On average, it takes 6 to 10 years for a successful startup to get to a liquidity event. If one of … [+]
Entrepreneurs build startups for many reasons. On top of the list is the excitement of turning ideas into useful solutions and profitable businesses. Eventually, founders of a successful startup can either exit through an acquisition, IPO or by stepping down for others to lead and run the business.
Merger and acquisition is how most startups exit. On average, it takes 6 to 10 years for a successful startup to get to a liquidity event depending on the business model and industry. The fact is, for every acquisition that makes the news, numerous others happen behind the scenes through private equity firms and brokers.
If one of your main goals is to eventually sell your startup, it’s never too early to build an acquisition foundation. Here’s what you need to do.
1. Identify Potential Buyers
Future acquirers will most likely be your direct or indirect competitors. With or without an acquisition plan, one of the first steps in starting a startup is learning about the market and existing players. To also learn what might intrigue your competitors, research their short and long-term plan, past investments, acquisitions and current challenges.
In addition to online research which might not have all the answers, the fastest way to get the information you need is to interview the founders or leaders of those companies. Those decision makers may not be willing to share the details if you’re a competitor but many will agree to an interview if you’re still not known.
In other words, the best time to conduct this research is before launch. As mentioned earlier, competitive and market analyses are key to the early stages of any startup. Speaking with experienced founders in the space can help you prepare for upcoming challenges. Learning what interests the competition in terms of acquisitions is a plus.
2. Identify A Unique Competitive Advantage
There are many ways to differentiate a business but not all differentiators are defensible. Your research from the first stage will help you identify opportunities worth capturing. Those meetings can be your first practical idea validation test. You may quickly realize you were going to invest in a solution buyers and competitors don’t care too much about.
A unique competitive advantage doesn’t only have to be a patented product. It could be exclusive access to a key supplier or distributor. It could be leading a market your competitors are planning to enter which can make acquiring you a quicker way for them to capture this market. It could be a solution to an internal problem that costs them a lot of money and time.
Private equity firms are always open to answer any questions you may have about their interests, expectations, previous acquisitions, industry trends, potential buyers, etc. Since they make money from facilitating merger and acquisition deals, they are enticed to guide future sellers into what might increase their chances of successfully selling their startups.
3. Define Your Acquisition Metrics
In other words, what will make your business worthy of an acquisition and what will make you excited to sell? Even though the number might change over time as you discover new opportunities and priorities, if you don’t start with a goal, you won’t know when you reach a big milestone.
Selling a startup should not be the only motivation for starting the business. It can take years to create an acquirable business. Without interest and passion for the journey, you won’t last to see an acquisition. This does not undervalue the importance of an acquisition plan. You should have a clear idea on comparable exits, their key metrics such as sales and growth rate, competitive advantage, etc.
4. Connect With Potential Acquirers
A big percentage of startups get acquired after a successful partnership with acquirers as customers, suppliers or distributors. Find out how you can partner with the targeted list of buyers you gathered in the first step above. The least you can do is connect with and build a relationship with decision makers early on.
5. Use Acquisition Marketplaces
A healthy growing business, small or big, can always find a buyer. It may take time, but eventually someone will be interested in taking over. Nowadays, depending on your business and size, there are many marketplaces that can find you a buyer at a fair price. You can start by checking Flippa and Empire Flippers.
Finally, keep in mind that one of the most important variables that can increase the chances of a successful exit is timing. You don’t want to be too early or too late but early enough to have room to quickly capture market share and late enough for the market to adopt the business model as a viable and valuable innovation.
This is easier said than done but can provide for a timeline to evaluate the market by. At the end of the day, building a product people love and need is a success no matter the circumstances. Follow the list of steps above to prepare for an exit one day but focus on creating a valuable business today.