Updated: Dec 7, 2020
In the year 2018, I got to sit shotgun on two different acquisitions at two separate companies, both handled very differently. This lucky/hard-worky streak earned me the tongue-in-cheek nickname "The Angel of Acquisition," and taught me a great deal about the acquisition process -- before, during, and after.
Now that the deal has closed and the dust has settled on acquisition number two, I'm going to do what I do best and share my learnings. Hopefully this will set you up for success should you ever find yourself supporting a leader or leadership team who is angling to sell.
If your startup is hoping to get acquired down the road, there are three important things you need to be doing from the very beginning. 1. Build a company worth buying, 2. Forge strategic relationships, and 3. Keep clear and detailed records.
1. Build a Company Worth Buying
A friend of mine who flips houses for a living once told me that she will only buy a house if she is confident she can turn it into a place that she herself could call home.
Likewise, you should never start a business you wouldn't want to keep running indefinitely. Build it to grow, and build it to last.
That means thinking about things like scalability from the very beginning. Believe the big lie and see your little seedling as a potential old-growth oak, not just as a sapling you plan to sell ASAP.
Hire the best people. Create the most efficient processes. Build the most buzzworthy brand with the best product-market fit you possibly can. Because if it's not bringing you value, then it's not going to be valuable to anyone else, either.
2. Forge Strategic Relationships
There are four interrelated pools from which to draw potential buyers, and your CEO should be cultivating relationships with all four from the very beginning: customers, investors, partners, and competitors.
If you don't know who your customers are, you're in more trouble than I can help you with here, so I'm going to assume you already have strong relationships in this area. Sit down with your CEO and make a list of your best, most brand-loyal and product-passionate customers.
Now add to that list all the customers you don't yet have but who have strong potential.
Look over your list. Which of those customers has the deepest pockets? Which are large enough to support an acquisition? Which is most likely to have a strong enough need for your product that they will eventually want to own the company? Pare it down to the most likely candidates, and plant the seed with them well in advance that you may be willing to sell down the road.
When it's time to look for investors, if you aren't looking already, keep in mind that in addition to traditional funding sources such as angel investors and venture capitalists, you should also be approaching companies you think might want to buy you someday. That way you can kill more than one bird with your precious investor-outreach stones.
Next, think about partners and potential partners, i.e. other companies you work with to produce, market, or sell your product and/or theirs. Partner acquisitions can be a true win-win, so keep an eye toward forging a deep, symbiotic relationship with at least one company of means.
Finally, take stock of your competition. Who else is in your space that is large enough to support an acquisition? Who could use an infusion of new talent and ideas? Whose product could be taken to the next level by incorporating yours?
Some of the companies on your list will show up in multiple categories, and those two-fers, three-fers, or four-fers should go right up at the top of the list. That said, your leadership should be building strong relationships in all four of these areas, treating all of them as potential buyers, and dropping hints that they may be open to that option.
Subtlety is your friend. You don't want to come off as desperate to sell, so a half-joking remark is the best way to go. You'd be amazed at how many acquisitions are kicked off by an off-hand "You should probably just buy us, ha ha."
3. Keep Clear and Detailed Records
One of the most grueling parts of the acquisition process is Due Diligence. This is the part where NDAs have been signed, an agreement has been reached on terms, and now the acquiring company wants to see the goods (more on that below). They're going to want you to open up the kimono and show them everything: financial records, HR paperwork, legal documents, sales and marketing numbers, and of course a deep-dive on your product.
It's like getting audited, but across every single aspect of your business. And guess who is going to carry the brunt of that burden? Yep: you! So if you haven't been keeping meticulous track of these things in advance, you are in for a very rough ride.
I highly recommend that, regardless of your eventual intent to sell, you keep records as though you plan to get acquired by a large company with a team of people dedicated to combing through them. This includes audited financial records, a security assessment by a neutral third party, and consistent processes across the board. That way you're prepared for any eventuality, and as a bonus, you'll have meticulously managed records. And that's never a bad thing.
It's also a good idea to make sure your legal representation has experience in handling acquisitions. It's not required, of course, but it sure helps to have someone along for the ride who has been down this road before.
Part two: The Acquisition Process
Once a company has expressed clear interest in acquiring your startup, you can expect all of the following to occur:
You will be asked to sign a non-disclosure agreement or NDA.
You will be asked to send summary-level documentation to support your claims around historical and projected results.
If that goes well, you will receive purchasing terms in the form of a Letter of Intent or LOI.
You'll get a list of due diligence items to put into a folder for perusal by the acquiring company.
If they like what they see, you will enter into final negotiations.
If and when a final agreement is reached and signed by both parties, you will move on to the closing process, which can take anywhere from a couple of weeks to several months to complete.
The Non-Disclosure Agreement
Once your leadership has signaled willingness to sell to a company that is serious about acquiring, both sides should sign a non-disclosure agreement (NDA). This protects both parties from potential information leaks--about the confidential information you're about to show them, about the terms of the deal, or simply about the fact that there is a deal on the table at all.
During the PlayFab acquisition by Microsoft, our CEO James made the decision to be completely transparent with the entire company, every step of the way. That was in line with our values as a company, and simplified things immensely in terms of who had access to what information and when. But it was only possible because of the small number of employees (17 of us altogether), and the high value we placed on trustworthiness as a culture.
James made sure that each and every one of us understood what was at stake should word of the deal or any of the details get leaked to the press somehow. And so we were invested on a personal level, and agreed as a group only to tell our spouses, impressing upon them in turn the importance of keeping this information confidential.
The Qualtrics acquisition was exactly the opposite. Even though I was supporting two high-level executives (CXO and Head of Product), I had no idea acquisition was even on the table until the announcement was made that an agreement had been reached with SAP. In fact, neither of my bosses was in on it until just before the rest of the company was told.
This level of secrecy is not easy to pull off, and was only possible due to two mitigating factors:
Qualtrics was on the verge of going public when the deal materialized. This provided a convenient smoke-screen since the heightened secrecy and unusual activity could be explained away as part of that process.
The deal moved at lightening speed. From LOI to final agreement took a total of two weeks. That's practically unheard of.
Most companies adopt a "need to know" policy, meaning that only those who need to know about the acquisition--for example, those working on due diligence--are made aware of it until a final agreement has been reached. Whatever you decide to do, make sure your policy is clear, consistent, and comprehensive.
The Letter of Intent
Once the NDA is signed and counter-signed, you'll be expected to send over financial statements and other supporting documentation showing the kinds of results you've been getting and expect to get moving forward. This is a very high-level form of due diligence, somewhere between a sales pitch and a comprehensive overview. Based on that information, the purchaser will either decide to terminate negotiations or proceed with an acquisition offer. That offer will come in the form of a Letter of Intent (LOI), also called a term sheet.
The terms will, of course, vary, but you can expect them to make an initial offer and to request a period of exclusivity, meaning that you are committing to deal only with them and not go shopping for competing bids. If you do, you'll be in violation of the terms of exclusivity and the acquiring company is well within their rights to withdraw their offer and walk away.
In fact, let me emphasize that either party can choose to walk away at any time during the negotiating process. It isn't over until the deal closes, so never get cocky or think you've got it in the bag.
One of the biggest risks in entering into an acquisition process is distraction, in other words, focusing all your energy as a company on getting acquired and not on continuing to run and grow your business as usual. Just remember that if your business results suffer during the acquisition process, your likelihood of losing the deal significantly increases, so do your very best to carry on and keep your priorities straight.
Due diligence is exactly as much of a pain in the ass as it sounds. You will need to track down documents across every aspect of the business. Do yourself a favor and start collecting documents you predict they are going to want for due diligence as soon as you learn that acquisition is on the table.
Here is an example of a typical due diligence checklist.
Don't be surprised if they follow up with additional requests or questions on what you've sent over. But don't just blindly hand over any and all information they ask for. Though you don't want to come off as uncooperative, it is your right and responsibility to only hand over information that is directly relevant to your valuation. This is especially true if your potential buyer is a known competitor (though keep in mind that any company that is looking to acquire a business in your field is now a potential competitor!). For example, never hand over your client list or detailed pricing information during due diligence, and only give over personal identification details for your employees after a final agreement has been reached.
The due diligence process is generally handled by a discrete team, often a third-party vendor that specializes in acquisitions, so don't be discouraged if you don't hear anything directly from the acquiring company for a while. Even after you've submitted all the requested documents, it can take weeks for their team to peruse it all, and just when you think you'll get a final answer you may get another list of requests instead!
Eventually, though, the due diligence process will in fact end, and the team will pass on their findings and recommendations to senior management, who will in turn adjust their offer in accordance with what they've learned.
Generally this results in a lowering of the offer price, both because they now have ammunition in the form of any tech debt, security risks, or other concerns raised during the due diligence process, and because they know that after going through that grueling process you are unlikely to walk away from the negotiating table.
At this point, you are likely to be presented with the initial draft of a purchase agreement, the terms of which will undoubtedly favor the acquiring company. At this point the conversation is largely between their lawyers and your lawyers, which is why I highly recommend hiring legal counsel that is familiar with the process.
As in all negotiations, there is likely to be a lot of back and forth. They'll try to get a deal that favors their interests, and you'll counter-propose a deal that favors yours, and so on until you reach an agreement or one of you decides to walk away from the negotiating table. Which, to reiterate, can happen at any time.
Once a final agreement is reached, both parties sign the agreement. It is at that point that the deal is generally made public, and any employees who were not made aware of the acquisition beforehand should be informed.
Obviously, the way that news is delivered is incredibly important. The messaging should be positive and celebratory of course, but it should also set up realistic expectations of what is to come.
This will be better news for some than for others, and though your leadership will need to help everyone understand why this is good news for the company overall, they also need to remain sensitive to those for whom this is an unwelcome turn of events.
For example, there were a handful of folks at PlayFab who had previously left Microsoft and were not especially keen to go back. James had to be very careful neither to dismiss their concerns nor to allow the minority to poison the well for the majority. And at Qualtrics, a number of us were so new that we had no vested stock at all, and it was pretty demoralizing to watch senior leadership blatantly celebrating their newfound wealth as if we were all in that same golden basket.
Part 3: Transition
As an administrative professional, you may or may not be offered a position within the new company on the acquired team. My understanding is that it is unusual for startup admins to get full time job offers at acquiring companies, for the same reason I started this blog in the first place: because the scope of the role and the necessary skill set to do well in each is vastly different. In fact, it was only at bossman's insistence that I was offered a transitional 6-month position at Microsoft, and in hindsight that's the only thing that would have made sense.
If you are kept on, though, you will likely have an important role to play in the transition from the original company to the acquiring company. If you're a small team being acquired by a much larger company, they're likely to have a team dedicated to helping you adjust and assimilate, with you acting as the primary point of contact for your team. That means all information will flow through you, either in the form of questions from your team that you will then ask the transition team, or in the form of information and announcements from the transition team that you will then pass on to yours.
The most important thing you can do during this time is to minimize attrition by serving as a listening ear and an advocate for your team. It's in the acquiring company's best interest to make sure your team is set up for success, so don't be afraid to push back and ask for exactly what you need!
In a larger and more established company, the transition may be more subtle or delayed. The acquiring company is likely to want you to keep operations churning along as usual, with minimal disruption and distraction.
Eventually you will start to see changes such as switching to using their internal tools, changing to their insurance policy, and adjusting to their financial schedule. It's a good idea to anticipate these changes in advance and prepare those you support for the transition.
If you have questions not covered above, please leave them in the comments! I'll be happy to answer them.