{"id":5406,"date":"2023-01-20T11:43:06","date_gmt":"2023-01-20T11:43:06","guid":{"rendered":"https:\/\/dev.matsio.com\/matsio\/saasboomi\/?p=5406"},"modified":"2024-05-16T07:09:16","modified_gmt":"2024-05-16T07:09:16","slug":"how-to-handle-acquisition-deal-from-competitor","status":"publish","type":"post","link":"https:\/\/dev.matsio.com\/matsio\/saasboomi\/saas\/leadership\/how-to-handle-acquisition-deal-from-competitor\/","title":{"rendered":"Your competitor wants to acquire you. Now what?"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">A few weeks ago, a friend approached me. He was anxious and at a crossroads. A competitor had come in to acquire his company and the conversation seemed serious.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The story of this founder&#8217;s friend started three months ago when the competitor called him and asked if he would be open to being acquired. My founder friend didn\u2019t think much of it and let it go. The competitor returned in three months and repeated the question, \u201cHow much?\u201d My founder friend fumbled and gave a range. The competitor promised to return in a week to talk some more.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It is an interesting place. Does he sell? If he does, how should he structure it? How much information should he share? It\u2019s a competitor and if the deal falls apart, the competitor will have access to a whole lot of sensitive information. It made me think, how should a founder handle a situation such as this?\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">I\u2019ve been through this before and I was lucky enough to get by and sell CloudCherry to Cisco. But Cisco was not a competitor and the market looked different. A founder, I realized, needs a guide to navigate this situation. This guide will protect founders and help them make the right decision and as is SaaSBOOMi\u2019s style, we called in an expert from an expert to set up a playbook of sorts.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">I called <\/span><a href=\"https:\/\/www.linkedin.com\/in\/omartawakol\/\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"font-weight: 400;\">Omar Tawakol<\/span><\/a><span style=\"font-weight: 400;\">. He has an interesting personality not just because of his clarity of thought but because he has built and sold multiple companies in the past. Omar\u2019s most recent company was acquired by Cisco for its conversational AI, but the largest exit he saw was when Oracle acquired Bluekai a few years earlier. If anyone knows acquisitions, it is Omar.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A little background on him: A few years after completing graduate school, Omar set up a SaaS-based recommendation engine. With just an eight-member team, his company produced the recommendation engine for Barnes &amp; Noble and Nordstrom. Soon enough, he had a potential acquirer. This company run by a famous founder was almost 10X bigger, well-funded, and ready to go public. Omar was on board and his company was acquired. But after the acquisition, there were multiple CEO changes and the proposed IPO never happened and all the value Omar could have realized was gone. Poof!<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This made him set up a few ground rules, which set him up for great outcomes in his future ventures and hopefully be useful advice for others.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">I posted to him the same question my founder friend had, and Omar asked:<\/span><\/p>\n<p><i><span style=\"font-weight: 400;\">\u201cIs this competitor a listed company or private?\u201d<\/span><\/i><\/p>\n<p><span style=\"font-weight: 400;\">That defines the way you have a conversation with them, explains Omar. Let\u2019s take a small step into why this distinction is important, a listed company is public and has liquidity. It gives the founder an insight into the acquirer\u2019s revenue, growth, profit, and strategic imperatives. This insight tells the founder how their company would fit into the larger scheme of things.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Now, let\u2019s assume the company is privately owned. It means the data on the company is limited and the fear of giving too much information too early is justified.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">He set a few ground rules to start with:<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Don\u2019t lose control over your destiny until you can provide capital to your employees and investors.\u00a0 In the main, this means sticking with public companies as acquirers.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Try to avoid complex conditional earnouts, because conditions and strategies often change.<\/span><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">Now, let\u2019s go deeper.<\/span><\/p>\n<h3><b>Stay with acquisitions that provide liquidity now<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">I prefer acquisitions from public companies.\u00a0 If, however, the company is private and you are not the CEO of the go-forward entity, take cash.\u00a0 Otherwise, you are taking stock that might not have value in the future.\u00a0 This is a risky outcome for your employees and investors.\u00a0 Liquidity now allows you to cede control for a known outcome today.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, Omar says that there are rare exceptions to this rule. For instance, if you were acquired by OpenAI or by Amazon prior to its IPO, these are rare opportunities. There should be clear signs in these rare cases, and it is not the total funds raised by the company or the CEO\u2019s popularity. \u201cIt is about how loved their company\u2019s products are and how much they drive revenue growth,\u201d he says.\u00a0\u00a0<\/span><\/p>\n<h3><b>Ref check<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">We all have ambitions to generate revenue and value for our shareholders. But when someone comes to offer you the exit, you need to know if the person you\u2019re speaking to is legit. Do they have the juice to do a meaningful deal?\u00a0 Speak to your confidant or an advisor, someone who is going, to be honest with you and does not have a vested interest in the transaction. Bankers want the deal to go through, you, the founder, aren\u2019t on their mind. For founders, who are just getting started, find this mentor\/advisor figure. It helps not only when you have major decisions to make but also makes the process less stressful.\u00a0<\/span><\/p>\n<h3>Find<b> another offer<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">You can get the best price and terms when there is another entity in the picture ready to do the deal.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Competitive pressure is one tool that will keep the M&amp;A table warm. Omar says that nothing will improve your M&amp;A outcome more than competitive pressure.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Start this process early.\u00a0 Finding another potential bidder in the middle of a process is very hard to do.\u00a0 You need deep relationships in place in advance. Always drive great partnerships that can drive meaningful outcomes for both parties. Don\u2019t build partnerships for the sake of acquisitions, build them for the sake of good business.\u00a0 If you do that, one of them might end up having good acquisition potential.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you don\u2019t have another bidder, don\u2019t lie. Lies get caught out and things could go sideways quickly.\u00a0<\/span><\/p>\n<h3><b>Find reliable anchors\u00a0<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Sometimes you are lucky and your acquirer reveals their price range to begin the discussion, but in other cases, they don\u2019t.\u00a0 In that case, you will have to start anchoring the potential acquirer. But <\/span>don\u2019t anchor in a way that makes bidders disappear<span style=\"font-weight: 400;\"> or leaves too much on the table.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cI saw this happen once, someone anchored a price that was too high and scared off a credible bidder,\u201d he says.\u00a0 Anchoring too low is also obviously bad.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">My point here is that you need to be careful about the price. Make it sound like the price range is determined more by the existing competition. Instead of offering exact numbers, give ranges where you should aim to anchor at the higher end. You want to provide the anchor that will push the interested bidder to stretch.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A caveat here. Your ecosystem needs to know you enough so that your bidders are convinced by the price ranges that you quote.\u00a0<\/span><\/p>\n<h3><b>Look at the true value\u00a0<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">A lot of companies focus on the headline numbers, like say hitting a $1 million ARR. But what is more crucial is the inherent value addition that you bring to the table. Let\u2019s say that you are building a $1 plugin. Your ARR may be $1 million now, but in the hands of the acquirer, it could be worth $30 million in 18 months. So think about what your product can do in the acquirer\u2019s company and not what your product can do by itself.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But how do you know how your acquirer values you? You move the conversation to what you can do together. Say the competitor has 10,000 enterprises and you are a $100 package. Imagine the possibilities together. The combination of the two can potentially achieve a $100 million ARR. That\u2019s the model you need to build.\u00a0\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cDon\u2019t force the acquirer to build this model on their own. Do it with them. Ask yourself, what is the synergy, what are the growth drivers, and what is the revenue projection,\u201d he says.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">You need to help them build it because you know your company inside out. This will help model some hidden potentials that were otherwise being ignored.\u00a0\u00a0<\/span><\/p>\n<h3><b>Don\u2019t reveal too much<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">How much is too much? You don\u2019t always know. But there is no obligation to share sensitive information with a potential competitor. So if someone\u2019s asking for your customer list you can refuse.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">You can do incremental reveals as the negotiations progress, from the early discussions to the term sheet stage.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cMy suggestion is to not give out anything sensitive until you get the term sheet,\u201d says Omar. If people insist, give out names of customers that you know are public anyway or you\u2019re sure won\u2019t migrate out of your platform.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">An acquisition could be a positive outcome in your lifecycle, not every story ends in an IPO, and some of the most successful outcomes were acquisitions. WhatsApp, YouTube, and Flipkart are all examples of meaningful acquisitions that continued to thrive.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">One last thought. Enjoy the ride while you are building your company and try not to think of acquisitions.\u00a0 Thinking too much of acquisitions replaces focus and energy better spent on your customers. If you focus on your customers and how to make their experience 10x better \u2014 the acquisition offers will likely follow.\u00a0 The opposite is not true.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>A few weeks ago, a friend approached me. He was anxious and at a crossroads. A competitor had come in to acquire his company and the conversation seemed serious.\u00a0 The story of this founder&#8217;s friend started three months ago when the competitor called him and asked if he would be open to being acquired. My [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":5408,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[94],"tags":[67,92,93],"chapters":[],"class_list":["post-5406","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-leadership","tag-playbooks","tag-ma","tag-exit-strategy"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Your competitor wants to acquire you. Now what? - BoomiAI<\/title>\n<meta name=\"robots\" content=\"noindex, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Your competitor wants to acquire you. 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