When Should You Walk Away From An Acquisition Offer?
I was having coffee with my neighbor Dave. Dave had been CEO of a large public company in the semiconductor space.
We had known of each other for years before we became neighbors. Dave was one of the first people to reach out to me after my company was sold.
Dave asked me if I knew “Victor” (I did know Victor). Victor was the CEO of another startup in the semiconductor space.
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Dave told me he was working with Victor to help negotiate a sale for the company. The sale, in this case, was really a liquidation.
Ouch.
I asked Dave how much of the company Victor owned. Dave said, “Around 20%.”
Ouch.
Depending upon the terms of the financing of Victor’s company, Victor walked away from upwards of $20M.
Ouch.
Victor’s story reminded me of something one my investors, Gill, told me right after we closed our initial funding. Gill told me that there was another company in his portfolio that had just accepted an offer to be acquired by Microsoft.
Gill said, “I think it’s too early for them to be acquired, but I can’t blame them for accepting the offer.”
Gill had been in the venture world for a long time. Gill knew how fragile startups are.
It’s hard for you to walk away from life-changing money.
You never know what can happen. A competitor can wipe you off the face of the planet tomorrow.
Or, maybe your investors turn on you and, like Victor, don’t support you any more.
Taking the money is usually a solid choice if you are not yet cash flow positive.
I told Dave that I had worked with an entrepreneur earlier that year (also in the semiconductor industry). He wanted to work with me to help him sell his company.
The first thing he said was, "I know I have to sell my company because it is going to start losing value."
So we developed a plan of who to reach out to and how to reach out to the possible acquirers. Then when we were ready to pull the trigger and start the acquisition process, the CEO backed off.
The CEO couldn't go through with it.
You have to remove the emotional pull of keeping your company and just look at the facts.
If you’re still losing money, then you will likely need more financing at some point. How likely is it that you will receive that financing?
If you are cash flow positive, then you have the ability to walk away if the offer doesn’t knock your socks off. You can make a risk versus reward decision about how you want to proceed.
If you are cash flow positive, you can also take into account how much you enjoy running your company. No amount of money can make up for that joy.
For more, read: What Are The Five Signs It's Time To Sell Your Company?
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