2022 has been an incredibly tough year to scale a startup in. A lethal combination of climbing inflation, rising interest rates and macroeconomic uncertainty has cut off access to fresh capital for many ambitious technology companies, tanked revenues, and forced hiring cuts.
Nevertheless, the potential for M&A activity remains high – as demonstrated by Adobe’s $20bn acquisition of Figma and Mandiant’s $5.4bn sale to Google – and some opportunistic startup leaders will see the current climate as an opportunity to expand their business and join forces with another industry player to achieve their common goals.
However, tech acquisitions are a lengthy, complicated process, and startup executives – who are often tackling a merger for the very first time – need to be well prepared to ensure that any prospective deal goes through smoothly and successfully.
Earlier this year, Paddle acquired US subscriptions metric startup ProfitWell – a company our founders had been interested in joining forces with for years – amid a tumultuous economic backdrop. Based on this experience, we believe there are three key learnings that any tech founder should be taking stock of when heading into a purchase – or a sale:
#1 Talk vision and values, before valuation
Many founders will assume that any potential acquisition has to start with the financials: discussing with the other party just how much the deal will be worth.
But the truth is, money doesn’t matter if both businesses aren’t the right cultural fit. Clashing values, goals and visions for the future of the combined company will cause huge issues in the long run, so make sure these align from the get-go to make the post-sale transition sooner.
In our case, Christian Owens (our CEO) and Patrick Campbell (ProfitWell’s then CEO, now our CSO) had known each other for years and both shared a vision of empowering subscription businesses to grow with as few operational hurdles as possible. Moreover, Christian had been a fan of ProfitWell’s product and business model as far back as when Paddle’s office was his apartment kitchen. The value match was there from the very beginning.
And when it came to negotiations, we still had at least half a dozen conversations about the purpose of Paddle and how we saw the world, and whether or not that aligned with ProfitWell too. So, before any negotiation, make sure to have honest, open discussions with the other party to really ensure that your visions and values are on the same page. Then you can pivot to setting a fixed price on the deal.
#2 Do your research – but stick to the essentials
As obvious as it sounds, doing your homework on the company you’re acquiring or selling to is of paramount importance, and should take place before the first round of discussions and throughout the process once negotiations are firmly underway.
In advance, collect information about the other company. What is it like to work for? How is the business performing? Who are its investors? What experience does the executive team have?
Sites like Glassdoor and Crunchbase are very useful for this, but word of mouth should not be underestimated, particularly if your sector is tight-knit like SaaS. 6 months before we approached ProfitWell, we interviewed some of their customers about their experience using the platform and what they would change.
We also spoke to our own employees and asked whether our teams or clients were using ProfitWell, and if so, what features they were utilising. And if you’re selling your startup, find out whether your acquirer has bought any other businesses, and if so, ask executives from those companies how the deal played out. Asking around the ecosystem is the best way to source an authentic, first-hand assessment of what the other party can offer.
But when it comes to fact-finding later in the process, stick to the essentials. We asked ProfitWell directly to provide lists of customers, three years of financial information, employee turnover figures and financial audits. While there will likely be countless things you want to ask the other company, be sure to scrutinise yourself on how much you really need. This will prevent you from overwhelming the other party, speeding up the process overall.
#3 Consider and establish important terms for the future
When undergoing an acquisition, it’s safe to assume that the acquiring company will absorb the intellectual property, legal entities and employees of the business it’s purchasing.
However, there’s other crucial terms that are important to think about from an early stage to ensure that the post-deal status quo works in everyone’s favour, too. For instance, if you’re acquiring, consider and negotiate what will happen to the leadership team of the business you’re merging with. Will these executives have a role in the new settlement? Will they expect to sit on the board of directors or take a senior position?
Be sure to have open dialogue with the other party’s senior leadership team; in our case we collectively decided that ProfitWell’s CEO would become Paddle’s new chief strategy officer while their CRO kept the same role, for the ProfitWell products.
These discussions can even apply to the product side of things, too. As part of our deal, ProfitWell wanted to keep their Metrics product free to use for the foreseeable future – something we also were equally committed to.
M&As made easy
Despite global economic uncertainty, tech acquisitions are not slowing down – and there’s over $770bn sitting on balance sheets for software firms alone. Many firms will be considering a purchase – or a sale – in the coming months.
But while an acquisition can be a daunting prospect for both the buyer and the seller, it doesn’t have to be. If you’re serious about merging with another tech business, be sure to consider values over valuations, do your homework on the company you’re joining forces with, and ensure you consider crucial terms that might prove to be a dealbreaker.
If you’re interested in going through an acquisition yourself, we have released a documentary highlighting our deal with ProfitWell, which you can watch here.
