Are you considering acquiring a startup as a way of growing your business or acquiring new tech? If the answer’s yes, then you’ll need to concentrate on due diligence before you make an offer.
At NorthStar Venture Partners, we’ve been on both sides of the M & A table. We understand the potential pitfalls of acquisitions and we want you to avoid them. Here are 7 key questions to ask before acquiring a startup.
#1: What Do I Hope to Gain with This Acquisition?
The first question is one you need to ask yourself: what are you hoping to accomplish by acquiring a startup? There are many potential answers, including:
- Meet shareholder expectations
- Acquire new tech or intellectual property
- Expand market share
The specifics of the answer are important, but the essential point is that you must know why you’re acquiring a company. If you don’t, then you need to think about it before proceeding.
#2: Why Are You Selling?
When a business owner decides to sell a company, there’s always a reason -- and sometimes, more than one. While your due diligence should reveal what you need to know, we still recommend asking directly
The answer you get may be complete or incomplete. If it’s incomplete, then you’ve learned something important about the person who’s selling. It doesn’t necessarily mean they’re dishonest, but it is a red flag.
#3: What Are Your Biggest Challenges?
Every company, regardless of its status or industry, has challenges. Asking the owner what those challenges are is a good way to get a feeling for what you’ll be buying.
A wide range of answers are possible, but asking this question can help point you in the direction of necessary due diligence. You may also ask about general industry challenges to gauge the owner’s understanding of the market and how that might impact the status of the company you’re acquiring.
#4: Can I See Your Last Three Years of Financials?
A company’s financial statements are essential viewing before any acquisition. If a business owner refuses to provide them, it may be a sign that they don’t have complete financials or that they’re going to reveal something that’s disadvantageous to the deal.
Keep in mind that if you’re merging or acquiring a startup, three years of financials may not be available, particularly if it’s an early stage startup. If that’s the case, ask to see what’s available together with their business plan and projections.
#5: What is the Company’s Culture?
Company culture is an often-overlooked “soft” aspect of an acquisition. We suggest asking this question early in the process because if the two cultures won’t easily combine, you can save yourself time and money by stepping away.
Aspects of company culture to consider include:
- The company’s core values
- The company’s vision and mission
- Training and employee nurturing
- Processes and procedures
It’s not impossible for two companies with divergent cultures to merge, but it is significantly more complicated than it would be if your respective cultures were similar. It’s important not to gloss over company culture when evaluating an acquisition.
#6: What Is Your Timetable for Selling?
Acquisitions take time and asking about the seller’s timetable is essential to get an idea of what their expectations and needs may be. The answer may also help you to pinpoint potential issues.
A too-quick timetable may be an indication that the seller is either inexperienced or desperate. You need time to complete your due diligence and understand what you’re buying. A too-slow timetable might mean that the seller hasn’t yet made up their mind about selling, or that they need time to get their ducks in a row financially. Either way, you need to know what they’re thinking before you proceed.
#7: Are You Willing to Stay After the Acquisition?
Some companies have tech or products that will continue to appeal to a broad audience even if the owner or founder leaves. But sometimes, a company’s success depends upon the owner’s presence. If the latter is true -- or if the owner’s presence can help you with your integration -- then it’s essential to ask this question.
Of course, you’ll also need to negotiate the terms of an owner staying, including:
- How long they’ll stay
- What their role will be
- How and when they will exit the company
Whether the owner plans to stay during the transition or not, you should have them sign a non-compete agreement. That way, you won’t need to worry that they’ll take your money and use it to compete directly with you.
Acquiring a startup can be a good growth strategy provided you have a full understanding of the deal before you sign on the dotted line. The 7 questions we’ve outlined here will allow you to separate the good deals from the bad while achieving your growth goals.
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