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How to negotiate an acquisition

If you’re eyeing up a company to acquire and are eager to make the first move, here's some key things to remember.

By Miriam Partington in Berlin

Santa Clara Employee Shoot - VP Level

Once you’ve made it clear to a company that you’d like to acquire them, you launch into a negotiation process — essentially, to figure out whether the arrangement will work and if so, how.

Earlier this year, Paddle — a startup offering payments, tax and subscriptions solutions for software-as-a-service businesses — acquired Profitwell, which offers financial reporting tools for SaaS. In our Startup Life newsletter, we asked Paddle’s COO Jimmy Fitzgerald for his top tips on navigating the buying process while ensuring that both acquirer and acquired have a chance to say their piece.

Assess whether your mission and visions align

Before you get into any specifics on price or the terms of the deal, you need to establish whether your mission aligns with that of the company you want to buy. In our case, we had at least half a dozen conversations — mostly founder to founder — about the purpose of our company and how we see the world, and whether or not that aligned with Profitwell.

Prepare in advance

Before you enter the first round of negotiations, collect information about the company you’re acquiring. There’s a lot of information at your fingertips — for example, on Glassdoor, which shows you customer reviews and employee ratings. But you can also find out a lot via word of mouth. Six months before we approached Profitwell, I asked our customers if they were using Profitwel, what they liked about it and what they would change. I even talked to people within Paddle, like our head of sales in the US, to ask whether companies in deals he was working on were using Profitwell. And if so, was it their price intelligence team using the product or their consulting team? Every time you engage with a possible stakeholder of the company you want to acquire, ask that extra question. It’ll help you build up knowledge over time.

Give an idea of how much you’d pay

It’ll make negotiations easier later down the line. After we had established Profitwell was a good match for us, we put our idea of the price out on the table. It allowed both parties to state their thoughts — ie, “we’re thinking north of this number”, or “for us it’s in this range” — and helped to make everyone comfortable to go deeper into the discussions.

Try to fix the price before you get to the stage of putting together a term sheet. This will help to signal that you’re both serious about the deal, and will prevent you from constantly retrading throughout the due diligence process.

Get only the essential info from the seller

This will vary from deal to deal. We asked the company to provide customer lists, customer references, three years of financial information, three years of employee turnover and financial audits. There will likely be a thousand things you want to ask the company, but scrutinise yourself on how much information you really need the company to give you. This will prevent you from overwhelming the seller, and make the process faster and more efficient.

Establish important terms

In most deals, the acquirer assumes the intellectual property and legal entities of the seller. You also have to negotiate what will happen to the leadership team of the company you’re acquiring: will they have to step down completely or can they assume new roles? In our case, Profitwell’s cofounders were absorbed into Paddle: Patrick Campbell became Paddle’s chief strategy officer and Peter Zotto kept the same role as chief revenue officer for the financial metrics product. There will be terms specific to your company that you will want to negotiate too. For example, it was important for Profitwell to keep its Metrics product free, as it symbolised for the team how they like to build products.

Negotiate buyer protections

These are to protect you against any problems that might arise with the selling company: for instance, if they break any terms of the deal or accrue big losses.

When you sign the term sheet — a document outlining the major terms of the proposed acquisition before you go through the due diligence process — buyers typically make “escrow” agreements. These are sometimes used to hold back part of the purchase price — typically 10 to 25% — for a warranty period, so that if anything does go wrong, the buyer will be compensated.

Tell your team once the term sheet has been signed

It’s tricky to know when exactly to tell your whole team about the deal. You want to be transparent, but at the same time you don’t want to cause any unnecessary fuss or angst in case, for whatever reason, the deal doesn’t go through. We only told the 35 members of our senior leadership team about the acquisition once we had signed on the dotted line. Up until then, only the 15 people involved directly in the M&A process knew. We told the rest of our team 24 hours before the deal was publicly announced.

On the subject of… negotiating an acquisition

🤝🏽 Hold founders’ hands. M&As are often uncharted territory for startups and buyers should be sensitive to that. Talk them through the process step by step and ask what their needs are.

❌ Be aware of the risks. Here are 18 key issues to consider during an M&A process. 

💰 Incentivise the “acquired” founders to stay. Encourage them to step into another important role immediately.

🤔 What’s an acquisition really like? Paddle and Profitwell put together a short documentary on their thoughts and feelings throughout the process.

⚖️ Five negotiation tips. These include staying focused on your original goal and avoiding overpaying for an acquisition.

Miriam Partington is Sifted’s DACH correspondent. She also covers future of work, coauthors Sifted’s Startup Life newsletter and tweets from @mparts_

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