We’re all familiar with successful startups exiting to multinational companies. But we don’t often hear much about early or mid-stage startups acquiring other startups (likely because the small amounts paid for the acquisitions don’t make much of a headline!).
If you’re a founder and your startup has reached the end of its journey (for instance, run out of cash, unable to reach product/market fit or has been unable to scale), there are two options – either close down your business or look for an exit. In this article, we look at mergers and acquisitions in the startup space including the benefits for both the seller and the acquirer.
Benefits to the Acquirer
You may be wondering why another startup would contemplate acquiring your flailing startup.
| Reason | Explanation |
|---|---|
| Team | Hiring great people is hard. A startup that is for sale might have a great team you can plug into your business. |
| Technology | A tech startup, even one that hasn’t found product/market fit, may have developed some useful technology. An acquired startup’s website can be a good source of leads and SEO link juice (particularly if the acquirer and seller are competitors). |
| Customers or Users | Acquiring a startup with some traction can mean acquiring their customers or users. Customer acquisition is expensive and tricky, so going down the business acquisition route can be a cost-effective channel if done right. |
| PR | A startup acquisition is still a news story (even if it’s a large-scale acquisition!) |
Benefits for Seller
If your alternative is shutting down your startup and moving onto something else, any sale can be quite appealing. A startup founder who sells a plateauing startup may be able to salvage the following.
| Gain | Explanation |
|---|---|
| Job | Upon acquisition, you might be offered a job. This is one of the main reasons startups are acquired (i.e acquihires). |
| Customers are looked after | If you sell to a competitor, you’re hopefully ensuring that your customers will be looked after. They will have a continuing need for the product and/or service you provide. It’s good form to do your best to help them maintain access to your product or a product like it. |
| CV Burnishing | A successful sale looks much more impressive on your CV than a “failure”. Hopefully, this won’t matter much because you’ll be raring to go on your next startup, but you might need a job to tie you over till then! |
| Investor Relations | If you’ve raised external capital and you get some kind of value when selling your startup, you’ll be in a position to repay some of your investor’s capital. |
How to Structure an M&A
The way in which you structure an early stage startup sale really depends on the value you’ve generated. It’s not unusual for founders to sell their startup for a nominal sum. If this is the case, the acquirer will not want to spend much on getting the deal done. Generally, you will use a sale of business agreement to transfer the assets and IP from one company to the other.
If there is some residual value in the company, then you’ll need to think about how to structure the sale, so it works best for all stakeholders (investors, acquirer, acquiree, employees, etc.). If you’re the founder and major shareholder of the startup being sold, a share sale may be more appealing. Structuring the sale in this way means you won’t hold onto any liabilities. The purchaser, on the other hand, may not favour this structure. If you’re selling a startup with little residual value, it will be hard to negotiate on the structure of the sale.
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Deciding whether to continue with your startup can be difficult, but it’s better to get something out of a plateauing startup than nothing. It’s worth pursuing an acquisition, even for a nominal sum. Be realistic about the value of your business, get out, and move on to bigger and better things.
If you have any questions about startup exits, mergers and acquisitions or sale of business agreements, get in touch with our startup lawyers on 1300 544 755 or fill out the form on this page.
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