Chapter 13Paint the Walls: Nobody Buys a Fixer-Upper

Perhaps the strongest signal you can send to the M&A market is when you already have an actionable offer from another company unsolicited. As explained in earlier chapters, this means that the initial terms and considerations are all spelled out, and you are willing to accept and work for this company based on those terms. Inbound emails from big company corporate developers does not constitute an actionable acquisition offer. Furthermore, a great offer from a company that you are unwilling to work for is also not actionable . One other nuance here is that the offer is from an inbound inquiry, meaning you did not solicit or ask a company for such an acquisition offer. This is important because you as the seller have all the leverage when it comes to an inbound inquiry, and the interested buyer potentially has more patience and goodwill to you as you fulfill your duty by finding out the best possible return for all the shareholders.

When you do have this unsolicited inbound offer in hand, typically the buyer imposes a tight deadline as well as an exclusive period once you sign the initial offer, making it close to impossible to get even an interested buyer to spin up a process to issue your company an offer. So the best course of action would be to quickly reach out to partners and potential acquirers who are already familiar with your business, and directly talk to the key decision maker and let them know that you received a good offer to buy your business. Do not disclose the terms but do let them know that timing is tight and you will likely take this offer. This would also be an excellent time to onboard an experienced banker who can help you negotiate and discover the true market value for your company. Again, do not take the first offer presented to you, take your time and talk to the board and do your research. We will cover more on the tactics and negotiations in the next section.

The next best thing if you do not have an actionable inbound acquisition offer is an inbound investment offer. Potential buyers know that once a new investor is brought onboard, the cost to acquire the same company would be significantly more expensive and also become more complicated as more stakeholders are involved. So if an exit is something you are considering, seek out what the capital market has to offer first to build leverage before going into the M&A market. Again, similar to what I explained in the prior section, ideally the investment offer is inbound, actionable and then it is best to approach existing partners with prior relationships to explore possible exit plans.

When presenting to a potential buyer, while there is no formula for success, typically one thing they always look for is some type of market differentiation. Is there something that is truly special about what you offer in the market? Is there a close second, or are you one amongst the pack? For Polarr, we worked on a number of products and services over the years. But one thing that remained tried and true was our specialization in leveraging low level web technologies that does not require any server infrastructures in building highly sophisticated photo editing tools for professionals. While this limited our potential target buyers to a short few, it nevertheless provided us with a differentiation that buyers saw as unique to Polarr.

While coming up with a thesis around what product/service differentiation your company offers, it is critical to come up with metrics that measure the impact or effectiveness of these offerings. If in fact this differentiation is industry leading, its metrics and downstream customer impact and growth rate should speak for themselves.

Having this differentiation may require shelving a bunch of products or services that do not have traction or are not central to your core expertise or business. Having too many specializations can be intuited as unfocused. However, one thing to be cautious about is that what a buyer sees as differentiating about your business may not necessarily be what you believe to be. So it is best to do as much homework as possible before doing outbound reach out and come up with potential theses on what joining forces look like, and what unique value propositions your company can bring to the table.

Your team plays a major role in the acquisition. What acquiring companies look for are domain expertise, culture fit/add, efficiency, locality, and willingness to work for them down the road. It is important for you as the entrepreneur to identify and reduce roles that do not fit the criteria. For example, supporting functions such as HR and marketing often are not value add in an acquisition unless you are a HR or marketing company. At the same time, for team members that are disgruntled, flight risks, or poor culture fit, it is best to offboard them before engaging with the buyers as such personnel issues could only make things complicated later on. One thing that is potentially problematic for a M&A is when you have a distributed team that is fully remote as opposed to one that all goes to a physical office. Believe it or not, I personally think the reason why Polarr was turned down by so many Silicon Valley tech giants was because we had a distributed team post pandemic and not enough of the core team were physically in the Bay Area. During the pandemic, a good chunk of our local employees moved to remote locations, and we unfortunately made the mistake of not asking all our employees to return back to the office when the pandemic ended. As all the other companies returned to office, when they ran due diligence on my company, they found the remote nature of our business becoming a sticking point. While there are always companies that are fully remote, having a remote-first work setup reduces the number of potential acquirers significantly. Finally, there may be advisors who are still being issued stock grants that add little or no value, or past cofounders who own majority stakes. It is important to be thoughtful and try to clean the cap table as much as possible and also reduce unnecessary advisorships as all of these will come up during personnel due diligence. Even though most of these will not result in any issues for the buyer, it would make the process a lot smoother when everything is tidy on the cap table and it's clear to the acquirer who and what each person does in the company.

Finally, and probably one of the most important areas to work on, is to reduce burn rate by slashing pet projects, unnecessary marketing spend, and redundant roles. The bottomline is, M&As take time, and sometimes it may not happen in the first few iterations. You need to make sure there is enough cash reserve to live and fight for another year. Furthermore, if you are burning cash and the prospect of fundraising is not great, you will be at the mercy of the potential acquirers and the terms will be dictated to you. You need to have the option to walk away from an offer, and the best leverage for that is having a cash flow positive company or one that at least is breaking even.

Now I understand that this doesn't apply to deep tech companies or those whose business models require raising a ton of cash before they can become profitable, and in that case, it is still prudent to be frugal and reduce cash burn, and also look for bridge loans and alternative financing options like debt to extend the runway so that the right acquisition offer can be found.

Now these are only a handful of areas that you could potentially improve before hitting the market. Nobody knows your company better than you, if there is one aspect that is not mentioned but keeps you up at night, then you should address it before approaching acquirers. Now let's take a look at how to come up with a list of potential acquirers.