The Insider's Guide to Getting Acquired
I’ve been lucky to have a front row seat for 3 startup acquisitions to publicly traded companies (Pardot to ExactTarget, ExactTarget to Salesforce, Rigor to Splunk).
It’s a wild ride and I hope everyone gets a chance to experience it.
I also worked closely with the corporate merger and acquisition (M&A) teams at ExactTarget and Salesforce — especially on the post-acquisition integration process — and have also heard many behind-the-scenes stories from founders about their experiences.
So, what’s helpful to know about acquisitions and getting acquired?
It’s probably not what you think!
Here’s the top 4 unexpected insights about getting acquired that every founder should know!
1. Being nice matters.
Before I knew the wild world of M&A transactions, I thought decisions were made with spreadsheets and slide decks based on facts, strategy, and metrics.
Silly, foolish Kathryn!
What I didn’t understand is — you have to work with the company you acquire. Definitely short term and usually (hopefully?) long term.
For the purchasing company, an acquisition is an expensive bet with no winnings until the new product is integrated into your business (and making money for you)!
To do that, you need collaboration, communication, humility, and teamwork.
In other words, you want to work with people that are reasonable and well-intentioned humans.
Now, not every company cares. But more care than you think.
And yes, you still have to negotiate, be confident, and advocate for yourself and your people. But just know that culture fit and personality DO matter.
It may be the winning factor in the deal (“I’d rather work with the team from StartupA”) or the losing one (“We looked at this space but passed because all the CEOs seemed like jerks.”)
And yes, that’s a real reason I’ve heard from a F500 leader for passing on an excellent strategic M&A opportunity.
Successful companies move too fast to spend time on assholes. Never underestimate the business value of being nice.
2. It pays to be scrappy.
Price matters to companies who want to buy you.
If two companies are pretty close in their offering but one has raised a lot less money, the acquiring company can get a much better “deal” — same tech for way less.
If a company raises a lot of money, its price goes up. They have to pay back the capital, give investors their share, and make sure there’s enough left for employees. A lower offer won’t be approved by the board.
Post-acquisition, the integration process between a corporation and larger startup is more complex and expensive.
Yes, some companies raise a lot and sell for a lot. Sometimes corporations are looking to acquire customers or revenue so the more the better.
But don’t assume that raising money to get bigger is always the best strategy for a future exit. I know many stories of smaller companies who “won” because of their size, scrappiness, and lighter cap table.
3. Sales reps have incredible sway.
One of my favorite M&A stories is about a tech startup who was acquired by a large public company…who had built the same product in-house.
Large Company built a competing product in-house. Startup Company thinks it’s done for. But the Large Company product isn’t great and Large Company reps don’t want to sell it. Startup Company builds an incredible partnership program driven by the sales reps wanting to sell their product. Large Company acquires Startup Company because they “have to” as driven by the sales org.
How amazing is that???
Venture M&A teams are often talking to company employees to find out what tools they’re seeing, what customers are asking for, and especially what sales reps are recommending or cross-selling.
A cross-selling partnership can be an M&A “try before you buy” testing ground. (Ditto for strategic investment!)
Will customers buy your product? Do sales reps want to sell it? How easy is it to sell?
If you’re hoping a partnership turns into something more, invest heavily in making the big company’s reps wildly successful.
Face time (road shows), working 1:1 with reps or pairing up your reps/their reps, a Slack channel, great technical support, executive sponsorship on both sides, and helping get deals over the finish line are all strategies I’ve seen work well.
But make sure you’re big enough and your product is mature enough for a partnership to be successful! You, not the large company, will have to do the heavy lifting to stay top of mind and help reps sell.
If you don’t get traction, it could backfire and hurt your M&A chances.
4. Negotiate early and high.
The main negotiation happens at the Letter of Intent (LOI) stage.
Yes, it seems early in the process and the instinct is “get ‘er done” asap and worry about the final price later.
BUT…
Once you sign it, it’s unlikely to go up and very likely to go down.🥴
Here’s why:
You now face a team of experienced M&A lawyers and finance folks whose job it is to uncover every possible risk, liability, or inconsistency and factor that into the deal.
Have a line of credit? That gets taken off the sale price.
Customer contract missing an auto-renew clause? Minus $2M.
No double trigger in your employee stock agreements? Less another $5M.
Like when you send an enterprise deal through procurement, expect a significant haircut.
Nothing nefarious or ill-intentioned about it. Just people doing their job.
What’s in your control is understanding how it all works!
Negotiate the crap out of the LOI and prepare for adjustments in due diligence.
What advice or unexpected stories do you have about M&A learnings?
How do you negotiate a great LOI? Tune in next week when we dive in to the best strategies for leverage in an M&A negotiation.
So insightful, thank you!
My #1 advice to any Founder selling their company is to maintain primary focus on operating and growing the business. Getting distracted by the process sometimes leads to setbacks in performance, which is often the main reason for deals going sideways.