Previously, we outlined the most common exit strategies for startups and why it is important to think about those strategies early. One of the most common exit strategies is mergers and acquisitions, or “M&A”. For a startup, this means the sale of all or a part of your company to another person or entity. Although M&A can refer to a sale of assets or equity of a company, we will primarily focus here on equity.
There are two types of M&A transactions which are distinctly different exit strategies: strategic and financial. A strategic M&A transaction would be the sale of your startup to another larger company that is a competitor, within the same industry, or that would enjoy some synergy with its current business by acquiring your company. Think of Amazon acquiring Whole Foods, Facebook acquiring Instagram and WhatsApp, or Google acquiring YouTube and Waze.
An M&A deal with a financial buyer is when a private equity fund (or venture capitalist or other third party) acquires shares of the company for investment purposes. The buyer doesn’t necessarily operate in the same industry, although it may or may not have other portfolio companies that do. Airbnb and Uber are both majority owned by private equity investors (although both are rumored to be considering IPOs).
Even though the impact on your company and your operations of being acquired by a strategic buyer may be different than a financial buyer, the legal mechanics of the actual M&A process are typically the same. The parties will sign a letter of intent or term sheet, conduct due diligence, and sign a purchase agreement. The strategies and considerations when negotiating with a strategic versus financial buyer are the key difference.
M&A is a complex process, but having the right help from the beginning can make all the difference. For more information, please contact Ashley Edwards.