Ask an Investor: How can I create optionality after I get an acquisition offer?

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At inovia, we love optionality! We framed our 2017 Annual Summit around the theme of exploring optionality and building the power to choose your own outcome. After the acquisition of Well.ca and Luxury Retreats – both companies that we were fortunate to partner with – our managing partner wrote blog posts about how the role that optionality played in both transactions.

In both of those instances, optionality had been a long-held principle among the management teams and the ultimate acquisition process reflected that journey. But how can you respond to an acquisition offer if you haven’t built in optionality all along, while still creating the opportunity to unlock more value than the offer on the table?

Bring in a banker

The best transactions occur when a company is not for sale, but a banker who has worked within the scope of your company’s industry and understands the reality of VC-backed technology startups can help you negotiate nuances that you wouldn’t spot yourself. They have a good understanding of what’s market, and also insulate you from tough negotiation sessions and can help preserve your relationship with the buyer.

Your banker becomes the “fall guy/gal” who can push harder than you, someone who needs to remain hireable and agreeable, can. Futhermore, acquisition discussions are almost always more premature than a management team perceives, and you’re best off hiring a banker to help uncover other potential buyers while the first conversation develops into something more meaningful. Given that…

Notify any large and/or strategic partners and customers

Anyone with a right of first notice (or a right of first refusal) needs to be notified. Don’t stop there – while reflecting the confidentiality of the offer you have in hand and without shopping the deal, indicating to your partners that your timeline to exit is approaching can help motivate action. The time to do this is while you’re still at the LOI stage and haven’t yet entered exclusivity. Don’t be a bad actor, but do reclaim the steering wheel. You have a great offer, but the buyer doesn’t get to claim control of your company’s future.

Get your data room in order

If you’ve just gone through (or geared up for) a financing round, you’re ahead as you likely have your documents in order. But even if that’s the case, start auditing your financial statements, undergo an external code scan, square up any IP assignments from all developers (employees and contractors alike), clean up all your employment agreements, prepare fair and realistic forecasts, and make sure that your contracts automatically roll over in a change of control. Acquisitions can blow up during diligence and you can get ahead of most of the common challenges!

Some acquirers, especially those with a massive balance sheet that far exceeds your purchase price are more focused on managing risk than managing cost.

Tread lightly with a counter-financing strategy. There’s a common narrative that negotiating an acquisition offer with your stated intent to raise another round can help you bid up the price. Your acquirer sees that you’re going to build and become more expensive, and they’re motivated to pay a bit more now to prevent paying more later, right? Not necessarily. These dynamics absolutely do exist, but not universally. Some acquirers, especially those with a massive balance sheet that far exceeds your purchase price are more focused on managing risk than managing cost.

If you raise another round and grow, you’re significantly de-risking your business. Yes, the price goes up, but to an acquirer that’s only spending a fraction of their balance sheet, it’s not a material increase. Consider these dynamics before countering an acquisition offer with your intent to raise another round.

Do your homework on what’s likely to arise during negotiations

You would never raise a funding round without reading Venture Deals (right?), and you should never go down an acquisition path without understanding how to evaluate terms in your LOI.

No matter what stage your business is in, optionality is something you can be proactively driving towards before an acquisition comes your way. If you’re reading this without an acquisition in hand, don’t ignore the lessons contained within!

At earlier stages, optionality is about identifying accretive partnership opportunities, building networks, and evaluating multiple paths for potential growth. As companies enter the mid-stages of their growth trajectory, optionality takes on a whole new meaning. Now, it is about positioning your company for hyper-growth and building options for scaling your business to the next level. As companies mature, optionality starts to gear towards exit-preparedness. Understanding the value of receiving inbound interest (even if you don’t intend to accept!), building relationships with potential acquirers, and still maintaining a laser-focus on running your business is a difficult balance that later-stage companies are faced with.

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Sarah Marion

Sarah Marion

Sarah Marion is an Associate at iNovia, a full-stack venture capital firm that partners with audacious founders to build enduring technology companies. iNovia manages $500M across three funds, and holds offices in Montreal, Toronto, San Francisco, and London. For more information, visit inovia.vc