About the only thing I could add to Kan's guide here is, when he talks about riding the lawyers, to be aware of how much you are going to spend on legal in a real acquisition. When I meet founders who've sold companies, I usually ask them how much they had to spend to close the deal, and every answer I've ever gotten squares with my experience: it's a price you can measure in Maseratis.
I never thought about hitting up VCs for term sheets during the process. That's clever.
If you contact VCs while in talks of acquisition, do you tell them that you have an acquisition offer from xyz corp? This could backfire a few ways. If the acquisition offer from xyz falls through, this signals to the VC very negatively and probably means they won't do a round now or even in the future.
So, Justin and or YC, maybe another guide and or a short post that would be helpful to entrepreneurs would be...
"What to do when tech companies come knocking at your door?"
For example we are a small start-up on the east coast. We have had oodles of tech companies reach out to us. One invited us out west to demo, saying would you let us buy it from you, please come out and demo your tech. Then when we get there they treat us like dirt, bait us for how we accomplished our tech and after we tell them they quickly show us the door.
Following that demoralizing event others tech companies reached out asking how we accomplished X. Well after being squashed by one company, we don't take any other companies minor advances seriously.
Thus, before spending the thousands of dollars to go out west (filed a provisional & some travel costs) we wish there was a resource to have helped us say ... Umm, no do not go out to the valley they have not offered you a term sheet. We did reach out to our network, it's not too small and those in our network said, "You should pursue it and or sorry I've never been in that situation before."
TL;DR - if a company is just fishing there's some quick ways to weed them out
I think there are ways to vet these opportunities. Some signals for me have been.
1. Is the person reaching out to you a decision maker?
2. Are they willing to sign an mNDA prior to you flying out?
3. Will they invest sufficient time as an indicator of interest?
--
#1 is fairly easy by looking people up on linked in. Depending on the situation you want someone in business development (for a partnership) or better yet corporate development (for deals or acquisitions). VPs or C-level folks are good.
#2 is harder as it might put off an interested party. It's a bit of chicken and egg. But never hesitate to say in a meeting "I'd love to share more once we've signed an mNDA" -- if that's truly your position.
#3 do some video conference calls with them and see who shows up on their side (see #1). The more time (number of people * time) they're investing can indicate their level of interest. If it's just one lone guy you're always dealing with and they're not VP or higher it might not be that great of an opportunity.
What can't be said often enough is that whether the founders will stay or go makes a huge difference in the valuation usually. If you value your freedom, you should accept a significantly lower price (think long and hard about it), as founders leaving will increase the risk for the buyer.
Another thing worth mentioning (happened to us): a change of ownership will stir up trouble in the company, so expect some people (troublemakers usually) to leave or cause other problems (we've had downright refusal to do particular work well within the bounds of their jobs, simply because the previous bosses had done these things themselves).
In any case, sealing the deal is only half the work, expect a lot more hassle in the year or so after that.
Thanks for your post! It strikes me as an authoritative guide on the subject. Plenty of gems to take away. The section on negotiation tactics could also stand on its own, since those are useful in many other situations as well.
We were in acquisition talks which had gone as far as agreeing to a price. We wanted a small break fee that would help cover legal costs if the deal fell through. It was a strong no from them and they wouldn't budge. So in our case yes. With that being said I too would like to know if it is uncommon.
I sold 40% of my company and I got insanely lucky to find a partner who fit all the holes that I have in my approach. He's now the CEO and I'm the President. I was losing hope for a long period of time even though my business was solidly in the black with large cashflows and zero debt, because it's such a niche business where no one is interested (sports science).
The guy dropped into my lap and made me a reasonable offer, which now "looks bad" because he's doubled revenue in six months. Not, obviously, that I'm complaining....
Luck is a huge part of the whole process. I went months and even almost 2 years resigned to the fact that I would be turning in 80 hour work weeks while having two kids and a wife to try and please, and that my personal health would be the sacrifice. I am not sure how I'd survive or if I could even continue to run the company under those conditions for much longer than I did.
I feel for the sole owner of a startup gaining traction and nearing an inflection point. I just wish I had more advice.
Having just gone through my first acquisition process from beginning to end, this was great reading and a lot of it range very true for us.
One thing that it seems people often forget is that, in business, if you're truly entering in to mutually beneficial agreements (whether it's hiring someone or being acquired), both sides generally will try to come to some sort of arrangement that makes sense for both sides. In other words, when it's understood that an agreement is win-win, then both sides are motivated not just for themselves but for the other side as well.
Of course, the sentiment is a bit idealist, as the hard part is actually figuring out when someone is being genuine and knowing exactly what value you're providing to them and they will provide to you. If a company really wants to buy you, and they're not trying to pull one over on you (e.g. intentionally offering much less than your value), then they won't try to strong-arm you into doing something you don't want to do. I think this is what the author is getting at when they say that it's okay for you to push back on things such as offer price, deadlines, etc. The key is to also be genuine and not try to pull one over on them.
Of course, this sentiment is also a bit idealist, as the hard part is knowing what your actual value is to the other party, as there's seldom an absolute value of something; it usually depends on the situation of the environment and other party, which constantly changes and which you won't have the full story.
This also assumes that genuine parties are wholly genuine and that they're not being led astray by other parties, whom they absolutely trust but who may not be genuine or as capable as they have led the primary parties to believe. I've seen plenty of deals fall through, or almost fall through, because of good people being influenced by outside factors.
I kind of lost my point in all that. I think it was simply that, while acquisition talks are stressful and time consuming, they can also be scary. That fear however, usually comes from doing a deal in which you may feel you're misrepresenting your value (and thus trying to get more from the other party than the actual value you're providing), or in trying to do a deal or negotiation which you feel you absolutely cannot walk away from. Both of these situations lead to more volatile negotiations which fall apart more easily. And this can lead to making the wrong concessions or agreements, which gets us back to one of the points in the article, which is that the best time to solicit an acquisition is when you don't need it and can easily walk away.
>One thing that it seems people often forget is that, in business, if you're truly entering in to mutually beneficial agreements (whether it's hiring someone or being acquired), both sides generally will try to come to some sort of arrangement that makes sense for both sides. In other words, when it's understood that an agreement is win-win, then both sides are motivated not just for themselves but for the other side as well.
This has... not been my experience at all. I mean, maybe it's just that I haven't worked on big enough deals? But my experience is that flexibility exists at the "handshake deal" size, but once the total deal value surpasses, say, the value of a nice used honda civic, professionals are excellent at squeezing as much surplus value (in dollars, of course) from the deal, and negotiation on things that are not money is largely impossible.
Now, for me? this has been true for every large deal. However, every large deal I've done has been with someone staggeringly larger than I am. (the largest was probably a co-lo deal with a staggeringly large co-location provider... with a total deal value above a quarter million bucks, so I'm small fry.)
Players that are my size or smaller are willing to be super flexible about everything, like you describe, but the deal value is usually so small that the only profit to be had is that it's fun to work with them, or that I get to learn something from them. And yeah, that's good and important and stuff, and I do a lot of deals at that level, but I almost think of this more as a social thing; network building and/or drinking with friends. I could do deals at that level all day every day and make rent, but there's no way I'd come close to what I can get as a moderately competent contract linux sysadmin working for a giant faceless company.
Why is this? Well, small companies, generally speaking, just don't have huge amounts of cash to throw around. And large companies? for large companies, I think it has a lot to do with what tptacek said about legal costs. A long time ago, there was talk of selling my company. I mean, it ended up being that they wanted to hire me for two years, at 30% more than I could get as a consultant, plus some performance bonuses that would depend as much on their actions as mine. But the total deal value would have been almost but not quite twice my previous largest deal value. Still, small potatoes, by the standards of such things. They were larger than I was... but still pretty small by industry standards, so they were willing to be super flexible, though they needed to keep the deal size super small.
The point I was making was that legal would have eaten all of the difference between what they wanted to pay for me & the company and what I can get paid as a contractor. The less standard the deal, the more it costs in legal. I imagine this is why large companies are so... inflexible on sub-MM deals. They have standard deals that have been approved by legal, and they don't want to spend the money to get a new deal approved.
So.. yeah, that's my experience. Deals are either handshake deals, with amounts of money changing hands that really don't matter (and I've bought companies at that level; It's common in the hosting industry, when someone is tired of running their company.) or they are large enough that legal is involved, in which case, unless it's a truly staggering amount of money, the giant cost of legal makes the deal way less interesting.
I've seen the same thing in employment. If you wanna work for someone like me for $15/hr, you can get all kinds of flexibility, no problem.
If you want to work for said faceless company and make decent money? you do it their way. You conform to their standard deal. I mean, they have a lot of standard deals you can conform to... and conforming to any of them is just fine, but pick one and quit fucking around.
(I mean, if you are an incredible person, again, it's probably different. But if you are a mortal who maxes out somewhere between $70 and $100/hr like most of us... you conform to their deal structure, or you come work for someone like me at 1/5th that.)
As someone who just went through an acquisition I hope that people will begin to write more about the acquisition process -- there's so much out there about raising financing, especially a seed round, and very little about M&A.
You tell them that due to the competitive nature of both of the businesses, they should "make an offer based on competitive intelligence and public information".
I cannot find a good link on it, but I think Novell used this technique when being approached by Microsoft.
Press articles, app downloads (instead of active users), M&A "offers", employeess or FTEs, # of global offices, money raised (instead of cash on hand), "advisors" (this is a particularly stupid one in my opinion).
Basically anything that isn't active users, revenue or profit.
> in order for a company to want to buy you, an internal champion will have to internalize one of these reasons
Truth. Identify who that person is and focus your energy on making sure they have everything they need to stay motivated to sell their company on buying yours.
The whole post is off-white on white in my Android phone, unless I click an icon which opens a text box over the main text. If I close the box then the main text gets low-contrast again.
No, it is the opposite of obvious. When a bigco reaches out and says they're interested in acquiring, the intuitive response is "we should figure out what they're talking about, because even if we don't want to sell, it'll be good to have the optionality".
I don't get why you say that investment bankers are expensive at 1 to 2%. If they can't improve the deal by at least 2%, they can't be worth dealing with at all.
The implication is that they typically can't add $200,000 of value to a 10MM deal. One possible reason is that the 8-figure deals are pretty specialized and obscure, and it's hard for a banker to know the right valuation for the company.
[+] [-] tptacek|11 years ago|reply
I wrote some thoughts about the company acquisition process (I've been involved in 3):
https://news.ycombinator.com/item?id=6650317
About the only thing I could add to Kan's guide here is, when he talks about riding the lawyers, to be aware of how much you are going to spend on legal in a real acquisition. When I meet founders who've sold companies, I usually ask them how much they had to spend to close the deal, and every answer I've ever gotten squares with my experience: it's a price you can measure in Maseratis.
I never thought about hitting up VCs for term sheets during the process. That's clever.
Remember, deals are made to fall through!
[+] [-] nodesocket|11 years ago|reply
[+] [-] yuhong|11 years ago|reply
[+] [-] hard-road|11 years ago|reply
"What to do when tech companies come knocking at your door?"
For example we are a small start-up on the east coast. We have had oodles of tech companies reach out to us. One invited us out west to demo, saying would you let us buy it from you, please come out and demo your tech. Then when we get there they treat us like dirt, bait us for how we accomplished our tech and after we tell them they quickly show us the door.
Following that demoralizing event others tech companies reached out asking how we accomplished X. Well after being squashed by one company, we don't take any other companies minor advances seriously.
Thus, before spending the thousands of dollars to go out west (filed a provisional & some travel costs) we wish there was a resource to have helped us say ... Umm, no do not go out to the valley they have not offered you a term sheet. We did reach out to our network, it's not too small and those in our network said, "You should pursue it and or sorry I've never been in that situation before."
[+] [-] jmathai|11 years ago|reply
I think there are ways to vet these opportunities. Some signals for me have been.
1. Is the person reaching out to you a decision maker?
2. Are they willing to sign an mNDA prior to you flying out?
3. Will they invest sufficient time as an indicator of interest?
--
#1 is fairly easy by looking people up on linked in. Depending on the situation you want someone in business development (for a partnership) or better yet corporate development (for deals or acquisitions). VPs or C-level folks are good.
#2 is harder as it might put off an interested party. It's a bit of chicken and egg. But never hesitate to say in a meeting "I'd love to share more once we've signed an mNDA" -- if that's truly your position.
#3 do some video conference calls with them and see who shows up on their side (see #1). The more time (number of people * time) they're investing can indicate their level of interest. If it's just one lone guy you're always dealing with and they're not VP or higher it might not be that great of an opportunity.
[+] [-] jacquesm|11 years ago|reply
http://jacquesmattheij.com/How+To+Sell+Your+Company
It's a bit more nuts-and-bolts than Justin's (excellent) post here, add to taste for best results.
[+] [-] lazyjones|11 years ago|reply
What can't be said often enough is that whether the founders will stay or go makes a huge difference in the valuation usually. If you value your freedom, you should accept a significantly lower price (think long and hard about it), as founders leaving will increase the risk for the buyer.
Another thing worth mentioning (happened to us): a change of ownership will stir up trouble in the company, so expect some people (troublemakers usually) to leave or cause other problems (we've had downright refusal to do particular work well within the bounds of their jobs, simply because the previous bosses had done these things themselves).
In any case, sealing the deal is only half the work, expect a lot more hassle in the year or so after that.
[+] [-] jzila|11 years ago|reply
[+] [-] merrua|11 years ago|reply
[+] [-] anatari|11 years ago|reply
A breakup fee would help mitigate this. Is that uncommon and difficult to negotiate for?
[+] [-] Im_Mr_Manager|11 years ago|reply
[+] [-] icelancer|11 years ago|reply
The guy dropped into my lap and made me a reasonable offer, which now "looks bad" because he's doubled revenue in six months. Not, obviously, that I'm complaining....
Luck is a huge part of the whole process. I went months and even almost 2 years resigned to the fact that I would be turning in 80 hour work weeks while having two kids and a wife to try and please, and that my personal health would be the sacrifice. I am not sure how I'd survive or if I could even continue to run the company under those conditions for much longer than I did.
I feel for the sole owner of a startup gaining traction and nearing an inflection point. I just wish I had more advice.
[+] [-] JangoSteve|11 years ago|reply
One thing that it seems people often forget is that, in business, if you're truly entering in to mutually beneficial agreements (whether it's hiring someone or being acquired), both sides generally will try to come to some sort of arrangement that makes sense for both sides. In other words, when it's understood that an agreement is win-win, then both sides are motivated not just for themselves but for the other side as well.
Of course, the sentiment is a bit idealist, as the hard part is actually figuring out when someone is being genuine and knowing exactly what value you're providing to them and they will provide to you. If a company really wants to buy you, and they're not trying to pull one over on you (e.g. intentionally offering much less than your value), then they won't try to strong-arm you into doing something you don't want to do. I think this is what the author is getting at when they say that it's okay for you to push back on things such as offer price, deadlines, etc. The key is to also be genuine and not try to pull one over on them.
Of course, this sentiment is also a bit idealist, as the hard part is knowing what your actual value is to the other party, as there's seldom an absolute value of something; it usually depends on the situation of the environment and other party, which constantly changes and which you won't have the full story.
This also assumes that genuine parties are wholly genuine and that they're not being led astray by other parties, whom they absolutely trust but who may not be genuine or as capable as they have led the primary parties to believe. I've seen plenty of deals fall through, or almost fall through, because of good people being influenced by outside factors.
I kind of lost my point in all that. I think it was simply that, while acquisition talks are stressful and time consuming, they can also be scary. That fear however, usually comes from doing a deal in which you may feel you're misrepresenting your value (and thus trying to get more from the other party than the actual value you're providing), or in trying to do a deal or negotiation which you feel you absolutely cannot walk away from. Both of these situations lead to more volatile negotiations which fall apart more easily. And this can lead to making the wrong concessions or agreements, which gets us back to one of the points in the article, which is that the best time to solicit an acquisition is when you don't need it and can easily walk away.
[+] [-] lsc|11 years ago|reply
This has... not been my experience at all. I mean, maybe it's just that I haven't worked on big enough deals? But my experience is that flexibility exists at the "handshake deal" size, but once the total deal value surpasses, say, the value of a nice used honda civic, professionals are excellent at squeezing as much surplus value (in dollars, of course) from the deal, and negotiation on things that are not money is largely impossible.
Now, for me? this has been true for every large deal. However, every large deal I've done has been with someone staggeringly larger than I am. (the largest was probably a co-lo deal with a staggeringly large co-location provider... with a total deal value above a quarter million bucks, so I'm small fry.)
Players that are my size or smaller are willing to be super flexible about everything, like you describe, but the deal value is usually so small that the only profit to be had is that it's fun to work with them, or that I get to learn something from them. And yeah, that's good and important and stuff, and I do a lot of deals at that level, but I almost think of this more as a social thing; network building and/or drinking with friends. I could do deals at that level all day every day and make rent, but there's no way I'd come close to what I can get as a moderately competent contract linux sysadmin working for a giant faceless company.
Why is this? Well, small companies, generally speaking, just don't have huge amounts of cash to throw around. And large companies? for large companies, I think it has a lot to do with what tptacek said about legal costs. A long time ago, there was talk of selling my company. I mean, it ended up being that they wanted to hire me for two years, at 30% more than I could get as a consultant, plus some performance bonuses that would depend as much on their actions as mine. But the total deal value would have been almost but not quite twice my previous largest deal value. Still, small potatoes, by the standards of such things. They were larger than I was... but still pretty small by industry standards, so they were willing to be super flexible, though they needed to keep the deal size super small.
The point I was making was that legal would have eaten all of the difference between what they wanted to pay for me & the company and what I can get paid as a contractor. The less standard the deal, the more it costs in legal. I imagine this is why large companies are so... inflexible on sub-MM deals. They have standard deals that have been approved by legal, and they don't want to spend the money to get a new deal approved.
So.. yeah, that's my experience. Deals are either handshake deals, with amounts of money changing hands that really don't matter (and I've bought companies at that level; It's common in the hosting industry, when someone is tired of running their company.) or they are large enough that legal is involved, in which case, unless it's a truly staggering amount of money, the giant cost of legal makes the deal way less interesting.
I've seen the same thing in employment. If you wanna work for someone like me for $15/hr, you can get all kinds of flexibility, no problem.
If you want to work for said faceless company and make decent money? you do it their way. You conform to their standard deal. I mean, they have a lot of standard deals you can conform to... and conforming to any of them is just fine, but pick one and quit fucking around.
(I mean, if you are an incredible person, again, it's probably different. But if you are a mortal who maxes out somewhere between $70 and $100/hr like most of us... you conform to their deal structure, or you come work for someone like me at 1/5th that.)
[+] [-] inmygarage|11 years ago|reply
Thanks for putting this together, Justin.
[+] [-] tptacek|11 years ago|reply
[+] [-] porter|11 years ago|reply
[+] [-] prostoalex|11 years ago|reply
I cannot find a good link on it, but I think Novell used this technique when being approached by Microsoft.
[+] [-] fudged71|11 years ago|reply
[+] [-] tptacek|11 years ago|reply
[+] [-] joeblau|11 years ago|reply
Justin; Could you touch on some other vanity metrics that you see companies measuring their success by?
[+] [-] justin|11 years ago|reply
Basically anything that isn't active users, revenue or profit.
[+] [-] jmathai|11 years ago|reply
Truth. Identify who that person is and focus your energy on making sure they have everything they need to stay motivated to sell their company on buying yours.
[+] [-] shenoyroopesh|11 years ago|reply
This applies not only for selling a company, but even consulting gigs, job offers, partnerships, etc.
[+] [-] emiliobumachar|11 years ago|reply
[+] [-] applecore|11 years ago|reply
Isn't this obvious? If you don't want to sell your company, don't talk about selling your company.
[+] [-] tptacek|11 years ago|reply
[+] [-] bentoner|11 years ago|reply
[+] [-] tptacek|11 years ago|reply
[+] [-] AznHisoka|11 years ago|reply
[+] [-] talltofu|11 years ago|reply
Thank you for putting techcrunch where it belongs
[+] [-] notastartup|11 years ago|reply
[+] [-] xenosapien|11 years ago|reply