The M&A Growth Process For Tech Startups

September 25, 2023
Photo by Gabrielle Henderson on Unsplash

Chris Spillman, Managing Director | Americas at Biztech Lawyers discusses the M&A growth process for tech startups. 

The M&A growth process for tech startups can be a complex and multi-stage journey. It requires time and attention to detail as well as careful planning, due diligence, negotiation and integration.

The typical M&A process for tech startups will begin with strategic planning and target identification. This is where the startup’s leadership will define its M&A objectives and strategies, such as expanding product offerings, gaining market share, or acquiring talent. Potential acquisition targets are identified based on strategic fit, technology alignment, market potential and other criteria viewed as important by the leadership. By way of example, if an Australian company wants to expand into the US, can it effectively do so by acquiring a US business with an existing customer base? The leadership team will also need to evaluate how it may be able to finance any acquisition, which may likely require early discussions with key investors and board members.

From there, the startup will conduct its preliminary assessment, carrying out its initial research on identified potential targets to evaluate their financial health, market position, technology portfolio, customer base and cultural compatibility.

If such an assessment indicates that a potential target could be suitable for more in-depth research, the startup may begin the process of due diligence. It is probable that by this stage, non-disclosure agreements (NDAs) will have been signed to facilitate the exchange of sensitive information during due diligence, which involves the startup conducting an in-depth analysis of the target’s financial position, material contracts, intellectual property, human resources and more. Technical due diligence assesses the target’s technology stack, codebase, infrastructure, and potential integration challenges. Cultural due diligence evaluates whether the target’s company culture aligns with the values of the startup.

If the startup is satisfied with the information produced by the due diligence process, it will enter the valuation and negotiation stage. This involves the two parties negotiating the terms of the deal, including the purchase price, payment structure, earn-outs and other financial arrangements. Legal advisors and financial experts can often play a crucial role in ensuring a fair and favorable deal for the startup. At this stage, a preliminary indication of the parties’ willingness to move to a transaction may be created and executed, such as a Letter of Intent (LOI) or Memorandum of Understanding (MOU), outlining the key terms and conditions of the transaction. One key element for alignment at this stage is the structure of the deal, and for this reason engaging professional tax advisors early on can be very valuable.

Any preliminary alignment on terms will be subject to deal structuring and formal legal documentation, whereby the high-level terms outlined in the LOI or MOU are formalised into definitive agreements. Detailed legal documents, including a purchase agreement (which may be an asset purchase agreement, stock purchase agreement or merger agreement), are drafted and reviewed by the parties’ legal teams.

Once definitive documents are agreed, there may be items that need to be taken care of before the deal can close, during the pre-closing stage. Depending on the jurisdiction and industry, and the size, a deal might require regulatory approval from particular authorities, such as foreign investment boards, antitrust agencies or industry regulators. Other third parties may need to consent as well, such as landlords, key suppliers and target shareholders. Consents, approvals and other necessary pre-closing items will be reflected in the closing conditions built into the purchase agreement. Generally it is important to keep the pre-closing period as short as possible.

Once all closing conditions are met the deal can officially be closed, or completed. At the closing, any exchange of funds and transfer of assets or shares takes place.

Integration planning and execution is crucial to ensure a smooth transition of operations, teams and technologies, which is why integration teams from both businesses will need to work together to align processes, systems and cultures. The post-closing integration will also involve communication with employees, customers, and stakeholders, as such activity is essential to maintain confidence and continuity. If there are elements of deferred and contingent consideration in the purchase terms, the parties may also need to be cognizant of managing to certain milestones or performance metrics post-closing.

During and after integration, the startup’s leadership monitors the progress of the acquisition to ensure that projected synergies, growth and other strategic goals are being achieved. Adjustments might be made to optimise the integration process and capitalise on new opportunities. This monitoring and synergy realization can be viewed as the final stage of the M&A process.

Any particular M&A growth process may vary, depending on factors such as the specifics of the acquirer and target and the current market conditions. Engaging with experienced advisors, including legal, financial and strategic consultants, can significantly enhance the startup’s chances of successfully navigating the M&A process and achieving its objectives.

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