Acquire vs acquihire, what should every entrepreneur know? Acquihires have become a much more well-known form of startup acquisition. How are they different from traditional acquisitions and M&A deals?
Eventually, if you are successful for long enough, your startup is going to head toward some form of exit. An acquihire could be one of them.
So, could an acquihire be right for you? When is it the right move? What are the potential pros and cons of acquihires? How do you get started and negotiate the best possible outcome?
The Ultimate Guide To Pitch Decks
Whether an exit was a part of your initial vision or not, if your company survives long enough, it is the most likely outcome.
How To Exit
Most new business attempts and startup ideas fail. Very, very few may continue to be private companies long term, and become reasonably large businesses. Some will go through an IPO and become public companies. Which is a form of exit for investors and founders. Sooner or later, the founders will move on after this event. At least with very, very few exceptions.
Of those that survive and get attention, a merger or acquisition is probably the more likely outcome.
A subset of this is acquihires. You also need to understand the difference between an acquire vs acquihire.
We’ll take a look at a couple of others in a moment.
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Exits provide liquidity events for investors and shareholders. When you take outside investment, you are really choosing to head toward an exit. They are investing either to get a windfall payout of returns at some point, or to at least get reasonable yields and be able to recapitalize at some point.
Of course, in some cases selling or liquidating a business is about salvaging what’s left amongst what you or your investors may feel is a failure or dead end. It can be a huge mistake to just close the doors, fold, and walk away when you could still extract some significant value in an exit. Some form of M&A deal is always worth exploring.
Then, in other cases, an exit is simply the best choice and path forward for the mission of the company, and all of its stakeholders, including the employees and customers. It can help speed up and scale the impact, improve quality, and put the business in the most capable hands to operate at a much larger level and different phase in the journey.
Or perhaps you are just tired or ready to move on to another project.
When To Exit
Whether it is an acquihire or other type of exit, timing can make a huge difference.
Whether it is a bankruptcy situation, or just seeing the ceiling or end of the joy ride in sight, staying ahead, and liquidating before the value goes down is just wise.
In other cases, you may face external conditions, or internal ones, which make it impossible to raise new capital, get financing, or keep growing enough organically, and selling your company is the best option.
You may just hit a plateau or level where your company is best merged or put in others’ hands.
In other situations, it is about simply the right timing, given the development of your business, your industry and competition, and the economy and markets. In some phases of the economy, valuations and terms are incredibly generous, and deals are fast and easy to make.
With lots of inbound interest too. At other moments, it takes a lot more selling and connections, and valuations and terms will be more challenging to negotiate. But take the time to understand how an acquire vs acquihire work before making your move.
Regardless of whether you’re going for an acquisition or an acquihire deal, the first step always involves knowing how to value your company. If you need more information about how to execute that, check out this video I have created.
Common Types Of Startup Exits
There are a variety of ways to exit your business, including the following.
An asset sale is about acquiring the assets of a company. This may be about the structure of the deal for one of the parties and their tax preferences. Or it may be about acquiring physical assets, or IP. This can often be a necessity in a bankruptcy-type situation where the company must be liquidated. Not all assets must be included in the deal.
This is where two or more companies are combined together. There are many reasons for mergers. Including roll-ups to prepare for a larger exit or IPO, to consolidate an industry, or to grow and expand efficiently. Or to become a larger player in the face of competition, and benefit from improved economies of scale.
A traditional acquisition is about one company buying another. It does not always have to be a larger one buying a smaller one. In fact, there are some great case studies on the Dealmakers Podcast on how some have pulled off the reverse. There are many reasons for acquisitions. Acquihires are one of them. It can also be about acquiring assets, users, customers, geographic markets, operational efficiency, taking out the competition, diversification, and acquiring specific metrics.
This is going to be the main focus of this article. It is a subtype of acquisition. With its own reasoning, math, and focus on specific factors and terms. You’ll learn in detail the key distinctions between an acquire vs acquihire.
Acquire Vs. Acquihire
So, what’s the difference between regular acquisitions and acquihires?
How might they differ in terms of the process, terms, valuation, and other factors?
Let’s first take a look at each on their own. Then their contrasts, and the pros and cons of acquihires. As well as the steps involved in them.
What Is An Acquisition?
An acquisition is when one company buys another. This can be an all-cash deal, an all-stock transaction, or a combination of both.
Not all assets and liabilities must be included, but they often are. Including the IP, customer contracts, accounts receivable, data, tangible physical assets like equipment and real estate, and employees.
According to Techcrunch, Google, Twitter, and Facebook are still among the biggest acquirers of startups. As well as, in turn, are some of the most active and significant among acquihires. But, there are differences in how an acquire vs acquihire works.
What Is An Acquihire?
Put simply; an acquihire is an acquisition that is focused on acquiring the target company’s team.
So, acquihires can work much like traditional acquisitions. As a founder, you may be selling your business in its entirety, with everything in it.
Your acquirer will focus on acquiring your team. Or maybe exclusively trying to negotiate the assimilation of your team. This may or may not be obvious from initial conversations and offers.
It is a way to buy and gain talent, which may come along with some of the things that they’ve already created.
Why An Acquihire?
So, why consider an acquihire as your exit?
There are potential advantages for both acquirers and sellers in an acquihire transaction.
As a buyer, this is a route for growing companies to take to acquire great talent. Talent which may otherwise be unavailable. They have been proven to be able to execute and achieve valuable things. This may include the founders or software engineers, and other in-demand roles.
With the end of non-compete agreements in the target of regulators, this may not long be a big focus for grabbing a few individuals. However, there is great efficiency in being able to acquire a strong and proven team that knows how to get things done and has already learned to work really well together.
Plugging in teams like this, especially sales teams, can help rocket a business with far more ease and cost-effectiveness than trying to recruit and bring together a team of your own from scratch.
Similar to asset sales, acquihires can offer a greatly simplified way of selling your business or buying a business in some terms.
When Are Acquihires The Right Move?
As an acquirer, this may be the right strategy in very tight and competitive job markets. It may end up being a lot cheaper, faster, and easier to buy a team than to recruit, test them out yourself, and have to offer huge sign-on packages to convince them to come on board.
As a founder, it can be meaningful to get your team acquired when you don’t foresee things going great in the near future. It can be a way to capture and extract value from all you’ve built when you may otherwise have to conduct a major pivot or are not sure you will survive changes in the marketplace.
An exit for your company can also be wise when your startup has really peaked, or when you are at peak value creation compared to the amount of work and time required to really make the leap to the next level. Especially if there is uncertainty about the economy or other factors looming over the next few years. It can be better to take the money when it is on the table. Especially when you don’t know if it will still be there tomorrow.
How Might A Traditional Acquisition Differ From An Acquihire?
There are several ways that you may find an acquihire ends up being a little different from other types of startup acquisitions. So, how does an acquire vs acquihire work?
What Is Focused On
Here the core focus is on the team and employees. In some cases, this may really be what acquirers are focusing their entire transaction on in terms of value.
So, it will all be about the quality and value of your employees. What they are worth. Especially in contrast to other options the acquirer has for recruiting comparable talent, onboarding them, and getting them to produce.
The more you can do to show the superior advantages, cost savings, and returns on this, the higher the price you ought to be able to get in an acquihire transaction.
Keeping The Team
In many other M&A and exit scenarios, the team may not be kept on, or at least for very long. Or in the roles and the compensation packages they were used to.
In this type of deal, you can be far more confident that your employees will keep their jobs and livelihoods, and will continue to be compensated in the way they expected.
Though you may also need to consider how your team will feel about this. Will you and your team really thrive and enjoy working in this new environment? It can mean new bosses, new roles, more or less control, and a completely new company culture and way of doing things.
Especially if you are a scrappy startup being acquired by a larger corporation that is far slower, more constrained, and has much different rules and processes for getting things done.
Expect a lot of the focus in due diligence and negotiations to be focused on employee contracts and agreements. Including stock options and other benefits.
How your company is valued, and the price willing to be paid will focus on what your buyer is focused on acquiring. In this case, that’s the team instead of IP, or physical assets, data, or financials.
Be sure you know the current employment market and HR space to really understand your value, and the factors involved. As well as the levers at your disposal to increase that value, or that could greatly diminish it before closing.
If you’ll be staying on with your acquirer, there may be a lot more compensation that is up for negotiation in the form of earnouts. That is a percentage of the sales price of your business which is based on the performance after the transaction is complete. It is what you can achieve over the next few years inside your new parent company. So, take the time to understand in detail what is acquire vs acquihire, and how both processes work.
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Keep in mind that in fundraising or acquisitions, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
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