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Ask HN: How do you deal with potential acquirers?
105 points by rexreed on Jan 17, 2014 | hide | past | web | favorite | 23 comments
How do you respond to someone who says they are interested in acquiring your business (especially a potential competitor) but won't make an offer until you share your financals and other confidential data? Do you ask them to make an offer without seeing the books first or share your data, hoping they make an offer, but realizing you're sharing confidential info? And how do you differentiate serious offers from time wasters who will chew all your time only to either not offer or low-ball after seeing your financial state? Can you get away with saying: "I'm not sharing you anything until you make an offer?" But then how can you obligate them to that?

And what if they are adamant that they won't make an offer until they see your books and do due diligence? I would think that if investors can make a Term Sheet commitment contingent on due diligence, so can you do that with potential acquirers. But they don't seem to see it that way?

Here's some suggestions we've gotten, but I don't know what is common place or accepted:

* Tell potential acquirers that they must first submit a Contingent Offer providing your books substantiate certain minimum metrics.

* Tell potential acquirers that they have to pay for your time in doing due diligence, setting a flat rate (say, $20k for sake of argument), with the amount counting as a non-refundable deposit towards the acquisition amount

* Use a trusted third party to do a due diligence review, providing your information to the third-party who will not disclose it to the acquirer, but only verify certain required facts or due diligence requests. The Trusted third party inspects the books and doesn't disclose them to the acquirer but knows their desired metrics.

* Breakup fee that penalizes them for walking away.

* Confidentiality agreement with huge damages for disclosing any of the information outside a small group of people in the acquiring company.

Here is some more general advice: assume acquisitions are not going to happen, and that this whole conversation is probably a waste of time for you. Even if you tell them everything they want to know, they either won't make an offer or will lowball you. And meanwhile it will have been a huge and uniquely damaging distraction.

This model of the world doesn't imply any specific strategy you should follow, but you'll find that adopting it will change the way you think about the situation. You'll stop bending over backwards (why bother, since nothing is going to happen?) which will in turn make them take on the burden of figuring out how to make the deal happen, which they'll do if they're serious.

A thousand times yes! This is exactly how you respond. If someone says "Would you be open to an acquisition?" You can say "Would depend on the particulars of the deal." And if they want more info you politely decline and say "If you're interested in making an offer for the company, make it, otherwise let's move on to other business."

This advice is especially true of "big" companies trying to blind you with what you think of as "huge" potential only to try to see who your top employees are and whether or not they can poach them.

People who are serious about a potential acquisition will tell you, without any other information, how they would price such a deal. Don't start due diligence and the distraction it entails until you have both a signed memorandum of understanding, and the potential acquired has to pay you if they back out of the deal.

Good advice! But how do you respond to indications of interest? Just ignore them and say you are not interested until they are literally waving cash in front of you, begging to aquire you, or require that they follow specific steps to indicate real interest, such as a Contingent Offer with a due diligence deposit, breakup fee, and strict NDA?

How is this done with the lots of sub $10M acquisitions that happen? Clearly deals are being done here, so I'm sure it doesn't pay to ignore bona fide offers, but obviously there's a lot of time wasters out there too.

What do you advise your YC portfolio companies to do here? Just ignore all offers or refer them to their lawyers or investors?

Our first advice is not even to talk to acquirers unless you want to sell the company now. It's remarkable how often founders who don't actively want to sell will talk to acquirers anyway, just to see if they'll make some offer too good to refuse. But acquirers never do that. When their offers are surprising, they are always surprisingly low. And the conversation is far from zero cost. Very far. That's the other big mistake.

My assumption would be if an acquirer is willing to make you an offer too good to refuse and you aren't actively looking to sell, then not talking to them would be the best way to actually spur that offer.

And take it from me, even if it does happen, you will probably regret it while you're vesting.

With regards to companies, I think pg's answer is the correct one.

In real estate, there is an institution called "earnest money." It is structurally similar to your 2nd bullet point -- a deposit against the eventual transaction price which is forfeited if the prospective buyer doesn't close the transaction within a particular window of time. (It gets returned if the seller kills the deal.) Earnest money protects the interests of the potential seller by screening out bozos. It protects the interests of the potential buyer by reassuring the potential seller that there are 120,000 reasons attesting to the buyer being really serious about the $6 million commercial property acquisition being discussed and therefore questions about e.g. engineering, permits, tenants, etc should be responded to as quickly as feasible.

$50,000 is barely about two work-weeks or less at the rates involved of professionals involve in M&A. If you want a quick out from fishing expeditions, tell them that you're willing to entertain offers but that, to avoid wasting the business' legal/accounting/engineering resources, you'll require $50k earnest money prior to dedicating them to exploring the feasibility of a deal.

A related strategy: "I'm not super-interested in doing an investment / acquisition / etc at the moment, but I'm a reasonable businessman and willing to entertain your offer." "We need a $FOO to get the ball rolling." "I have entertained that offer and do not feel it is the best use of our time to proceed on this at this time." "It is absolutely standard to..." "If your firm really wants to do this, I'm sure you'll figure out a way to make it happen. If not, no worries -- we'll both end this chat no worse than where we started it. Best of luck in your endeavors."

I would assume that all agreements are something that can and will be broken. The only thing that works is make them put their money where their mouth is. If they are serious about acquiring you, they must be prepared to spend money to do it: lawyer fees, accounting fees, and money paid to you in exchange for your company. So, make sure there is money on the table: a non-refundable termination fee, which could be a percentage of the theoretical purchase price. I went with 5% with the sale of my company.

A good salesman will never put a price out there first, so you will probably need to come up with that valuation: just put it out there high enough so you will be happy were it to go through, and assume this is the beginning of the negotiation. If you and the acquirer cannot get close in that discussion, this is a good gauge of future success in the other more complicated discussions that will come.

As others have said, get a good lawyer. There are lots of places where this can go awry. When I sold my company (~$450k), I did not understand the difference between an asset sale and a stock sale which has vastly different taxation implications. A good accountant is worthwhile here as well for the same reason.

You can tell them you cannot engage in a detailed discussion without the termination fee conversation completed since you will be spending money as well.

> A good salesman will never put a price out there first [...]

Why would that be? Wouldn't a good salesman anchor as many details of the deal as possible in his favour?

Naming the first price tends to give up too much information. The other party now knows what you value it at (at either the highest or lowest price, depending on the side) and can negotiate you up or down from there. It also puts an immediate floor or ceiling on the negotiation that could burn you. This is especially true if the information is asymmetrical.

Imagine you're interviewing for your first job in a new industry/country - they ask you what you want to earn, and you say "$50,000". Now they can either say "oh, that's much higher than our starting rate" or "that sounds about right" - they'll almost never say "really? We were thinking $75k."

It might go against the business' interests to lowball a hire beyond the base salary, and in many places it is illegal to pay someone a lesser salary than somebody else in the same position. I've heard of the "we were thinking +$xx" happening a few times; I guess both sides end up very happy.

> [...] and in many places it is illegal to pay someone a lesser salary than somebody else in the same position.

So everyone gets the same salary (in the same position)?

First of all, get a lawyer. I went through the same thing, and talking with lawyers helped me get my head set correctly. There are various firms in SV and TX that focus on this sort of thing. I don't remember their names, but a web search will surely help you find them. Talk to the lawyers, tell them what you want, and what you got. Then have them take care of things. Otherwise, you might end up being liable for stuff you did not know about.

Also, a lot of companies do this to take away your focus. Don't treat the buyout as something real until the money clears. Otherwise, focus on the business.

I am going to counter this advice, and say first thing you do is gauge interest, start the conversations, let them push for it. When things are obviously starting to solidify and are getting serious, then consult with an attorney.

I just went through this situation last year, and while taking legal advice early on is good, it's very easy for lawyers to get their share of money. If you already have a relationship with a lawyer, sit down with them for an hour and get an overview, but don't have them do anything like draft documents, review dialogue, etc. They'll want to do these things (billable hours) but they'll just cost you a ton, when 95% of the time the deal isn't going to happen anyway.

Here's an answer I wrote to a similar question a couple months back:


Acquisition negotiations are extremely expensive. Assume they're going to fall through, and that you'll lose a lot in the process.

Confidentiality agreement + breakup fee.

Be more worried about wastng your time and diverting attention from running your business than your competitors seeing your books.

Stay focused on your business. Sacca says companies are bought, not sold.

Find a founder or board member type person who has been through a couple of these. I sold my company a couple years ago, and it was invaluable to be counseled by proven exit veteran.

Here's some general advice: * Come up with a number that you'd be willing to sell for, mostly to know when a deal is at least good enough * Anyone who is serious about dealing with you will not expect you to work for free, unless you truly have no power, which I suspect is unlikely * Keep growing & running your business until it's not your job anymore * Have fun, and don't make big decisions when tired or grumpy

Good luck my friend :)

> * Breakup fee that penalizes them for walking away.

This is pretty standard, especially when there are regulatory concerns. AT&T ended up shelling out more than $1B when the T-Mobile deal fell apart.

But what about the typical run-of-the-mill startup scenario where you're doing minimal to some small revenues and the potential acquirer is either a competitor or a larger company? Are breakup fees common in these single to low double digit $M acquisition scenarios?

Understand that "common" is a made up concept here. Every acquisition is different. You get what you demand here.

Unstated is any indication of your own desire to continue with the business. Why would you entertain the time and effort for a failed conversation? Get this straight first.

Consider the likely possibility that your potential competitor learns of your financial situation, and operations in detail, and walks away, with the intent to modify their own business based on what they learn, thanks to your tutorial.

I would impose a breakup fee to penalize them for walking away.That way you can keep non serious buyers at bay and safeguard your interest.

I think you have a number of ideas already, anything more specific would probably depend on knowing the unique parameters of your situation. What business do you have that someone wants to acquire?

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