M&A Startups

A Strategic Or PE Firm Wants To Buy Your Company. Now What?

Illustration of a hand reaching out of computer screen to shake someone's hand.

By Gaurav Bhasin

As a founder or CEO at a technology company, at some point you may get an unsolicited approach from a strategic buyer or a private equity fund to buy your company.

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Let’s discuss questions to consider when this happens.

Do you want to do a deal?

Do you need capital for growth and liquidity for yourself and your shareholders?

If the buyer is a strategic party, is this a company that can accelerate your sales significantly by selling your products via their established sales distribution channel that can be value enhancing for both parties?

Is this strategic buyer one that your company would fit well into post-acquisition?

Will your products fill out the solutions portfolio and accelerate the product roadmap of the strategic party, improving go-to-market?

Will your team be happy working there?

What do you want to do?

Next, consider what you’d want to do if you sold your company.

Would you want to stay at a strategic for two to three years post-exit?

Gaurav Bhasin, managing director at Allied Advisers

If the approach is from a PE firm, could the deal allow for immediate liquidity and the ability to rollover some equity for a second bite of the apple on the next exit? Could it allow you to either continue to run the company as CEO, or have the buyers bring a seasoned operator to manage growth for the next stage?

These are questions unique to each company and should be thoroughly thought through with your co-founder or senior team member, trusted adviser or investor.

Based on your responses, if there is a desire to consummate a transaction, there are some additional questions to research.

Researching your buyer

Now you have to determine if the buyer is serious and if it really has the ability to close a deal.

What is its past transaction history and record of successfully closing transactions and integrating acquired companies? How much does it pay and how does it generally value companies?

If the buyer is a PE firm, does it have a history of acquiring companies and growing them organically, or via acquisitions, and at what multiples did they exit upon selling after their hold period?

How did management fare in prior transactions with the PE firm?

If you determine the buyer is credible, you should probe into reasons why it approached your company and what it intends to accomplish via the transaction. Is the buyer serious about acquiring your business or is it simply “kicking the tires?”

Getting a competitive offer

What if this buyer falls through — have you created other options?

Based upon discussions with your trusted group, if you determine the timing is right for your company for a strategic transaction and the inbound may be worth considering, you should run a proactive process to enhance a successful outcome.

While there is a saying that “companies are bought, not sold” this ends up producing a suboptimal exit outcome if the company only engages with the inbound party.

Competition for your company among buyers helps enhance exit value or valuation at which you would raise capital.

The company can benefit by running a proactive process to select a targeted list of the likely prospects, which could be strategic and/or PE firms depending on your company sector, size and focus on getting the buyer groups into M&A meetings.

The goal would be to get additional parties to the table as a greater number of buyers drives up valuation and improves deal terms. At the same time, you should keep the inbound party engaged.

Buyers have differences in their ability to pay based on their size and perceived synergies with your company, and running a process surfaces the party that can provide the best valuation and fit.

Competition for your company provides negotiating leverage and will help provide a “market check” to ensure you are getting paid maximum value and appropriate deal terms.

In a bilateral process, the buyer knows that it’s the only horse in the race, so will take advantage of the situation to squeeze the seller in many ways. Similar to selling real estate, you showcase your home to multiple buyers to get the best value versus showing it to only one buyer.

Many strategic buyers use former bankers in their corporate development function, and PE firms are masters in dealmaking. Consider engaging a banker to level the playing field as sell-side bankers know what the market is in terms of valuation, structure and deal terms, and who the potential buyers are for your business to reach out to. The banker will manage process timelines by running structured processes, which can be beneficial to the company.

This also allows the management team to focus on running the business by providing a supporting team and strategic guidance, and levels the playing field by adding skillful team members on your side during an exhausting M&A process.

Gaurav Bhasin is managing director with Allied Advisers, a global technology-focused boutique advisory firm headquartered in Silicon Valley (with a presence in Los Angeles, Tel Aviv and Mumbai) focused on investment banking for entrepreneurs and investors.

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Illustration: Dom Guzman

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