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Startup M&A in India | Complete Guide (2024)

Startup M&A complete guide. This guide covers nuanced aspects of startup mergers and acquisition processes.

An overview of Startup M&A Ecosystem

Mergers and acquisitions (M&A) play a vital role in helping startups achieve their goals, with startup merger process facilitating growth through increased scale and resources, and acquisitions providing access to new technology and customers. The need to consistently prioritize M&A arises when pursuing inorganic expansion, as it aids in increasing market share, gaining a competitive edge, and leveraging resources for international profit generation.

India is the third largest startup ecosystem in the world and consequently M&A activity has significantly risen in the country. This surge is driven by the growing capital needs of startups seeking expansion through M&A. While M&A can benefit startups, it entails various risks. It is crucial to thoroughly understand the potential risks and rewards before engaging in any merger or acquisition.

When evaluating a potential M&A, consider factors such as the company’s financial health, future prospects, and competitive landscape. Additionally, assess the potential impact of the deal on the broader industry.

M&A is essential for startups to grow rapidly and efficiently. However, exercising caution and understanding the associated risks are imperative before entering into any deals.

2022 stood out as the year dominated by mergers and acquisitions (M&A). As per several reports, there was a big increase in important deals among startups in India. The number of mergers and acquisitions (M&A) went up by over 10%, with around 240 deals happening, compared to 2021.

On the other hand, in 2023 the Indian startup scene faced a funding shortage, and it was expected that more companies would merge or be acquired due to this. However, the current data available shows a different story.

A handful of 95 mergers and acquisitions (M&A) occurred in the first three quarters of the last year. This is almost half of the 205 M&As that happened in 2022, which was an increase from 120 deals in 2021.

We are yet to discover what awaits us in 2024.

Legal steps and preparations for a successful merger or acquisition

When deciding on a merger or acquisition, legal considerations include the business nature, target company size, ownership, and regulatory environment. Approval hinges on ensuring fairness to shareholders, avoiding excessive debt, and aligning with the startup acquisitions strategy. Compliance with country-specific laws is crucial. Obtaining approval from relevant authorities involves navigating complex conditions, and failure to meet them may lead to rejection or significant modifications.

Navigating through the various steps involved in a M&A process can be tedious. It can span from six months to several years. There is a structured sequence which needs to be followed when going headstrong in a M&A transaction.

  • Creation of a Target List: Prior to embarking on the M&A journey, firms compile a list of potential acquirers or sellers.
  • Initiation Of Contact: After selecting specific companies, initial contact is established to gauge interest in the potential transaction.
  • Sending Teaser: Sellers entice potential buyers with a teaser document, sharing insights into their products, ownership structure, and growth prospects.
  • Confidentiality Agreement: At the outset, both parties sign a crucial confidentiality agreement to maintain the privacy of discussions and materials.
  • Confidential Information Memorandum (CIM): Serving as a buyer’s handbook, the CIM provides comprehensive information on the company’s management, financials, competition, and market opportunities.
  • Indication of Interest (IOI): Buyers express their interest through a non-binding written offer, detailing the sale price, transaction structure, and other essential components.
  • Meetings Between the Parties: Demonstrating mutual interest, both parties engage in meetings to assess compatibility and alignment of business interests.
  • Letter of Intent (LOI): The buyer outlines details on price and deal structure, covering aspects like closing dates, break-up fees, and exclusivity periods. While generally non-binding, LOIs can become binding under specific contract terms.
  • Due Diligence Process: The buyer conducts a thorough examination of documents provided by the seller, assessing risks and enhancing decision-making by reviewing financials, intellectual property, customer base, litigation, infrastructure, technology, inventory, production, and marketing plans.
  • Purchase Agreement: A legally binding document that supersedes prior LOIs and IOIs, detailing final terms such as purchase price, closing date, warranties, executive provisions, and break-up fees.
  • Pre-Closing Period: In some instances, a pre-closing period ensues where conditions like government approvals and third-party consent must be fulfilled.
  • Closing: Once all prerequisites are fulfilled, money is exchanged between the purchaser and the vendor, signifying the end of the deal, and the buyer takes over the management of the business.

Due diligence in Startup Mergers & Acquisitions

If you’ve ever tuned into shows like Shark Tank, you’ve witnessed due diligence in action – the meticulous examination where investors dive deep into a startup M&A intricacies. All entrepreneurs convey confidence through their words, but the mood can shift dramatically if they have been concealing critical details, such as debts or legal entanglements.

Imagine that pivotal moment when it becomes clear that the entrepreneur will not win over the investors – that is the intricacy of due diligence unfolding.

While shows like Shark Tank gives us the glimpse of preliminary due diligence through casual talks. Although, in reality, it is a far more formal process. Investors thoroughly scrutinize every aspect of the business in a well-structured manner.

In a startup’s journey, a potential merger or acquisition offers opportunities like market expansion and fresh capital but all of that comes with challenges. M&A deals demand thorough due diligence, involving Legal, Financial, and Operational checks.

A streamlined due diligence process is essential. It is a complex process involving various parties and phases. Here is an overview of key steps:

  • Evaluate Project Goals: Define corporate goals to align resources, identify necessary information, and ensure alignment with the firm’s strategy.
  • Analyse Business Financials: Conduct an exhaustive audit of financial records, assessing asset health, financial performance, and potential red flags.
  • Thorough Document Inspection: Engage in a two-way conversation with the seller, request documents, conduct interviews, and perform on-site visits for comprehensive understanding. Seller’s responsiveness is crucial.
  • Business Plan and Model Analysis: Examine the target company’s business plans and model to assess viability and integration potential.
  • Final Offering Formation: Collaborate to share and evaluate findings, utilizing collected information for valuation and determining the final offer during negotiation.
  • Risk Management: Holistically assess the target company, forecasting potential risks associated with the transaction.

In the planning phase, predicting the required amount of due diligence can be challenging. Ideally, the process should be completed within 30 to 60 days by a dynamic, cross-functional team. The goal is to close the deal swiftly while ensuring thoroughness. While it is impossible to uncover all issues during the investigation, being energetic and efficient is crucial, maintaining quality to meet the due diligence deadline.

Carefully conducting due diligence, seeking external expertise when necessary, and planning for post-merger integration are crucial for a successful M&A transaction. Recognizing common issues like rushing through due diligence, underestimating legal risks, neglecting integration complexities, and relying solely on internal expertise helps navigate the process more effectively.

In essence, it underscores the necessity of being exceptionally well-prepared to navigate the probing inquiries from potential investors.

As for post-due diligence, review the findings and make strategic decisions. Finalising the terms and ensuring legal compliance is crucial. Plan a communication, integrate operations, and execute the deal. And lastly, monitor post-merger success.

To know more, read our guide on due diligence for startups in India.

Structuring deals: Key legal considerations and common pitfalls

Mergers and Acquisitions can transform startups in India, providing incredible growth opportunities. To make it work, effective due diligence is vital. For those exploring a merger or acquisition, follow these steps:

  • Build Your Team: Bring in legal, financial, and industry experts for comprehensive coverage.
  • Understand the Target’s Business: Analyse the target’s business model, market position, and competition for strategic alignment.
  • Review Finances: Examine financial statements and projections for health and potential issues.
  • Check Legal Compliance: Conduct a thorough legal review to catch any issues.
  • Operational Check: Assess efficiency, asset quality, and key relationships.
  • Evaluate People and Culture: Understand team dynamics, company culture, and leadership.
  • Tech and IP Assessment: Evaluate technology, patents, and intellectual property for value and risks.
  • Identify Risks: Spot market, operational, and compliance risks.
  • Prepare for Negotiations: Leverage due diligence insights for effective negotiations.
  • Plan for Integration: Create a post-acquisition plan for a seamless transition.

Balancing the excitement of potential growth with meticulous due diligence is crucial. Even seasoned entrepreneurs can encounter common pitfalls, jeopardizing the long-term success of mergers or acquisitions. Let us examine these mistakes and ways to avoid them:

  • Cultural Compatibility Oversight: Focus beyond financials; assess cultural compatibility to align with your startup’s values and vision.
  • Insufficient Financial Analysis: Conduct in-depth financial reviews, going beyond surface-level analysis, to ensure alignment with strategic objectives.
  • Neglecting Legal Due Diligence: Engage legal experts to review intellectual property, litigations, and compliance, avoiding legal repercussions.
  • Post-Merger Integration Challenges: Develop a detailed integration plan addressing IT systems, corporate cultures, and operational workflows to avoid disruptions.
  • Incomplete Risk Assessment: Conduct a holistic risk assessment, considering market volatility, operational redundancies, and regulatory changes to prevent unforeseen difficulties.
  • Rushing the Due Diligence Process: Allocate sufficient time for due diligence to avoid overlooking critical issues during the M&A process.
  • Lack of Expertise: Engage financial advisors, legal experts, and industry consultants to fill gaps in internal expertise, ensuring a comprehensive understanding of the target company.

Seeking an external legal team adds specialized knowledge and unbiased perspectives. It’s valuable for identifying potential risks and opportunities in M&A transactions.


Q. How to Choose the Right Structure?

A: Consult with legal and financial advisors to evaluate business goals, risks, and benefits, ensuring the chosen structure aligns with the company’s objectives.

Q. How long does the M&A deal structuring process typically take?

A: The timeline varies based on factors such as deal complexity, regulatory approvals, and due diligence. It often ranges from several months to over a year.

Q. What are some common mistakes to avoid while conducting due diligence?

A: Yes, this includes overlooking things like cultural fit which simply means evaluating company’s culture, leadership styles, and employee engagement to ensure alignment. Neglecting financial analysis, ignoring legal due diligence, underestimating post-merger challenges, incomplete risk assessment, rushing the process, and lacking external expertise are some other common mistakes that can occur during a M&A transaction.


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