One of the persistent myths about mergers and acquisitions is that companies buy start-ups and turn them into larger businesses. The truth is that CEOs buy small companies when they look 12 to 18 months in the future and see a strategic gap. Because an individual drives the demand for whether a transaction takes place, priorities and the deal itself can change several times before finalizing a sale.
Mergers and Acquisitions from the Perspective of the Seller
If you receive a buy-out offer, it’s important to keep in mind that it isn’t a one-time cash-out situation. Typically, mergers and acquisitions require retention, vesting, and re-vesting over a two to the three-year time period as well as the possibility of earn-outs over two to three years. If a CEO offers to buy out your start-up, it’s safe to assume you’re committing to a 24 to a 36-month relationship with the individual acquiring your company.
The Buyer’s Perspective
Before even considering mergers and acquisitions, companies must have a clear strategy with a specific vertical in mind. It’s important for the CEO or another business leader to consider every possible alternative. Some of these include straight acquisition, co-investing, building in-house, licensing, and partnering. This is the only way to determine which type of acquisition would work best for the company’s needs.
Purchasers should also keep their primary motivations for pursuing mergers and acquisitions at the forefront of their mind throughout the transaction. Reasons such as reducing taxes and economies of scale are typically secondary to enabling the company to enter a new market and filling an identified strategic gap that exists with resources or the company’s products.
Schedule a Consultation to Learn More
Mergers and acquisitions can be a complex topic no matter how long you have been in business. We invite you to contact Sudden Rivers Capital to request an appointment with a financial advisor to learn more about whether this strategy is the right one for your business.