[HN Gopher] Lessons Learned after $5B of M&A
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Lessons Learned after $5B of M&A
Author : ttunguz
Score : 178 points
Date : 2022-02-17 20:02 UTC (1 days ago)
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| lurkervizzle wrote:
| I've been lucky enough to have sold two companies (edit: in the
| very low $XXX M range to provide context on the rest of my
| comment), and 1 is the most important point by far in this list.
|
| The other thing that I almost think should be point 0 is that
| medium sized acquisitions (high $XX M - low $XXX M) are
| incredibly hard to "incept". If you're looking for a low $XX M
| exit, that can be justified with good tech + a good team. If
| you're looking for larger exits, that's all about revenue, and
| company traction.
|
| For the high $XX M to low $XXX M acquisitions, you can't just
| start talking to companies 6 months to a year before you run out
| of cash to make it happen. Typical tech companies do product
| planning cycles 1 to 2 years in advance, and a key part of that
| planning cycle is whether they're going to build or buy parts of
| the solution. The result here is that unless your product/company
| is part of the acquirer's plan (e.g., either to buy you or to
| build equivalent that was too hard), it's really hard to get the
| corporate sponsor and the budget and the timeline etc to work.
| Hence, it's damn hard to "incept" a deal.
|
| This is important for founders to understand IMO because so many
| of the recent Series A and Series B fund-raises have taken low $M
| ARR companies and given them valuations >$100M. That means these
| companies have no option but to go for a revenue and traction
| outcome after >$30-50M ARR. Tech acquirers aren't going to pay a
| premium of your Series B valuation if you don't have consistent
| off the charts growth. IMO, there's going to be disappointed
| employees mainly in a bunch of companies in the next 2-3 years.
| jacquesm wrote:
| > If you're looking for larger exits, that's all about revenue,
| and company traction.
|
| That's highly dependent on the space. Companies in emerging
| domains can be bought pre-revenue at valuations that by
| traditional metrics do not make sense simply to gain some time.
| phoe-krk wrote:
| FYI: M&A seems to mean "mergers & acquisitions". The acronym is
| not expanded anywhere in the article.
| goldenkey wrote:
| imchillyb wrote:
| That's a lot of M&M's.
| goldenkey wrote:
| herodoturtle wrote:
| I read a really great book recently - "Failing to win" - about a
| hot startup that had all the momentum behind it, but ultimately
| failed.
|
| It covers many of the points in this article and more - and the
| pacing is a really great.
|
| It is one of the most insightful page-turners I've read in recent
| times.
|
| [0] https://www.amazon.com/Failing-Win-Hard-earned-purpose-
| drive...
| tmcz26 wrote:
| We sold our 8-year-old startup last year, and boy do a lot of
| these bullet points ring true. We were very lucky that one of the
| founders was skilled at the M&A game, or we would have
| underpriced it dramatically.
|
| If you're thinking about selling, I'd recommend hiring an advisor
| firm. They charge a 2-8% fee, but they are worth it. You get
| better valuations and help with the tricky clauses.
|
| The one about losing leverage after term sheet, it depends. Our
| acquirer was a public company, so they had to announce the
| signing to the market. It would look really bad if the
| acquisition didn't go through (stock jumped when TS was
| announced), so I'd say we had even more leverage then.
|
| Edit: typo
| jacquesm wrote:
| > If you're thinking about selling, I'd recommend hiring an
| advisor firm. They charge a 2-8% fee, but they are worth it.
| You get better valuations and help with the tricky clauses.
|
| I agree but: you _also_ have to do due diligence on your
| advisor firm, they are definitely not all created equal, I 've
| seen some of these blow up perfectly good deals and like any
| other broker their incentives may _seem_ aligned but on closer
| inspection they really are not. Get them to run the process,
| but keep them out of the decision making loop other than as a
| conduit to create breathing room. Never have a quorum of
| shareholders at the table during negotiations or you 're going
| to get skinned. Get offers, go back to the shareholders /
| founders and discuss, then counteroffer.
| mbesto wrote:
| jacques and I both work in M&A so we see a lot of these
| deals. trust what he says above.
|
| to add a few things from the questions in the threads here:
|
| - Lawyers IMO are much more important for deal dynamics than
| investment bankers. investment bankers will find you the
| buyer, help price the deal, and manage the process, but
| lawyers are the ones who make sure your terms are right.
| Kirkland Ellis, DLA, Troutman, Weil, Morgan Lewis etc.
|
| - re: Investment bankers ("advisor firm"). The best firm for
| SaaS I've seen is William Blair - the companies they
| represent are consistently top tier and well prepared when we
| review them on the buy side. If you take this list:
| https://firsthand.co/best-companies-to-work-
| for/banking/most... my general advice is to stay away from
| the retail bank names (BoA, Citi, DB, etc.) and the big four
| (EY, PwC, etc.). But pretty much everyone else is solid.
|
| Happy to answer any other questions. I've sat through 300+
| transactions (mostly on the tech advisory side) and went
| through my own sale recently.
| fairity wrote:
| Any advice on finding the right advisor firm for a sale in the
| high $xx million range? We're a team of builders and have no
| experience in M&A, and little experience in
| finance/negotiation.
|
| I'm worried that a broker will be incentivized to close a deal
| at an undervalued price, similar to brokers in real estate.
| tmcz26 wrote:
| Since these firms charge a % of the deal they have an
| incentive to get higher valuations. It also looks good on
| their resume. But you can just look at their portfolio and
| see the exists they worked on, the valuation, who the
| acquirer was, etc. You can try and reach out to some founders
| to check if they liked working with the advisor too.
| endymi0n wrote:
| In all honesty, my concrete advice would be reaching out to
| other local founders privately and asked what worked for them
| and what didn't. Note there usually is a lot to these stories
| that aren't told in public for many reasons.
|
| On top, one thing I regret is not having joined a network of
| founders and entrepreneurs earlier. These days, I would just
| ask them and get 2-3 spot-on recommendations with warm intros
| in a day. We hackers and builders usually scoff at these kind
| of "elite" networks until we realize building and selling a
| company is fundamentally a people business, where connections
| and trust are paramount. Reach out to me on LinkedIn for an
| intro to the organization I'm in (it's global).
|
| As for the original advice: +100 from my side. Especially if
| the whole founder round is not experienced, you really want
| to have a cold blooded veteran on your side. Someone who
| commands respect by founders, is hired by you guys and is
| incentivized by getting home a part of the deal. Not only do
| these brokers have the know-how, they usually have a vast
| network of interested parties to bring to the table at any
| time to get a bidding war started and are experienced in
| navigating the delicate timing of the funnel that is crucial
| for a success. The differences in outcome I've personally
| witnessed with and without brokers are night and day, even
| though I have my own cultural issues with them.
| jacquesm wrote:
| > In all honesty, my concrete advice would be reaching out
| to other local founders privately and asked what worked for
| them and what didn't. Note there usually is a lot to these
| stories that aren't told in public for many reasons.
|
| This is the best advice. You won't be able to 'interview
| them' and make a good judgment, the people that have
| already gone through a process with them know better what
| they are like. And even then you have to be aware that
| plenty of these places have 'A' and 'B' teams and that you
| need to make sure you are comparing apples-to-apples.
| cascom wrote:
| Interview several firms that have done deals in your
| space/vertical, and where this will be a meaningful
| transaction to the firm/md - and ask them for valuation
| guidance (e.g. what they think they think they can sell your
| company for) you'll generally find they'll be in a similar
| range (e.g. 4-5x ARR) that should set expectations for the
| sale process.
|
| Deal structure can be worth ~20%+ of purchase price so don't
| be myopic on focusing on price only. Trying to get the last
| dollar usually leads to broken deals and unhappy people on
| both sides, but you want to make sure that you're getting a
| good market read on value for your business.
|
| Make sure you trust the team/have chemistry, you'll go
| through quite a bit together. Also make sure you have M&A
| counsel - don't let your commercial counsel handle this (you
| wouldn't let your internist perform open heart surgery on
| you...)
| throwaway9870 wrote:
| Interview them. That is what we did and it worked great.
| Where are you located? I used ours twice and both times was
| happy.
|
| You can incentivise them to push for higher prices with the
| terms you offer them. The ones I worked with were highly
| motivated and skilled at pushing higher.
| stpe wrote:
| Pick any of the big four; PwC, EY, Deloitte, KPMG.
|
| Typically they'll do a valuation and put a bonus threshold.
| x% under, x+n% if over.
| chrisgd wrote:
| Oftentimes a banker would include an incentive fee for higher
| valuation - 2% of value up to $50M then 3% on anything above
| $50M. You can negotiate all these things up front.
| acegopher wrote:
| How long did the process take for you? From getting the word
| out until sale? Once you had an offer, how long did due
| diligence take?
| cbtacy wrote:
| I've sold 4 startups. Median time from starting the process
| to close was 6 months, with the quickest transaction taking
| 2.5 months and the slowest almost 9 months.
|
| Diligence ranged from 3 weeks to 7 weeks.
|
| Fastest transactions were private company acquisitions.
| Slowest were public company deals.
| anonymouse008 wrote:
| Curious: were there any takeaways for the question "what to
| build for what outcome"?
|
| As in, was there an association with time building + time
| in market = greater sales price? Did Higher Free Cash Flow
| or Higher Growth lead to a better ratio (cash v stock) for
| offers?
|
| Very curious -- four successes is quite the batting average
| tmcz26 wrote:
| From the time we decided it was time to sell (for real, not
| just theoretically) until the money was in the bank, almost
| 18 months. It took us 2 months to find an advisor, then
| another 3-4 months building the deck and investor material
| (cashflows, projections, etc). We put up a bid, so we had
| some 8 companies interested at first and we narrowed that
| down to 3. That process was LONG, but that is what gets
| better valuation - competition. After we signed the term
| sheet it was another 6 months due to regulation and legal
| quirks, due to the acquirer being a public company. Those
| were the longest 6 months of our lives :)
| Invictus0 wrote:
| The author probably should have stopped at bullet 7. The rest is
| clearly filler.
| thiscatis wrote:
| Did anyone find the close button on the most annoying popup ever?
| Had to leave the page.
| wodenokoto wrote:
| it's way up in to top right corner.
| Hard_Space wrote:
| Top right corner, grey 'X'.
| ilamont wrote:
| Had to switch to reader view. "X" was invisible.
| cinntaile wrote:
| Is it gone cause I'm not seeing anything? You guys might need
| some more adblocking!
| chollida1 wrote:
| Yes, but this type of thing is common for non technical people
| setting up blogs. it's probably a plugin that the author has no
| idea even exists.
|
| I had to close the page without reading as I couldn't figure
| out how to make it go away. Didn't seem to have a close button
| on it anywhere.
| danuker wrote:
| > it's probably a plugin that the author has no idea even
| exists.
|
| It says "Built with ConvertKit". To get rid of it on every
| site, until they change it, add this uBlock Origin filter:
| *##.formkit-slide-in
| nerdponx wrote:
| "Built with ConvertKit"
|
| My guess: the author never tested it, saw a bump in email
| subscriptions after adding it, so they kept it.
| mring33621 wrote:
| well fart@fred.com is a new, eager subscriber!
| dougSF70 wrote:
| There was enough screen real estate for me to read the text,
| like peering over a fence.
| dang wrote:
| " _Please don 't complain about tangential annoyances--things
| like article or website formats, name collisions, or back-
| button breakage. They're too common to be interesting._"
|
| https://news.ycombinator.com/newsguidelines.html
|
| The greater problem is the upvotes which tend to push these
| things to the top of a thread, where they choke out interesting
| discussion. But it's harder to do anything about the upvotes.
| ivank wrote:
| It seems to go away after a reload.
| kwertyoowiyop wrote:
| Ditto. Evidently I failed the IQ test to find it.
| gumby wrote:
| Yes, the placement of the "X" was absurd. If it hadn't been in
| a gutter I wouldn't have found it.
| mring33621 wrote:
| I had to zoom out a few levels (ctrl- on windows/chrome), find
| the 'x' on the upper right side, close the popup, then zoom
| back in.
|
| Really crappy experience, 'ConvertKit'!
| vaishnavsm wrote:
| I had to devtool remove it. Fortunately, they didn't obfuscate
| the popup like many seem to do nowadays.
| [deleted]
| varsketiz wrote:
| > There are three types of sales: team, team & tech, and team,
| tech, & traction.
|
| There are more types. You can buy an entry to a specific market.
| You can buy users. You can buy to prevent your competitors move
| to buy.
| 0xbadcafebee wrote:
| These are the lessons from the selling side. From the buying side
| there's a different set of lessons, like: they sold us junk that
| doesn't really work, their people are leaving to another start-up
| the founder created, nightmarish regulatory violations that only
| pop up after the merger, having to re-build their entire tech
| stack/accounts from scratch because it was all built by hand and
| held together with masking tape, contracts not discovered until
| after the merger, vetting all software licenses and use cases,
| the product not being able to integrate with your product like
| they claimed, 10 years of tech debt. Then there's how much time
| and money you lose and risk you gain from not doing enough due
| diligence or not having an efficient onboarding/integration
| process. I've been at large companies that were M&A masters, and
| companies that have done dozens of M&As and still can't get a
| single one right.
| ProAm wrote:
| Due Diligence is an art form. Not an activity where move fast
| and break things works.
| anonymouse008 wrote:
| I have wondered this too -- honestly the big co's best strategy
| is either: truly hire you with an upfront bonus or wait for you
| to die out and pick up the pieces. Those that go for flashy
| deals to fly with the stock price seem to suffer from what you
| note above.
|
| Heck you could even say the Amazon Whole Foods Acquisition was
| a loser -- they haven't leveraged the store network like
| Walmart has.
| superyesh wrote:
| >Heck you could even say the Amazon Whole Foods Acquisition
| was a loser -- they haven't leveraged the store network like
| Walmart has.
|
| As someone who was a regular at Whole Foods even before the
| Amazon acquisition, from my viewpoint, it has been a win-win.
|
| 1. The online shopping experience has been amazing from the
| Amazon site/app. Target comes close. 1.a. The free delivery
| for Prime members was an awesome perk while it lasted and
| definitely made me buy from WF more than the alternatives I
| have.
|
| 2. I get 5% from the Prime card, I actually am incentivized
| to shop more at WF.
|
| 3. Amazon wise I can safely pick up my packages from the
| nearest store.
| codingdave wrote:
| > the product not being able to integrate with your product
| like they claimed
|
| This one jumped out at me.
|
| I've definitely seen integration struggles post-acquisition,
| but I typically find that the parent company (buyer) needs to
| be accountable for that integration. But you seem to be saying
| it is the seller's responsibility to understand the buyer's
| product and evaluate the integration during due diligence? Did
| I read that correctly? If so, I'd like to understand that
| perspective better - would you be willing to elaborate?
| fudged71 wrote:
| We've been working on tools for post-merger integration, and
| there don't seem to really be any other tools in the space.
| It's a huge problem.
| shoto_io wrote:
| _> There are three types of sales: team, team & tech, and team,
| tech, & traction. Each one is more valuable than the last,
| provided the company grows. The greater the revenue, the more
| likely the acquirer prices a target on a revenue multiple._
|
| I have also seen team + traction and traction only.
| bickmark wrote:
| that popop
| ttunguz wrote:
| sorry, fixed now.
| gumby wrote:
| A lot of these look like cases of sales of smaller startups
| (which is fine). The process he describes is almost identical
| with Enterprise sales, down to the role of the "coach" in the
| customer's (acquirer's) company.
|
| Which makes sense, but framing it that way from the start will
| make it easier to navigate.
| ttunguz wrote:
| OP here: in these notes are processes for 2 multi-billion
| dollar sales and most of the points applied to those as well.
| jacquesm wrote:
| Great stuff. A long time ago there was a long thread on HN about
| this subject, the original thread got deleted, but I summarized
| it here: https://jacquesmattheij.com/how-to-sell-your-company/
| nickreese wrote:
| #7/8 are the most important in my experience. Easy to lose all of
| your leverage if you don't know what you're doing when you're
| negotiating the LOI.
|
| In addition to the LOI items, we got conceptual agreement on the
| phone from all decision makers about a huge list of other items
| that we couldn't fit in the LOI and sent an email recap.
|
| To this day I call the recap email the "golden email" as it was
| definitely the most profitable email I've ever sent.
| aconsult1 wrote:
| I'm curious about this. Why the recap email was so important?
| What did it cover that the LOI didn't?
| ttul wrote:
| Likely things like:
|
| 1. Founder gets a special washroom with a golden toilet seat.
|
| 2. Unlimited lattes at Philz, but only on Tuesdays.
| alberth wrote:
| What do you mean when you say "couldn't _fit_ in the LOI".
|
| Aren't LOI just written agreements? Your quote implies there's
| a space limitation.
| Invictus0 wrote:
| LOIs are 4 pages long by convention. They are also not
| legally binding and are just the blueprint for the definite
| agreement.
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