What is an Acquisition Exit Strategy?

An Acquisition Exit Strategy refers to when a business owner decides to sell their company to another company. This method can potentially result in financial compensation for original owners, which may be influenced by the perceived value of their company..

This approach could enable the swift acquisition of liquidity and allow for a prompt departure to pursue other business opportunities..

Other exit methods include IPOs (going public), passing the company down to family, or liquidating assets and closing the business.

Pro Tip: If you’re considering becoming part of an acquisition, it is best to plan ahead. Get your financials in order, pinpoint potential acquirers, and obtain expert advice to maximize your company’s value.

Example: When Facebook acquired Instagram, it was an acquisition exit for Instagram’s founders.

Here are the six steps of the acquisition process: 

• Initial Contact: Initiation can be either the acquirer or the target company, with the option of adding an investment banker to locate potential buyers.
• Non-Disclosure Agreement (NDA): To protect confidentiality, both parties agree to an NDA regarding sensitive information.
• Due Diligence: An investigation of company financials, technology, legal standing, team dynamics, and customer base is done by the acquirer, and it can take weeks to months.
• Letter of Intent (LOI): Once satisfied, the acquirer sends a document outlining the terms of the deal they are proposing.
• Negotiation: Details such as payment structure, price, and employee contracts are negotiated from each side until an agreement is made.
• Closing: Ownership of the company is transferred after the final agreements are signed by both parties.

The different types of acquirers are:

• Strategic Acquirers: Typically, sizable businesses within the same industry are looking to merge talent, technology, and market share, and they are also considering the integration of product(s) into their existing services for competition purposes. 
• Financial Acquirers: Private equity firms interested in a financial ROI that might have a goal of selling for a profit in the future.
• Competitors: When direct competitors decide to work together by joining product lines and eliminating other competitive threats in the industry.

Acquirers are looking for these key financial metrics:

• Annual Recurring Revenue (ARR): A key indicator of your company’s predictable revenue stream.
• Customer Acquisition Cost (CAC): The cost of acquiring new customers.
• Customer Churn Rate: The rate at which customers leave your business.
• Gross Margin: The portion of a company’s revenue left over after direct costs are subtracted.
• Growth Rate: Demonstrates the potential for future revenue and profitability.

In preparation for acquisition:

• organize financial records
• assemble a team
• obtain a professional valuation
• demonstrate and monitor proper SaaS metrics
• seek professional advice from attorneys and financial advisors
• ensure legal compliance

These steps prepare the company for due diligence and negotiations. 

One of the most common limitations of SaaS acquisition faced by founders is failing to prepare adequately.

Not being able to pinpoint specific goals for the business acquisition, aspects like market business growth or technology, can ultimately lead to unexpected and potentially unsatisfying results.

Additionally, SaaS founders may have unrealistic valuations. While it may feel your life’s work is worth the price tag you gave it, it is important to evaluate it based on precise reasoning. Customer base, technology, financial projections, and market trends are included in the list of aspects to consider.

Failing to comply with legal and compliance regulations can lead to different complications.

And let’s not forget about negotiations. Some founders might have complicated negotiation strategies that stall this SaaS exit strategy.