Majority of Canadian startups hope to be acquired within three years: PwC

More and more, Canadian start-ups are hoping to be snapped up quickly through simple acquisitions, according to an annual survey of emerging companies conducted by PwC.

“The entrepreneurship ecosystem is growing and more and more people want to do it, but it’s a lot of work and a lot of ups and downs,” said Eugene Bomba, head of Canadian emerging company services at PwC. “It’s not easy to put yourself through building a company for the longer term, but the longer you’re able to do it, the hope is that eventually the higher the valuation of your company will be and the more jobs that are created.”

PwC’s annual Emerging Companies Survey looked at 150 Canadian startup CEOs and the challenges, opportunities and strategic priorities surrounding their businesses. The vast majority of companies included were relative newcomers on the scene, with three-quarters of respondents reporting annual revenues of $500,000 or less.

The survey found that 78 per cent of emerging companies are looking at some sort of exit strategy, with nearly two-thirds considering an acquisition – an increase from last year’s 44 per cent.

Moreover, they want a quick way out, as 40 per cent said they plan to leave the market in between one and three years.

The PwC report found that, given their short-term view, few companies are interested in going public through an initial public offering because they’re concerned about the risk of a challenging IPO market or may not want to go through the trouble if they plan on selling. Costs associated with going public are often too high for a small business to assume, particularly given recent IPOs that have stumbled out of the gate.

While most startups said they’d like to be acquired, the report also found that many show a “startling” lack of acquisition preparedness.

The companies tend to be up to date on taxes and corporate documents, but less than a quarter have reviewed or audited their financial statements and only 11 per cent have completed a formal valuation. In fact, 22 per cent have taken no steps towards preparing for a sale.

“While exiting through acquisition doesn’t bring about the same level of scrutiny as an IPO, (mergers and acquisitions) do carry their own set of challenges and require a significant amount of due diligence,” Bomba said. “A major component of a successful acquisition is preparedness, so that when the time is right companies are in the position to negotiate a strong sale.”

The survey also found that the biggest challenge for most respondents in their most recent financial year was funding, followed by revenue generation.

Canada remained their main source of revenue, with online sales as a key driver.

Also, attracting and retaining talent was only a concern for 10 per cent of companies, which was a big change from two years ago, when it was the top challenge for startups.