Ask HN: How to handle acquisition offer from a competitor?

I'd try to focus the initial conversations on understanding why they view your company as a strategic fit for their plans, their view of how the market may develop, etc. From there, you can get into what the integration of the two companies might look like (do they want you and your team to stick around, are they more interested in technology than customers, etc., etc.) There are a ton of things you can engage them with to get a better sense of whether or not you can do a deal at the price you've got in mind. And if it turns out you can't, just say so. Something like "Listen, I think you are really just interested in our patents, and I think we've got a lot more value in our organization - I don't think its likely that we'll be able to bridge the gap between how you'd value our patents and how I value the entire business. If you really want to talk about an acquisition, it would have to be on the basis of your interest in the entire business otherwise I can't sell it to my investors, board and team. It really is your call, what do you think?" etc…

Put another way, price should be one of the last things you talk to them about and there are plenty of real things to talk about before you have to indulge them with a fishing trip. Usually all the real stuff doesn't come out until a letter of intent has been inked and due diligence starts. Its perfectly okay to keep a few cards tight to your chest until you get to that phase… assuming you manage the conversation well up until that point…

I think the deposit requirement might be a little too passive-aggressive for my liking. I'd personally want to take the stance that they are approaching you in good faith and do everything I could to make a transaction - unless I firmly was opposed to any sale. It really comes down to what you are trying to achieve. If you think you'll end up selling in the end, it might not be helpful trying to pick the buyer - stay focused on making a sale happen instead.

This is good advice.

There are a couple of things I'd add. If you're more than just a couple of founders, ensure you have a watertight no-solicitation agreement, in addition to an NDA. More than information, employees who know the domain are valuable to the competitor.

Finally, the one overriding thing to keep in mind for all offers -- dont let it be a time or energy sink. Its easy to fall into that trap, if the first couple of conversations are productive.

I-banker here. I deal with similar situations on fairly regular basis.

Couple of tips:

- NDA is useless. Sign it but don't expect them to adhere to it. Even if they don't, it's extremely difficult to prove a breach (they likely won't be disclosing it to others anyway, just using it against you).

- Ask them how they plan to price your assets - is it based on your financials, your technology, your customers, etc. This may disqualify them right away: e.g. they tell you is that they only look for revenue growth while you think your technology is the most important part of the company.

- Have them give you a formal presentation on their company and where they see your firm fitting in. This really serves 3 purposes: a) allows you to see how they are approaching the market and whether they've thought this through or if it's a fly-by. If this is a random "let's see if we can buy this cheap" situation, they'll likely be reluctant to spend quality time with you; b) you will learn what their pain points are, which will give you leverage later, if the acquisition progresses; c) probably most important, you will spend time together and will start to get a sense on whether you can trust them. Establishing a beginning of a professional relationship goes a long way for you (e.g. sometimes you just know if the other person is a charlatan or if they are a straight shooter) and for them (they start developing a level of trust and are not as suspicious you'll trick THEM)

- after the initial meeting, share your concerns and ask them for suggestions on what they would do if they were in your shoes

There's more, feel free to reach out to me directly if you'd like.

What I like about this advice is that it puts the ball squarely back in the potential buyer's court and may help to minimize the distraction entailed in making wild guesses about potential deal structures and outcomes.

This is a case where the acquiring company has the burden of convincing a potential seller to sell. It is not a positive sign if the buyer is unwilling to pitch their deal all out.

Speaking from some experience:

As a buyer I always want to see stats before making an offer. As a seller I will give basic revenue figures and then ask for an LOI with a # or at the very least a number in writing to see if these people are serious.

I think when you hit a certain price range you're better off taking an M&A firm that works in your market. 7 figures is definitely in that price range. The really good firms take your company, wrap it up, and basically take it to auction.

If you're really serious you need an advisor + counsel to make sure you don't screw yourself over. Taking advice from people on the internet is never a good idea.

There will always be a risk that you are going to disclose information that they could potentially use against you but people tend to overrate this risk. The biggest risk comes from continued distraction in a deal process affecting the focus of your team on execution.

I don't think your deposit idea is realistic but I might be wrong. Here is what I would do: Ask them for a hypothetical bid and their valuation model (factor assumptions) behind it. This way you could model their bid on your real data without having to disclose it and see whether you would be happy with the price.

If they are not prepared to give anything away without more information there is a high chance that their behaviour is predatory and you should pass.

Thanks. This is really helpful. I have been thinking about the concept of valuation model, but in a different wording (like previous commenter esun told , our revenue is between X and Y etc). I guess asking them to provide some kind of valuation based on what their growth strategy, assumptions on existing revenue are will be more helpful indication whether they are serious, rather than extracting deposit which may be discouraging and also legal burden for them.

I'm confused, how does an NDA protect you? An NDA usually says that they won't disclose your secrets to a 3rd party. But they wouldn't have to, they just have to use your secrets internally to compete with you.

"... we are not looking to sell..."

In this case, you are in a good position to play it the way you want to play it. Honestly, if it's a competitor, don't give them competitive information without having a good feeling that this is for real.

Consider negotiating a valuation formula, rather than a price. You could say "our revenue is between X and Y" or "we have between X and Y customers", and proceed to discuss terms accordingly.

This protects you from divulging too much information, and gives the other party a chance to demonstrate serious intent.

PM me for specific valuation help if you want more info. (MBA, developer).

Well that's the problem everyone has with competitor acquisition; how much of it is a business info harvest and how much is real. How about sitting down with them to talk, getting a feel for what they're actually about (asking if they have the money, what the terms might be etc) and then if you're still unsure, "sell" them exclusive rights for a period. It's not ideal and a lot of this is done by feel to be honest as for some companies, initial contacts are a daily thing from competitors and some are rejected outright.

We already had a sitdown, we had a feeling that they are a serious buyer and also believe they have enough cash for the transaction but its just our feeling. We had offers in the past via email but they were probably fishing expeditions, this time its probably not but since we are not looking to sell we thought to get some additional protection using the deposit. However, I have not found any advise how to structure it. What do you mean by "sell exclusive rights" ?

Essentially, you can "sell" rights to negotiate with you exclusively. It's often used so that the seller can focus on a single party but gets a reasonable payoff if the sale doesn't go ahead for any reason. The other party therefore has to commit resource and won't just do it for the sake of doing it. I've usually seen it done when there are, say, 3 or 4 interested parties to narrow it down to 1 in the first instance. On some occasions the party that had exclusivity drops out and it's either a good thing as the other parties are still there or a bad thing as a serious buyer dropping can raise alarm bells.

If it's a potential 7-figure deal - go find a good merger and acquisition (M&A) attorney, it will be WELL worth your time and money. If you end up going through with the deal, you want to make sure you don't make reps and warranties that could damage you in the future. I've been through 2 acquisitions as a founder, once through a competitor. Part of any legitimate inquiry besides "just talk" is a term sheet. If this term sheet isn't under the NDA - you could shop it around a bit. They want you. The person that is willing to walk away has all the power. Definitely be skeptical at first - they have nothing to waste but time until the deal is signed. Don't be annoying when talking with them, but don't give away "trade secrets" - it's hard to advise without knowing the context of the business - but I'll try my best.

This is getting more into the valuation side, but if the multiple you speak of is based on 8x EBITDA because of some sort of recurring revenue/profit, then you could find investors elsewhere (easy). If it's based on an IP valuation and you are a company in debt and not making money, that's a different story. Just the fact that someone is interested in acquiring you (whether it's just a fishing expedition or legitimate) will bring confidence to other investors. Regardless, it's a personal decision. I always think of it like this - if you were to not take the deal, and your company went bankrupt in 2 years, or you did take the deal and your company grew 10x in 2 years - which would you rather do? If you are not ready to sell your company, then don't do it. In my last company, we got 3 potential buyers before we sold - everyone wants to buy a successful company (especially now that so much capital has been pulled out of the markets).

Regardless - congratulations. Whether this is fishing or real, it's a great milestone to reach - so be excited about it.

How bad is it for the acquiring party if they get a bad reputation by fishing for information and walking away afterwards? If they are planning more acquisitions in the future they would never make such a bold move.

I would:

- review the NDA, and make sure your lawyers are happy with it

- disclose as much information you feel comfortable with

- if they want more, ask for a term sheet (with a number in it, and all details about a possible earn-out etc.!)

There is no pressure on your side as you are not looking for an exit yet, but I assume there is a price for everything so just keep moving the proces.

PS If you haven't yet, read all M&A articles here: http://mba-mondays.pandamian.com/tableofcontents/

Just be open and negotiate in good faith, or you'll cock up your potential acquisition. No demanding weird terms - it's only a 7 figure transaction. Running up their legal bill and being a pain in the ass will only hurt you.

If you've got a reasonable worry that revealing a particular bit of information will materially damage your business should the negotiations fail, this you can initially withhold, with an explanation that it's sensitive and you'd like to wait until things are further along. But the vast bulk of the information request should be fine, and if you want to sell, you should provide it.

I wouldn't consider NDAs from their lawyers as something that protects you.

It doesn't matter who writes an NDA; it's a non disclosure agreement, not a "can't take advantage of this information to compete with us" agreement.

If you're not really looking to sell then you shouldnt be worried about scaring them away, so just demand all the documents that will protect you and a non-refundable deposit that will hurt if they dont get it back. That'll show you how serious they are.

David Cohen (TechStars founder) has a good post on this subject: http://www.davidgcohen.com/2010/06/18/you-have-acquisition-i...

You may find Bob Gourley's book Make Money for Bob to be a bit helpful here. It has a few good chapters on how he has bought and sold businesses, and he handles each one with honesty and integrity.

http://www.amazon.com/Make-Money-Bob-Bottom-Entrepreneurship...

This is an area that it is worth paying someone who knows and has done it several times before. There are brokers who do this for a living, and are good at it. The commission they charge is worth getting it right.

Sounds like they want this deal more than you, so take charge. Tell them no, they can't have more information until they disclose the buy price, and even then you want a non-refundable deposit if the deal falls apart, in exchange for giving them proprietary information.

I'd also consider getting a business broker or lawyer involved, to talk to them for you.

ugh no - please don't do this! this is a negotiation, not a fight. talking price on the first date isn't going to be productive because neither party has any clue what is being bought and sold.

also, do you own talking. surround yourself with advisors and experts, but don't give up control of the initial deal structure. Let your lawyers close the deal, don't even bother trying to do that yourself, but never let the lawyers handle the opening rounds. I like to take care of negotiating the initial letter of intent and then give that document to the respective lawyers to turn into a real contract - and intercede if anything starts to go sideways.

I agree about the importance of managing the deal yourself. That said, there's definitely a way to get a sense for what the counterparty will pay without asking for an upfront price.

He needs to know how the acquiring company is thinking about the acquisition. Are they buying the technology? Purchasing a revenue stream? Buying a marketing channel? A combination of the above? If this is primarily a technology acquisition the price can be discussed independent of sensitive business data. If it is a revenue play you can talk about multiples. And if it is a marketing play you can talk about they value users. The idea is to build consensus around an informal model for how to value the business without going into detail. It requires sharing some data, but not necessarily opening the books.

I also think its reasonable to have a non-refundable deposit in exchange for going through the due diligence procedure. I wouldn't consider ballpark figures sensitive for my own business, but wouldn't agree to go through due diligence without being sure it wasn't a fishing expedition.

I agree. Don't screw this up by taking the wrong approach.

Remember the HN article about the one guy who tried to negotiate his sneaker deals by himself and overplayed his hand and lost out twice.

https://news.ycombinator.com/item?id=3466887

The company offering to buy you can't make an offer or even a ballpark offer because they have no idea what your company is actually worth. It might be a mess of Visual Basic code behind the scenes, or it could take 10 people to keep the server running, etc. Also, you could be faking your revenues, so they can't put any offers down before they know you're for real.

I would suggest contacting a lawyer who is familiar with this and getting a good understanding of what your risks are by disclosing this information, but you also don't want to scare off the buyer.