I wrote about the long and arduous IPO path a while back. Here we discuss the equally daunting mergers and acquisitions (M&A) path.
The growing trend in early-stage M&A is to ditch the suits. According to Dealogic, 73 percent of acquirers utilized a formal investment banking firm in 2003. By 2013, only 31 percent of acquirers used a formal investment banking firm. Ironically, M&A volume has increased, not decreased.
Acquirers, typically large technology firms with cash to burn, are recruiting classically trained investment bankers and training them to identify early stage opportunities. We call this function corporate development, as the role finds holes in the corporation's current technology and uses acquisitions to develop these areas. The focus is not so much on revenue, but product and staffing needs. Hence, the newly coined term acquihire, which occurs when you can't hire engineers so you acquire them.
On the other side of the transaction, the acquisition targets don't have the resources to recruit a corporate development team. However, early stage companies need to be armed with the same expertise. They need acquirer research, a valuation estimate, and a negotiation plan.
Here's what you need to do it yourself:
Acquirer Research - Begin reviewing your competitive landscape for companies that may work well with your team. Look for companies that share your culture, value, and vision. It's good to get to know these companies before you need them. Strategic partnerships are a great way to test the waters.
Valuation Estimate - Be armed with a valuation estimate based on related transactions in your industry. You can pay for a service that tracks these numbers or you can research them on your own. This guide to valuing your company explains the methodology.
Negotiation Plan - If you do your homework (know what you're worth) and have discussed all the possible outcomes (asset sale, equity sale, or acquihire) you should be able to set parameters for negotiating the transaction.
Closing the Deal
Most acquisitions will require you to stay around. If it's an acqui-hire, the assumption is that you are now an employee of the acquirer. If it's a traditional equity sale, you will more than likely receive an earn-out in your offer. For example, you will be required to stay on for a set period of time to earn additional compensation based on the company's performance. If it's an asset sale, you are simply selling certain assets and in most cases won't be required to tag along.
It is critical that you understand what the "NewCo" will look like. Will you be replacing an existing team? Perhaps you are tasked with creating a new division. Make sure you are on board with the integration schedule. If not, it could hamper your ability to receive compensation outlined in the earn-out.
Have questions about the process? Leave a comment below or tweet me @atelieradvisors.