During times of sparse funding, many startups who are facing headwinds will consider M&A options to get a soft or moderately profitable landing for their teams.
But does anyone actually want to acquire you? Getting acquired is like meeting the world’s worst in-laws: Judgmental, money-obsessed, potentially driven by ego reasons that are impossible to fully divine.
In this post we run through a range of questions that acquirers typically ask when deciding to proceed with a transaction, going beyond the surface level analysis of “does this business / product have synergy with ours” and “do we like the team.”
Not having great answers to all of these questions isn’t a blocker to getting acquired. After all, if your company was so strong that you stacked up well on all of these dimensions, you’d probably be on the other side of the table gobbling up smaller companies instead. Instead, this is meant to give companies who are pursuing M&A exits a sense for what their acquirers will consider, so that you can consider how attractive you are as a target.
Two notes before we start:
- These dimensions are primarily applicable for “strategic” acquirers: Companies who will acquire and operate your company as a part of their own business. They’re somewhat less relevant for private equity acquirers who are primarily searching for cash flows in a domain where they can add efficiency.
- Many of the same factors that an acquirer will want to see in your business are applicable to fundraising (including public offerings), so having good answers to these questions does have independent value.
Value Accretion
Acquirers don’t like things that are going to negatively impact their valuations. Since most tech companies are valued upon a combination of revenue, growth rate, and profitability, they’ll tend to look at these dimensions to make sure that acquiring you doesn’t decrease their valuation.
Example considerations that an acquirer might have include:
- Is the target’s growth rate at least as high as mine? Otherwise, I’m diluting my growth rate.
- Are the target’s gross or operating margins at least as high as mine? Otherwise, I’m potentially diluting my profitability.
- Is the price that I’m paying going to enhance or degrade my multiple? For example, if an acquirer is trading at a 7x revenue multiple, buying a company for $10m cash that has $1m in ARR will likely reduce their valuation ($10m cash paid, $7m valuation added).
- What is the target’s Net Dollar Retention? Am I buying a leaky bucket, or will this key SaaS metric go up?
All of these dimensions have room for compromise. For example, if you’re profitable, in most cases it’d still theoretically be valuable to acquire you for $1 even if you aren’t growing. But these are the main parameters that acquirers will consider and weigh against the acquisition price.
Team Composition
It’s common for the number and quality of engineers to be a key factor in acquisitions. Acquirers look for strong engineering teams (and to a lesser extent, product and design) which will maintain the product and help them to accelerate their R&D.
It’s well known that acquirers often evaluate or interview team members prior to an M&A event. But there’s more to getting a deal done than your team’s ability to invert a binary tree or two. Acquirers analyze many different dimensions of team composition in order to decide if they like a target’s team:
- Is the team in a location that we’ll be able to collaborate with? What timezone are they in? Are there even reasonable flights? Are they in a location where I can legally employ anyone, and if not, am I okay with the local labor laws that I’ll need to adapt for?
- What is the team’s working style between remote / hybrid / in-office? Will that work with our existing team?
- What is the team’s seniority level? Even if they’re smart, do they have experience or will we need to train them?
- Does the team have a large amount of management debt that we’ll need to pay down? Does this team require structural changes such as hiring (or removing) managers in order to make it work?
- How is the target company compensated? If they’re paid much more than your team, you might need to make adjustments in order to preserve pay parity. Additionally, the acquirer needs to consider how to properly incentivize any target team members that they want to keep around (often with additional equity grants, bonuses, or changes to vesting terms, if they can swing it), and judge their motivation to remain for a useful amount of time.
- Are there other special team considerations? For example, does the target have a celebrity CTO who will help you get press, or a CFO who led a past company through an IPO or other valuable experience? Conversely, are you taking on known employee issues?
Customer Mix
When you acquire a company, you acquire everything about them, including their customers, which often comes with significant complex considerations. As a result, acquirers will evaluate your customer mix to see if it matches with their business goals:
- Is the target going to create a support headache for me by adding a large number of tiny customers that my enterprise sales team and financial operations can’t support?
- Is the target going to create an account management problem for me by adding very large customers who’ll demand to shift my roadmap? Or alternatively, will the target give me access to an enterprise sales motion that I don’t have yet?
- How are your customers acquired? Will joining the acquirer accelerate your customer acquisition, the acquirer’s customer acquisition, or both?
- What is the geographic distribution of your customers? Will the target provide access to a new geographic market, or will it force us to invest in a geography that we don’t care about? Do they have a bunch of customers in a country where I can’t even legally serve them (for example, a US company can’t just take on a bunch of Iranian customers without some awkward conversations with the Feds).
- Same question as geography, but for industry.
One final important consideration: There are cases where an acquirer doesn’t actually care about the customers that they’re acquiring. Perhaps they’re small, not that valuable, or just plain inconvenient. In this case, an acquirer might literally think about intentionally churning the undesirable customers. In that case, questions of the acquiring company’s responsibilities to the target company’s customers also come into play.
Go-to-Market (GTM) Affinity
In mature SaaS companies, the GTM process becomes one of the critical motions around which the company is oriented. Acquisition can be a way for companies to level up their GTM motions by introducing fresh blood into the company, but can also be highly disruptive to their ability to generate revenue by causing chaos:
- Will the target provide access to a new go-to-market approach that the acquiring company doesn’t have? For example, do they have a skilled enterprise sales team, a great event marketing program, or a robust product-led growth (PLG) motion that the acquirer can deploy?
- On the flip side, is the target only viable with a GTM model that will cause friction with the acquirer? For example, would this acquisition obligate the acquirer to build a PLG motion, or force them to change their pricing to avoid confusion with the acquired company’s enterprise revenue?
- Is the target heavily dependent upon in-house services to service their deals?
Takeaways
Acquisitions are very personal and somewhat unnatural. They’re like adopting another entire family into your own, all at once, and paying them money to do it. Check out these questions to figure out how appealing you are to a potential acquirer and understand a bit more about your worth in the market.