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How To Run An Acquisition Process

Caution: entertaining the idea of an acquisition is a toxic mind virus. It will destroy your company. Only read this guide if you’re committed to selling and have an offer in hand.

With that said, below are some things to consider when selling your company:

Take a minute. Breathe. Do you really want to do this? Selling your company will be one the largest decisions of your life. Don’t look back a decade from now and feel like you made a rash decision. Leave town for a weekend. Rent a cabin somewhere. Pour whatever you think into a Google Doc until your mind is clear. Don’t sell your company because you’re burned out. Sell it because you want to sell it.

Assume the worst. Managing your own psychology is incredibly important. Don’t start fantasizing about a payday before the money is in the bank. Think about what you’d do if you couldn’t sell the company. Get comfortable with that reality. Assume everything will fall through. This will give you ultimate power during negotiations. You’ll have a backup plan you’re emotionally comfortable with.

Don’t over optimize before you have something. Try to get an offer — any offer — first. Don’t optimize it much. Just get close to terms you’d begrudgingly take. Once you have an offer in hand, you can try to price out the market by talking to other acquirers.

Understand the different types of acquisitions. The flavor of purchase will dictate the price you’re offered. There are three buckets:

  1. Acquihire. The company wants the people. Not the vision. Or the software. You’ll be getting a slight premium on a traditional job offer.
  2. Strategic. The company wants the people working on the thing they’re working on. Some software will get re-used. You’ll be valued at a multiple of headcount ($1-2M per head in the AI world) plus some additional (occasionally large) modifier, based on the Sponsor’s interest.
  3. Business line. You’re going to get acquired and be run as an independent entity, with your own P&L (e.g. Zappos). Headcount won’t be a major factor in valuing the price, some other business metric will be (e.g. revenue).

Understand the power dynamics. In most companies, you’ll need buy in from a Sponsor (eg a VP), not just the corp dev team. Make sure your Sponsor is senior enough. If he or she isn’t, work together with them to make the case to their superior.

Understand your future org chart. Two conditions for post-acquisition happiness:

  1. You’re working on something that’s important to the CEO.
  2. There’s nobody working on this project internally.

You need a greenfield area. If you can’t get a time commitment from any executive at the company, be alarmed. If there’s a sea of product managers focused on what you’re building, be alarmed. All of those people have pre-existing opinions, relationships and organizational ladders to climb[1]. It’ll be annoying to compete.

Communicate carefully with your team. Be open with your co-founders and board, but don’t put the team through the emotional rollercoaster. Communicate broadly only once a termsheet has been signed. (If someone on the team asks, don’t lie. Just tell them you’re always exploring highly unlikely realities, including acquisitions.)

Understand the tax implications. Lots of founders seem to be focused on a cash payday. More often stock is preferable, especially considering QSBS. If you have a holdback component, investigate how that holdback will be held in escrow.

Reputation over money. Optimize for an outcome that makes the team happy. You’ll want to work with them again. Once the deal is done, celebrate with the team and pay for it personally. You’ll create memories for a lifetime. Robby and I flew out our entire team to Hawaii for a week before we started at Apple.

Don’t try to fix the company. When my company was acquired, I was convinced I was going to fix all the things. I’d finally shed the chip on my shoulder and be viewed as a hero who turned Apple around. This mindset is a recipe for pure frustration. You can push as hard as you’d like, but you’re a new face in town. You’ll never have the right to fix everything. Focus on the one mission you were acquired to do. Accomplish that. You’ll be much happier in your own little universe.

I hope this guide was helpful. If I can help, just let me know. My email is d@dcgross.com.

[1] Apple’s secretive culture was a huge plus in this regard. Fewer voices in the room means you’re able to focus on your work.