What Every Founder Should Know When An Acquirer Comes Calling

By on October 31, 2013


Congrats, someone is interested in talking about potentially buying your company! For many entrepreneurs that’s an exciting feeling. But the acquisition process can also be intimidating and even confusing. You may not know why a potential buyer is calling, what exactly they want, or what to expect throughout the process. Part of the reason for that is there are no set rules for how an acquisition occurs. The specifics of the process can vary depending on the types and size of companies and buyers involved. Still, based on our experience with hundreds of corporate development members actively engaging with Exitround companies, we wanted to give a general sense of what to expect when a potential buyer comes calling. As you’ll see, there are many different boxes that need to be checked for a potential buyer to pull the trigger and buy a company, but with a well-prepared, transparent approach you can make the process as smooth as possible. And keep in mind that you’ll have to tailor this to your specific situation.

1) Getting To Know You

After initially connecting, a buyer will ask to set up a first phone call (typically within a week’s time) in order to quickly gauge your general interest and fit for his company. Consider this like the initial phone screen during a normal hiring process, to determine the highest level feel of a conversation to see if it’s worth spending more time on this potential match. This is also the time where you should get a sense for if the buyer is actually not interested in acquiring you, but just wants to learn more about you for the future. Or if the buyer may just want to explore business development deals. In other words, how serious are they and how serious are you. (This is the subject of a more in depth future blog post.)

2) First Information + Face-to-Face

If the initial phone call goes well, they will now (within a week of the initial first call) ask for LinkedIn profiles, GitHub profiles, and any other team and/or high level product information (if they haven’t already).

Typically, they will also want to set up an in-person meeting with the founder/CEO or cofounders. The goal of this meeting is to get a sense of your expectations, as well as a closer look at the fit of your company with theirs. If you’re not geographically located near each other, they’ll look to set up a web video conference or longer phone conversation.

Pitch Deck or other data: It’s uncommon that founders already have these documents and information about the company such as engagement metrics, monthly recurring revenue numbers, and past quarterly and yearly financials. But we’ve heard from our corporate development members that it’s often very helpful if the startup comes to this meeting having done some homework and preparation. Some more experienced founders who have gone through this process before have a short deck prepared to help explain the business and synergies between the two parties.

As one of our expert M&A Advisors, David Liu, Managing Director of Technology Banking at Jefferies, says: “Always have your pitch deck ready.” What he means is, no matter if you’re raising money, trying to close a sales or business development partnership, or looking to get acquired, you probably already have a deck handy in order to bring the potential buyer deeper into your story and help them understand exactly how the two parties can fit together. No need to go build something fresh, but tailor your existing deck to that of the interested buyer.

In another example, we’ve seen other more experienced founders prepare a detailed summary of each of the team member’s specific technology contributions and past roles. This is different from a resume in that it lists all the employee’s prior companies and roles, and explains each of the specific projects they had been responsible for. This gives the buyer a deeper understanding of the specific skill sets, expertise and leadership experience of each individual team member.

3) Devil’s in the Details: Setting Expectations, on both sides

Here’s the real meat of the conversation. This may come after the first in-person meeting, though many of the more experienced acquirers tend to have this conversation earlier rather than later to make sure expectations are aligned. In this conversation, the buyer will explicitly ask or suss out the following points:

  • What are your (the founder’s) expectations of what would happen in an acquisition with this party? (You must keep the team together or don’t care, You must work on a the same product, don’t want to work on old products, etc.)

  • What’s your feeling about the buyer shutting down the product after the acquisition?

  • What would happen if the buyer wanted only some people on the team, but not all? (IE the rest are let go.)

  • What are the expectations of your investors (return on investment, etc.) ?

  • How long are you and your team willing to stick around the acquiring company, post-acquisition?

  • What is motivating you and your team? Being known as an “acquired” company? Making money? Soft landing for your employees? Returning money to your investors?

  • What are your expectations on culture of the acquiring company?

Ultimately, the buyer is trying to get an idea of the total “clearing price” (which is much more than just dollar value) that you and your team are expecting, and whether or not that matches with their strategy and ability to provide you with a satisfying outcome.

The buyer’s worst fear actually isn’t overpaying, though they’re quite good at making sure they don’t do that; their biggest fear is acquiring a company and team that isn’t happy and leaves shortly after the transaction is complete. Often the people are the most important part of a transaction, even as part of an important IP, technology and product acquisition. In addition, each of these transactions take up an immense amount of time and resources for the acquiring company. So to have people leave quickly after an acquisition actually hurts the business worse than if they’d never have engaged in the first place.

At this point in the process, you should have a fairly clear picture from the buyer about what are the core assets they’re looking to buy. Is it just the team, is it a specific product or piece of technology, or is it the entire company? Each of these components (and others) means many different things in terms of the type of transaction, compensation, team outcome, investor return, tax implications, and so on. Ultimately, this is the point at which you should decide whether or not this a type of deal you, as the Founder, are excited to moving forward on, and whether or not it makes sense to further engage the rest of your team.

Managing the expectations of your team within an acquisition process is a very delicate game. You want to balance the timing of when you inform your team, with where you are at in the process. You may not want to tell your team too early, to help insulate them from the inevitable emotional ups and downs of the process. Though at the time you move towards Team Interviews, you will have to bring them up to speed. This is a great area to seek the advice of your Board and Advisors who may have gone through this before and can make specific suggestions given the unique dynamics of your particular company and team.

4) Team Interviews (1-2 weeks)

If it appears that expectations on both sides are within a standard deviation of each other, the buyer will request to meet and interview key members of your team. They may ask to meet specific people, or they may ask you to select a small group of your top employees to send for interviews. These are almost entirely always engineers or key technical product people.

These interviews will typically be held by engineers or technical product people at the acquiring company who will try to determine if there’s a technical skill, process and culture fit. Each individual interview could last from a couple hours to half a day.

Typically these interviews include high level questions that test the understanding of the “fundamentals” of programming. Oftentimes, these are questions, theories and concepts that many engineers haven’t been thought about since computer engineering classes in college. And many times the interviewee is asked to stand before a white board and draw out the solutions by hand.

This is a very, very common place where interviewees get tripped up, and where reviewing some of the basics and fundamentals of computer science would be helpful. (Note: This is the subject of a blog post, a series even, all on its own).

If the first set of interviews goes well, the buyer will typically ask to interview the rest of the technical team in a similar fashion.

5) Deal Execution & Due Diligence (4-8 weeks)

If you make it past the interviews and the buyer is still engaged and pressing ahead, you’re moving into the actual Deal Execution and Due Diligence phase of the process. Typically, this means that the buyer is happy with the product and experience fit, and that most of the team members fit the skill and culture check.

It’s at this point the buyer should come to you with a pretty cut-and-dried view of exactly how they’re looking at the transaction. They’ll tell you what assets they may be interested in buying, how they want to structure the transaction, and which people they’re specifically interested in bringing over. They’ll also give you a view into how they’re thinking of valuing the transaction and what it will look like as a ratio of compensation, equity, cash or both. Also they would lay out how they’re thinking about retention bonuses and/or earn-outs for the team.

This could all be conveyed in a conversation or more formally presented in a term sheet. Once you get a term sheet in hand, now begins the legal song-and-dance. Lawyers come in on both sides, negotiate over terms, legal structure of the transaction, and representations and warranties of each side.

This also begins the more formal “due diligence” process where the buyers dig into all your legal documents, IP warranties, patents, financials, forecasts, and so on.

(The specifics of this is too complex for this post, we’ll depend on one of our expert legal advisors to help detail this process in another post).

6) Deal Closing

This is it! After the legal back and forths, and after the due diligence is complete, you’re finally ready to close. Typically, both parties will agree to a closing date before they engage in deal execution to ensure the process continues moving forward at a timely pace.

When the deal closes you and your team will sign Offer Letters of Employment at the acquiring company, any non-retention/earn-out acquisition consideration and compensation will be paid out (cash, equity or both) and you will begin work at the new company.

In closing, please note this is a highly generalized view of the acquisition process; if you have had different experiences and want to share openly or confidentially, or have additional questions please submit them at ask@exitround.com. We’d love to hear from you!

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9 thoughts on “What Every Founder Should Know When An Acquirer Comes Calling

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  8. […] The information in the report will be of particular interest to entrepreneurs and investors seeking to understand the trajectories of startups and what possible outcomes are for their companies–particularly since 88% of tech M&A deals happen below $100 million. Determining potential outcomes is a useful baseline to have in mind as entrepreneurs and investors think about how much to invest or raise, and at what valuations. Knowing the market is also important when entrepreneurs and investors go through an acquisition process. […]

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