Acquirers | Exit Planning for a VC backed company
This is the second in a series of posts exploring M&A for VC backed companies by Nicole Bentz, Flyover Capital & Abhinaya Konduru, M25.
- Post 1 : Why & What?
Previously, I talked about why exit planning matter and types of exit paths. In this post, we will look into who the acquirers are and why they acquire companies.
Who Are Typical Acquirers?
Typical acquirers are larger corporations driven by a diverse set of motivations. Those motivations include, but are not limited to, a desire to diversify their business or product suite, expand across a new or adjacent market, consolidate the market and solidify their position. The motivations behind an acquirer’s purchase will often dictate the role of the acquired company post-acquisition. Will your company remain a stand-alone business unit within the new company? Will it be warehoused? Will your company become fully integrated into the new business? Understanding your role, and the role of your company, in the new organization is vital when considering an acquisition offer.
Another common type of acquirer is a private equity (PE) firm. PE firms typically acquire a controlling interest in the company. Then, a PE firm will work to implement operational efficiencies and create value within the acquired company. Ultimately, PE firms hope to substantially increase the value of the company to reach a profitable exit at a later date.
For the purposes of this post, we will focus on corporate acquirers.
Why Do Companies Acquire?
Companies will acquire for a multitude of reasons, all of which can impact the value they will place on your business. These reasons can best be thought of as a series of three tiers, with each tier representing a different acquisition profile. The base tier, a Team Acquisition, aka an “Acqui-Hire,” being the most common yet usually deriving the lowest value from an acquirer. The top tier, a Strategic Acquisition, being the rarest type but typically garnering the highest value from acquirers. Of course, the best acquisitions will often blend aspects of all three tiers.
As a CEO your job is to convince an acquirer that your company is worth more than the sum of its parts to the acquirer. Hopefully, a significant multiple! Below are the common characteristics of the three types of acquisitions:
1. Team Acquisitions (aka “Acqui-Hires”)
A team acquisition, also known as an “Acqui-Hire,” is the most common type of acquisition. In a team acquisition, a company is purchased as a means to efficiently hire key, often hard to otherwise hire, talent. You and select members of your team will join the acquiring company, bringing your unique experiences and expertise to the company. In an “Acqui-Hire,” the acquired company typically has the least leverage during the negotiation process. The primary motivator for an acquirer is simply the opportunity to improve the level of their team’s talent.
2. Product, Tech, or IP Acquisitions
When you think of traditional M&A, you are probably envisioning a product, tech or IP acquisition. Companies considering such an acquisition are typically looking to fill a gap in their current product suite, tech, or business. This is often depicted as your classic “build or buy” decision. Should a company invest the time and money to build out a new product or enter a new segment of the market? Or would an acquisition enable them to leapfrog their current roadmap? Even better, would an acquisition increase their customer base, revenue, and chances at future growth opportunities? You should work to convince them the answer is yes, and hopefully by a significant multiple!
Post-acquisition, your product will likely either continue to operate as a stand-alone product or be integrated into the acquirer’s product suite. This is a prime example of why it can be helpful to form strategic partnerships with potential acquirers early on! If you have already demonstrated an ability to easily integrate into the acquirer’s product suite, you have not only proved that you can quickly prove your value, saving the acquirer time, but you have also removed a potential point of friction from the deal.
3. Strategic Acquisitions
A truly strategic acquisition is the rarest type of acquisition. Acquirers will view a strategic acquisition as an opportunity to purchase a non-reproducible asset. These are “category-killer” purchases, forever altering the acquirer’s business and an industry’s market dynamics. A strategic acquisition will dramatically impact the acquirer’s business opportunities by an inestimable multiple. The opportunities a strategic acquisition opens for an acquirer include, but are not limited to:
- The consolidation of a market
- An ability to cross-sell,
- The opportunity to enter a new market, or
- The ability to block a current, or potential competitor’s market positioning.
In other words, this is a “can’t miss” opportunity for the buyer, worth far more than the mere financial value of the acquired company.
As you can imagine, strategic acquisitions are often an emotional decision for the buyer. For example, the buyer may be motivated by “FOMO” if they are unable to acquire the company. Or worse yet, if one of their competitors acquires it. Proceed with caution in these types of situations. Generally, it is best to keep emotions out of the negotiation process. Of course, not everyone does. Be cognizant of the emotions and motivations at play for a strategic acquirer — and yourself!
As you continue to build a valuable business, your chances of reaching the next “tier” for a potential acquirer increase. For every additional tier you climb, you increase the value of your company and should be able to prove an even greater impact to the acquirer’s business. Remember, successful acquisitions rarely come to fruition for a 1x impact to the acquirer’s business. Acquirers are motivated by the long-term opportunities for impact and growth to their business.
In the next post, Abhinaya will go into a checklist of items that you can keep in mind during various stages of a company.
