Is Now a Good Time to Acquire Startups?
Sure, the current economic environment stinks. Most companies with cash are sitting on it, waiting to see what happens with the credit and equity markets. But some shrewd companies will take advantage of what cash they have to invest a percentage of it in acquisitions. From an acquirer’s standpoint, now is a pretty good time to be picking up some relative bargains in the startup world.
1. Economic uncertainty tends to make founders more realistic in their expectations. As entrepreneurs see their brethren doing the unthinkable — things like laying off employees to prepare for an expected pinch — they may have less lofty goals for the sale of their enterprises. Rather than figuring they can weather the storm and still become the next Google, they may be willing to make a deal now.
2. Political uncertainty should lead to some concern over future tax consequences of a sale. Many in the technology world support Barack Obama for president and his odds certainly seem pretty good today. However, if elected he has indicated he would ask for a 33% increase in the capital gains tax rate. While these sorts of things tend not to be retroactive so as not to penalize those who did deals after projecting lower rates, in the current environment, it is nearly impossible to rule anything out. An entrepreneur who expects he might sell in the next 12 months or so might just be willing to do a deal at a slightly lower number today to avoid paying substantially more taxes later.
3. Put simply, there aren’t many buyers out there right now. That makes it less likely that an acquirer will get trapped in a bidding war. This translates into more appealing figures from the side of the buyer.
Of course, for some of the same reasons, entrepreneurs may want to stand pat and see how things shape up. But for some that could end up being a risky strategy that costs them a shot at a payday.
I’d have to agree with you Chip. A friend and I have been putting together some materials to present to investors about a piece of software we’re building. The initial plan was for millions of dollars and a big flashy launch. Now we’re re-working things to facilitate a slower, less expensive launch.
The one concern that I would have is crippling the company by investing too little. Some start-ups may be willing to accept less money, but some may not ask for enough to function.
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