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Three questions to consider when preparing for the next M&A wave

September 29, 2022   by Alyssa DiSabatino

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Startups looking to ride the upcoming M&A wave need to hold a mirror up to their businesses and see themselves through the eyes of a potential acquirer, said the author of a recent Harvard Business Review blog.  

And insurance startups, can get the M&A ball rolling by asking — and adapting to — these three questions: 

  • How scalable are my systems? 
  • How can I insert my company into M&A deal flow? 
  • Is my company considered a good business partner? 

Based on patterns from the 2007-2010 recession, the current slowdown in venture capital investment suggests a post-recession-type M&A wave is on the horizon, wrote Todd Klein, partner at venture-capital firm Revolution. 

“Regardless of whether you plan to seek a buyer or take advantage of shifting market dynamics to make a strategic acquisition, it’s important to note that M&A processes typically require 12-to-18 months from start to finish,” he said. “Startup founders can start positioning themselves now to be acquired in that wave.” 

During the acquisition process, M&A buyers often consider factors such as deal terms, strategic fit, competitive gaps filled, cultural compatibility and potential upside. While they’re all important, many of these are more intrinsic and less actionable. 

One actionable category that startups can work on is their ‘lift’ (i.e., how hard will the purchase and subsequent integration of a company be?). The easier it is for a buyer to actualize a startup’s value, the easier it is to lift. 

Startups can start the process of making their prospective buyers’ lift lighter by determining how to become scalable. 

From a buyer’s perspective, scalability means they could grow immediately without requiring a substantial investment in infrastructure. “While the buyer may eventually integrate your back-office systems, IT stack, and supply and logistics networks, they will first ask whether they could take a hands-off approach and still get value,” Klein wrote. 

Offering growth capacity, audited financials and cleaned-up messes are all components of a scalable startup. “If you’ve been wavering on closing an underperforming division or settling nuisance lawsuits, do that now,” he added. 

The next step for a startup to take before the next M&A wave begins is to determine how they can insert themselves into the deal flow. 

The first way to do this? Meeting and getting to know three-to-five investment bankers, Klein wrote.  

An advisor will be able to accurately tell your startup’s story to a potential acquirer, but only if they understand your company, team and strengths. These discussions may also provide you with valuable industry insights. 

A second, less traditional way to enter the M&A stream is through strategic board enhancements.  

A startup can gain access to potential business or strategic partners inexpensively by adding board members in categories adjacent to its industry or who have recently retired, suggested Klein. 

The last consideration a startup should keep in mind is whether they’d be a good business partner for potential buyers. Questions to reflect on include: 

  • Are your operating plans current? 
  • Is there a detailed version that encompasses the current fiscal year as well as a higher-level plan for the next three-to-five years? 
  • Do these include detailed organizational design and hiring strategies? 
  • Is your IP fully scheduled and in digital form? 

By answering (and maintaining the answers to) these questions, startups can quickly offer fresh information when it comes up in a potential deal. 

From there, startups on the market should make three lists for internal consideration:  

  • Executive talent they’d like to hire 
  • Potential acquisition targets (i.e., businesses that, for the right price and at the right time, would increase the startup’s value) 
  • Companies that could be the right potential acquirer 

“Knowing who belongs on your list, and how to get on another company’s list, could make the difference between finding the right partner and settling for a lesser one,” wrote Klein. “Selling during a period of consolidation isn’t necessarily inevitable, so the goal is to create the option, enabling you to efficiently decide whether that’s the right outcome.” 


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