How to Avoid Common Acquihire Mistakes

Written by Dave Bailey

Filed under board management strategy

Acquihires can provide a soft landing for your tech startup team and return value to your shareholders. Here are a few tips for startup founders to get your negotiation off on the right foot.

1) Don’t overlook old-school businesses as potential buyers

As a startup, you may be biased towards selling to another tech company. However, don’t overlook the opportunity to sell to ‘old-school’ companies with little technology but with a lot of cash that could benefit from your team and its skills. One HR-focused startup in my network was bought by a recruiting company to leverage its large data set.

2) Don’t focus on your minimum requirement

If you bring an attitude of “anything over X amount would be a good deal”, you might be focusing too heavily on your reservation value—that is, the value below which you’d walk away. Instead, focusing on the value you can add to your potential acquirer is likely to get you a better result.

3) Don’t forget to research the latest benchmarks

Acquihires are a market like any other, and benchmarks exist for how much companies can be acquired. For example, in some markets, a hungry acquirer will pay upwards of $1 million per developer. Why? They get speed to market and also stand to make a considerable return by starting six months earlier.

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4) Don’t forget to uncover the buyer’s interests

In any negotiation, your optimal strategy is to focus your counterpart on your aspiration (that is, the optimistic outcome for you) and their interests (the benefits of acquiring your company).

But how do you get them to reveal why they really want to buy your company? Try on the Buyer’s Mindset:

“I want to make sure the future role is really worthwhile. What would we work on, and what would be the impact?”

This simple question turns the potential acquirer into the ‘seller’, trying to convince you that your work will be incredibly valuable. Wherever possible, get the potential buyer to reveal numbers:

“How much is this opportunity worth?”

“What are the benefits of starting now versus in six to nine months?”

5) Don’t forget to position your IP

Take stock of your current IP to see whether it can meet a need for your acquirer. This includes your mailing lists, customers, revenue streams, relationships, and your code. Be cautious of falling into one of these fallacies:

  • “I could rebuild this in a week, so it can’t be that valuable.”
    You can build it quickly because of all the study, practice, and skill you’ve developed. The acquirer may not have this.
  • “This isn’t one of our main features, so it can’t be that valuable.”
    Value is in the eyes of the beholder. If the code solves a problem and your acquirer’s tech resources are focused on other things, then it’s value they wouldn’t otherwise have.

Think like an entrepreneur, not an auditor. What are your acquirer’s needs? How can you craft a solution using what you have?

6) Don’t forget to negotiate with your preference shareholders

Everything is always open to negotiation—even liquidation preferences. When the preferences are high, you will often have little-to-no financial incentive for the founders to accept an acquihire. In these cases, some investors will agree to special terms, such as a management carve-out, to align incentives and preserve relationships.

7) Don’t commit team time without an LOI

No acquisition process is guaranteed to succeed. Maximise your chance of dealing with a serious player by asking for a Letter of Intent (LOI) in writing. While it’s not a guarantee, it may increase the likelihood of the acquirer following through.

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8) Don’t reveal your alternatives (but imply that they are good)

As soon as you reveal your alternatives, you stand to lose ground in the negotiation because your potential acquirer will justify why their offer is better than no offer (a tactic that you want to be using!). Instead, consider using this phrase when the time is right:

“We have some other offers, so would it be feasible to get your best and final offer in writing by tomorrow?”

Related reading

Originally published Mar 15, 2024

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