According to the SmartUp methodology, companies are generally acquired for one of four specific reasons. The most desirable type of acquisition occurs when a startup is profitable. In this case, buyers view the company as a financial asset that generates immediate cash flow and has a proven business model. Another reason is a strategic or technology need, where a larger company buys a startup to acquire a specific technology, product, or content database that fills an immediate gap in their own offering. In other cases, a company may be acquired as an acqui-hire, where the startup failed to build a viable product or business model but has a talented engineering team that the buyer wants to secure. These deals are usually valued at a few million dollars and rarely result in significant wealth for founders. The final scenario is a distress sale, where the company has run out of money and is sold for a fraction of its invested capital.
The sale price of a company depends heavily on its financial health. Profitable companies are often valued based on a multiple of their earnings. If a buyer strategically needs the company to block a competitor or enter a new market, they may pay a significant premium on top of the financial valuation. Founders of profitable companies have strong leverage because they do not need to sell, allowing them to negotiate better terms or continue running the company indefinitely.
Acquisitions are not always simple cash transactions and often involve complex mechanisms. An earn-out structure includes part of the purchase price paid upfront, with the remainder paid later based on performance targets. Deals can also be structured as cash or stock transactions. While stock offers potential future growth, cash is immediate and risk-free.
Not all acquisitions result in a payout for founders. Due to complex cap tables and aggressive investor terms such as Liquidation Preference and Participating Preferred shares, a company can be sold for a high number while founders receive nothing, as proceeds are used to repay investors first.
excerpt (invent based on the text i pasted):An acquisition is a primary form of exit in the startup world, but not every sale creates value for founders. Depending on profitability, leverage, and cap table structure, a company can be acquired as a cash-generating asset, a strategic move, an acqui-hire, or even a distress sale that leaves founders with zero return.
