target makes about itself and its business. Best to talk to your friendly company counsel on this one.
• break-up fee: if the transaction is large enough to warrant one

1. Regulatory delays have become more common recently when selling to a large technology company. Most mergers close on time. But should a transaction be subject to review by the US, the EU, the UK, or other jurisdictions, the closing period can take many months, a year, or longer.
2. Referencing a buyer paints a picture of the company and teams' future post-sale. How does the acquirer integrate a company? Treat founders throughout their vesting period? What will it be like to work there next year?

Sales processes are convoluted and complex. There are some parallels to raising capital in that success rates improve by?building auction pressure . But the mananging the nuances are critical should you decide to pursue a merger.