With a difficult macro environment, many startups are struggling to fundraise, making the prospect of selling your company increasingly attractive. Plenty of founders mistakenly believe that an acquisition process will be similar to fundraising and thus have a good chance of success. Unfortunately, once that dream meets reality, the numerous myths of acquisitions quickly break down. Here are the most common myths founders believe at the beginning of an acquisition process.
Someone Else Will Do the Work
Myth: Hire an Investment Banker to do most of the work required for a sale process.
Reality: Alas, selling a company is incredibly difficult (versus being aggressively pursued) and getting a potential buyer genuinely interested requires a lot of work by the founders directly, not just leveraging the banker’s network. Plus, once you start talking about acquisitions, the thought will preoccupy everyone on your executive team, regardless of role.
The Process Takes 6 Months
Myth: 6 months of runway is enough to complete an acquisition process.
Reality: This is the minimum expected timeline for success, assuming you find a matching buyer immediately. Most companies are not that lucky, and during an acquisition process, you will have unforeseen costs, e.g. legal fees, that can shorten runway significantly. When we sold my last company, we underestimated the timeline, so the founders had to temporarily cover more than $100k of debt while we waited for the close.
Past Interest Makes a Sale Likely
Myth: Several companies in the past have expressed interest in buying your company, therefore, you should be able to create a competitive process.
Reality: Unless the potential buyer put a number in writing, they weren’t serious. A casual inquiry about a sale is a great distance from completing an acquisition and still a long way from even being willing to engage in a process. If a potential buyer does engage they will still usually need a compelling reason to complete the purchase, especially in a tough macro environment. Many acquisitions collapse in the last days before the final signature.
Acquisition is the Only Option
Myth: The fundraising environment is not favorable, so your only option is to sell the company.
Reality: This mindset tends to lead to a downward spiral, where the company focuses on the acquisition versus growth, making the company less attractive to potential buyers, creating a worse and worse situation. Instead, cutting costs, raising prices and working towards profitability will both extend the company’s runway and make it more appealing to a potential acquirer.
The media-driven myths around startup acquisitions have made the prospect of a sale seem more realistic to founders stuck in tough situations. However, reality is very different, and most founders will have to navigate towards a sustainable business model without relying on the possibility of an acquisition.
Sterling Road invests in idea stage and pre-seed B2B startups based in the US, Canada and UK.
