Startup Guide in Mergers and Acquisitions

Navigating the intricate landscape of mergers and acquisitions (M&A) is a critical endeavour for startups aiming to scale and thrive. In this article, we cover a founders’ guide to M&A strategies, outlining seven key steps to a successful M&A deal.

In the growth and scale phase of a company, founders frequently contemplate the subsequent steps for growth, which may include:

• creating &/or sustaining profitable operations,

• securing additional capital, and or

• exploring opportunities for mergers and acquisitions (M&A).

Mergers, which involve the amalgamation of two companies to establish a new joint entity, frequently prove to be the most efficient means of acquiring new skills and resources. This approach can save both time and money while opening doors to novel market opportunities.

On the other hand, acquisitions, where one entity takes over another, offer an alternative avenue to either

• sell and embark on a new venture or

• acquire and continue building upon an existing one.

Undergoing a merger or acquisition often evokes a blend of excitement and trepidation among founders. Here at Fullstack, we guide numerous clients through M&A offers, ensuring they steer clear of novice errors and typical stumbling blocks. Here are seven steps to help you get through the process.

1) Introduction via Investment Teaser

When a company is in search of potential buyers, it often embarks on an auction-style process to identify suitable acquirers. In this process, a crucial tool comes into play: the investment teaser. This concise document typically consists of one or two slides and serves as a preliminary introduction of your company to potential strategic or financial buyers. It’s important to note that these teasers are often ‘blind,’ meaning they withhold the company’s name.

Key information typically included in investment teasers:

1. Investment highlights and the company’s unique value propositions.

2. An overview of the company itself.

3. Insights into the customer base.

4. Details regarding products and/or sales mix.

5. A financial snapshot covering EBITDA, revenue, profit margins, forecasts, and more.

2) Confidentiality Assurance through Non-Disclosure Agreement (NDA)

When investors have signalled interest, it’s standard process to organise a Non-Disclosure Agreement (NDA).

Typically, these NDAs include:

1. The defined duration for the NDA

2. The jurisdiction specifying the governing laws applicable to the NDA.

3. An outline of what constitutes confidential information.

4. Consequences in the event of a breach.

3) Detailed Disclosure via Confidential Information Memorandum (CIM)

With the NDA in place, the next phase involves initial due diligence. During this stage, the seller assembles a Confidential Information Memorandum (CIM), a comprehensive dossier containing more in-depth data for the prospective buyer, encompassing:

1. A comprehensive overview of the company’s history, including details about its team and ownership.

2. An elaborate description of the company’s product portfolio, business segments, and target markets.

3. Insights into competitors and the company’s distinctive value proposition.

4. A concise historical overview of key performance metrics, encompassing past financial trends, profitability, and financial projections.

5. Information regarding facilities and equipment.

6. Pertinent details about customers and suppliers.

7. Insights into the production or service processes.

8. Details about intangible assets, including intellectual property and research and development initiatives.

9. An overview of technological capabilities.

The CIM’s purpose is to provide sufficient information to allow an evaluation of the risk-versus-reward profile of the acquisition target, striking a balance between transparency and maintaining an element of intrigue to entice potential acquirers to submit a non-binding Expression of Interest (EOI) and advance further in the process.

4) Expression of Interest

An Expression of Interest (EOI) is an informal letter that outlines essential terms of an agreement, covering:

1. The initial purchase price and additional considerations made by the acquiring firm.

2. Fundamental assumptions underlying the proposed price.

3. The necessary due diligence process to finalize the deal.

4. The anticipated timeline for deal completion and any requisite approvals.

5. Any pertinent information crucial for facilitating the deal’s closure.

The primary objective of an EOI is to filter out less committed buyers and provide a platform for serious parties to demonstrate their dedication.

5) Thorough Due Diligence and Executive Meetings

Once a set of serious expressions of interest (EOIs) from serious contenders is received, the due diligence phase takes centre stage. This critical process allows both parties to delve into potential synergies and uncover any gaps or issues in the information available. During this phase, the seller facilitates access to a designated data room—a physical or virtual location established by the seller to house and share vital documents essential for an M&A transaction. Typically, these documents encompass comprehensive historical financial statements, significant contracts, corporate policies, strategic planning documents, and other relevant information.

Prospective buyers and their relevant representatives, including legal counsel, gain access to this data repository as they strive to construct a comprehensive understanding of the seller/acquirer, including a thorough assessment of the risks involved. This phase might also include on-site visits and meetings with the management team.

Following a meticulous due diligence process, the buyer/acquirer should be sufficiently informed to make a formal offer, usually presented in the form of a Letter of Intent (LOI).

6) Letter of Intent (LOI)

Following the successful completion of due diligence, the subsequent phase involves the mutual signing of a Letter of Intent (LOI). True to its name, the LOI is a written document that delineates the intentions of both the prospective buyer and seller concerning the merger or acquisition.

LOIs typically possess a non-binding nature and prominently feature the proposed purchase price. This step often marks the final stage before engaging in exclusive negotiations with a single potential acquirer, outlining a clear roadmap for the transaction’s ultimate closure.

A standard LOI generally includes:

1. The structural framework of the merger or acquisition.

2. The specified purchase price.

3. Critical closing conditions, inclusive of working capital requirements.

4. A detailed timeline and essential terms integral to the deal.

7) Exclusivity, Binding Agreement, and Finalization

Upon acceptance of the Letter of Intent (LOI), the concluding phase commences with the ultimate negotiations. This initiates a period of exclusivity, during which both the buyer (or investor) and seller commit to exclusively engaging with each other, discontinuing discussions with any other potential parties.

Typically spanning a duration of 30 to 90 days, this exclusivity period grants the prospective acquirer the necessary time to secure funding, establish any requisite legal entities for effective tax planning, and conclude any remaining due diligence before arriving at a definitive purchase agreement. A determined buyer may seek to expedite the deal within a shorter timeframe.

Subsequently, the seller formulates a binding offer, which represents a formal commitment by the bidder to acquire the target company. If both parties opt to sign, the final step entails executing a purchase agreement. Upon the signing of the binding offer, the transaction is officially sealed, marking the moment for celebration!

Conclusion

The process of mergers and acquisitions for startups is a multi-step journey that involves several key steps, from initial expressions of interest to the ultimate closing of the deal.

Throughout this intricate process, careful planning, transparency, and a strategic approach are key to closing the deal. Navigating the complexities of mergers and acquisitions requires expertise, and seeking guidance from financial professionals with exposure to M&A can be instrumental in achieving a successful outcome. Reach out to Fullstack, for more guidance.