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Startup Exit Strategy Planning: 10 Surprises Buyers Don’t Like to See

// David Ehrenberg - Guest Contributor

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April 16, 2014
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During an acquisition, potential buyers don’t want to discover anything new that wasn’t previously disclosed, anything that raises any questions, anything at all unexpected. Surprises can cause your potential buyer to reduce their original offer…or even walk away.

The better you can prepare your potential buyer—and yourself—for an acquisition (and minimize or, better yet, eliminate surprises) the smoother the process will go.

In planning your startup exit strategy, keep in mind these things that no acquiring company wants to see during an exit:

  1. Missing documents. In advance of an acquisition, you should prepare all the necessary paperwork and have it ready and available. Obviously this documentation is useful not only in the case of an exit, but in other situations too, such as when you are fundraising or trying to go public. So don’t wait until an acquisition is on the horizon before creating the necessary documentation. Acquiring companies could be looking for everything from corporate records to contracts to board minutes. Document as you go along and create a system for housing all of your essential documents.
  2. Lack of audited financials. Your finances should be in order and your financial statements should be done in accordance with GAAP (generally accepted accounting principles). Prospective buyers are not impressed by sloppy financial reporting—your financials are the last place that they want to find any surprises. Again, buttoned up financials shouldn’t only be a goal when facing an exit; this is an important step to take as your business grows.
  3. Blended personal and business finances. Prospective buyers want a clear understanding of your finances. When you mingle your personal finances with your business, this creates confusion. Make sure that you separate your transactions and that your books reflect this clear separation.
  4. Equity issues with former employees, investors, and shareholders. Your capitalization table should be up-to-date. The last thing you want is someone showing up in the final stages of your exit demanding equity that was promised to them.
  5. Unclear ownership structure. What is your ownership structure? If it suddenly isn’t clear who owns your company and/or who makes the decisions, this can be a serious problem.
  6. Issues with intellectual property. If your company holds any patents or has other IP, there should be clarity—and documentation—around this. The IP that your company holds are a significant asset; without them, your company can look less appealing.
  7. Sales tax compliance issues. If you have product or subscription sales, or traveling sales personnel, you need to be well versed in your tax obligations to ensure compliance. If a potential buyer discovers outstanding sales tax issues when digging in your books, they will not be pleased.
  8. Staffing issues. The choice to use employees vs. independent contractors is an important one, with concurrent tax implications. Many startups thoughtlessly go the contractor route without a real understanding of compliance—and wind up paying the price down the road.
  9. Outstanding contracts. If you’ve signed your company up for a long-term contract (e.g. with a service provider, for real estate, etc.), this can be an unwelcome surprise to a prospective buyer who will suddenly find themselves on the hook for your prior commitments.
  10. Changing team. Often one of the largest selling points for a buyer of a company is its team. When someone is interested in buying your company, that usually includes the value-add of its people. If an acquiring company catches wind of the fact that key team members don’t plan to stick around, this can be a serious issue. When establishing your equity plans, give some thought to how to promote retention to incentivize key team members to stick around.

Once you’ve started down the acquisition path with a potential buyer, the last thing you want to do is lose their trust. Unfortunately, any unwelcome surprises do violate the trust that you’ve worked so hard to build. But fortunately, proper planning and transparency can prevent unnecessary surprises, smooth the acquisition process, and facilitate your successful exit.

The views, opinions, beliefs, conclusions, and other information expressed in this material is not given, verified, or endorsed by Square 1 Financial, Inc. or any of its affiliates. Instead, this material is solely the work of the author, and represents his views, opinions, beliefs, conclusions, and other information he wishes to present, in all cases without any manner of endorsement from or verification by Square 1 Financial, Inc. or any of its affiliates. 

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