The growing trend in early-stage mergers and acquisitions (M&A) is to ditch the suits. According to Dealogic, 73% of acquirers utilized a formal investment-banking firm in 2003. By 2013, only 31% 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, recruit classically trained investment bankers and train 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 acqui-hire, which occurs when a company acquires engineers rather than hire 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 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. Use this guide to help value your company and learn 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 acqui-hire) 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 simply sell 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 replace 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.
