Propeller Industries

5 Tips for Founders: How to Prepare Your Startup for M&A

Jessie Bao

Jessie Bao

Senior Vice President & Head of Corporate Development

Jeff Gustafson

Jeff Gustafson

Chief Financial Officer & Transaction Advisory Founder

July 11, 2023

While 2021 was a banner year for M&A transactions, 2023-2024 is shifting to a buyer’s market. We anticipate an increase in activity as financial sponsors — which are holding record amounts of capital — seek to take advantage of the changing headwinds, tightening of available financing, and lowered valuations. It’s also a favorable market for strategic investors, and we are indeed seeing an increase in the number of strategic investors looking to buy. Against this backdrop, founders need to be that much more prepared to enter an M&A conversation.

Here are five tips to consider if you’re on the market.

1. Shift Your Mindset Regarding Valuation

The unfortunate reality is that values are compressed as we face a debt crunch and a more difficult funding environment. On the positive side, the valuation reset better reflects reality — allowing you to focus on long-term growth and success, better positioning your company for the future.

It’s also important to remember that valuation and timing are closely intertwined for M&A exits. The current environment should impact founders’ perspectives in both areas. For example, if you have a three-year time horizon and you hope to earn $50M from selling your business, you need to adapt your thinking. Will you wait longer to exit, spending more time building the business — or will you accept a lower number?

2. Consider Creative Structuring to Bridge Valuation Gaps

Contingent forms of payment can help bridge the gap between the valuation you seek and the risk the buyer is mitigating. For example, an earnout is an arrangement where the purchase price is paid out contingent on your ability to reach certain milestones post-close. With this agreement in place, you should be able to negotiate a higher sale price. Just make sure projections are realistic.

You may also have options for up-front payments, staged payments, and payment methods such as cash versus stock. The right structure depends not only on what the founder wants, but on the founder’s value to potential buyers.

3 Changing Strategies Can Be a Red Flag

From a potential buyer’s perspective, simpler stories are better. They want to feel confident that acquiring your business will provide a clear path to value actualization. Accordingly, if you were not consistently clear on your vision and aligned to your product roadmap and business model, it could come back to haunt you. Many founders don’t realize this could be an issue until buyers start asking questions.

Large pivots in strategy can send a signal to investors that you were not organized in your short- and long-term planning and execution. In addition, major shifts make past performance an unreliable indicator of future success, making it more difficult to accurately measure projected cash flows and revenue.

Sometimes pivots are needed. But where possible, keep your story simple. Anyway, to achieve your plans from your latest fundraising objectives, doesn’t your team need to be focused and tracking toward a common goal?

4. Don’t Dismiss Cultural Fit

Some of the biggest reasons we see M&A deals fail are culture clash and leadership misalignment. This can be especially pronounced for earlier-stage companies, when overlap of management is so significant. Culture assessments are key to determining how compatible teams are in terms of communication, risk management, policies, customer focus, employee retention, and more. Are the acquirer’s goals aligned with your short-, medium-, and long-term vision?

Of course, every M&A deal is different. For example, if your business — which built its reputation on speed and efficiency — is being acquired by a much larger firm, you may not realize how much the change in operations may limit your speed and efficiency. If you have a lot of employees and your startup is acquired by a business of similar size, management teams will have to work together, making alignment even more crucial. But if your startup’s fairly self-sufficient six-person team is being swallowed up by the 1000-pound gorilla operating in your space, cultural fit may not matter as much. Bottom line, do the reverse due diligence to assess the degree to which cultural fit may impact the future success of your business.

5. Don’t Underestimate the Need for Solid Due Diligence

Preparing for due diligence is critical to the sales process. This can be a time-consuming and complex effort, so it’s important to get started early on the foundational elements you’ll be expected to provide. At Propeller, we work with our clients to prepare for both M&A transactions and fundraising asks by leveraging our team’s decades of relevant experience. Before we dig into requests for due diligence items, we follow applicable best practices such as:

  • Setting up data rooms — early. Create and organize a data room to securely house deal documents and information. A virtual data room allows for proper access management, up-to-date records, and quick collaboration. It’s also something that takes a larger time investment than you may expect, so it’s crucial to be proactive and start preparing well in advance of any planned M&A.
  • Building out a long-term forecast model. Develop a long-term forecast model that incorporates assumed cost-savings, integration costs, cash flows, and other key factors. Buyers will want to ensure that projections are reasonable and they understand any potential business or financial issues.
  • Ensuring a strong focus on short-term goals. What do you need to achieve in the short term? Make specific goals supported by realistic plans to execute. If you seek to raise funds, make sure you have a clear idea of potential sources and how you would use any funds raised.
  • Preparing financial statements with detailed support schedules. A comprehensive explanation of the schedules helps to clarify every financial question related to outstanding receivables or payables, inventory accounting, depreciation, and any other details about unusual balance sheet entries. Advance preparation helps you avoid any last-minute confusion or surprises that could cause buyers to walk away.


By working with our clients to provide these materials, we are helping to build credibility, project competence, and form trust to solidify relationships with potential buyers. All of this is critical to seeing M&A through to completion.

Position Yourself for M&A Success

Adequately preparing your startup for M&A is always important. In the current environment, it’s even more critical. With valuation expectations having come down, it’s a good market for acquisitions, so we expect to see transactions happening quickly and a general consolidation for earlier-stage companies. Propeller’s Transaction Advisory services and team of fractional CFOs assist entrepreneurs through fundraising and M&A processes. We can introduce you to investors, assist with valuation analysis, negotiate term sheets, and more. Make sure you’re ready, optimally positioning yourself and your startup to make the most of the M&A opportunities that may be on the horizon. Need some help? Let’s talk.

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