How to negotiate an acquisition

Once you’ve made it clear to a company that you want to acquire it, you begin a negotiation process — essentially to find out if the arrangement will work, and if so, how.

Earlier this year Paddle – a tarnishing Offering payment, tax, and subscription solutions to software-as-a-service businesses – Acquired Profitwell, which provides 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 both buyers and buyers have an opportunity to contribute.

Assess whether your mission and vision match

Before going into details about the price or terms of the deal, you need to determine if your mission aligns with that of the company you intend to buy. In our case, we’ve 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 aligns with Profitwell.

Prepare in advance

Before going into the first round of negotiations, gather information about the company you are acquiring. There is a lot of information available to you – for example on Glassdoor, which shows you customer reviews and employee ratings. You can also learn a lot through word of mouth. Six months before we approached Profitwell, I asked our customers if they use Profitwell, what they like about it and what they would change. I’ve even spoken to people within Paddle, like our sales manager in the US, to ask if any companies are using Profitwell in deals he was working on. And if so, was it your Price Intelligence team using the product, or your consulting team? Ask this additional question each time you engage with a potential stakeholder in the business you are considering acquiring. It will help you build high knowledge over time.

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Give an idea of ​​how much you would pay

This will make negotiations easier later. After realizing that Profitwell was a good fit for us, we put our asking price on the table. It allowed both parties to voice their thoughts – ie “we think north of that number” or “for us it’s in that range” – and helped make everyone feel comfortable to delve deeper into the discussions.

Before you start creating a term sheet, try to set the price. This helps signal that you are both serious about the deal and prevents you from constantly re-trading throughout the due diligence process.

Receive only the essential information 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’s probably a thousand things you’d want to ask the company, but see for yourself how much information you have Yes, really need the company to give you. This prevents you from overtaxing the seller and makes the process faster and more efficient.

Define important terms

In most transactions, the acquirer acquires the intellectual property and legal entities of the seller. You also need to negotiate what will happen to the leadership of the company you are taking over: will they have to step down completely or can they take on new roles? In our case, the co-founders of Profitwell were brought into Paddle: Patrick Campbell became Chief Strategy Officer of Paddle and Peter Zotto retained the same role as Chief Revenue Officer for the financial metrics product. There will be terms specific to your business that you will want to negotiate as well. For example, it was important for Profitwell to keep their Metrics product free as it symbolizes for the team how they like to develop products.

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Negotiate buyer protection

These are designed to protect you from any problems that might arise with the selling company: for example, if it breaks contract terms or suffers large losses.

When signing the term sheet — a document outlining key terms of the proposed acquisition before going through the due diligence process — buyers typically enter into “escrow” agreements. These are sometimes used to hold back a portion of the purchase price – typically 10-25% – for a warranty period to compensate the buyer if something goes wrong.

Notify your team once the term sheet has been signed

It’s difficult to know exactly when to tell your entire team about the deal. You want to be transparent but at the same time not create unnecessary excitement or fear if for whatever reason the deal doesn’t go through. We only notified the 35 members of our leadership team of the acquisition after signing on the dotted line. High until then, only the 15 people directly involved in the M&A process knew. We notified the rest of our team 24 hours before the deal was publicly announced.

On the subject…

🤝🏽 Hold hands of founders. M&As are often new territory for startups and buyers should pay attention to it. 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.

💰 Incentives for the “acquired” founders to stay. Encourage them to step into another important role instantly.

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🤔 What does an acquisition really look like? Paddle and Profitwell have put together a short film documentary on their thoughts and feelings throughout the process.

⚖️ Five negotiation tips. This includes focusing on your original goal and avoiding it pay too much for a purchase.

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

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