This is a guide for pre-IPO tech CEOs for when and how to acquire companies. Many thanks to Bob Borek, Dave Eisenberg, Tyler Finkelstein, Auren Hoffman, Shahir Kassam-Adams, Pete McCabe, Tal Rosenberg, Bobby Samuels, and Jim Williamson for their suggestions and edits putting this together.
Early in my startup journey, M&A was not a part of the toolkit I ever considered. I suspect this is true for most startup founders: buying a company seems prohibitively expensive and complex, and there is very little playbook for how to do a deal. Only after LiveRamp became a public company did I really begin to understand the toolkit: we had the balance sheet and the ambitions where we made several successful deals.
When I went back into the early-stage world, I brought this toolkit with me — and have now led 15 transactions (3 on the sell-side, and 12 on the buy-side) ranging from 6-figure to 10-figure deals. I credit the toolkit with accelerating Datavant’s path by several years, and helping us very quickly establish product-market fit and build scale.
I’ve tried to summarize the lessons that I’ve learned on the buy-side below, and will walk through:
- Why most M&A fails
- The four types of deals
- Five prerequisites to considering M&A as a strategy
- The playbook: Executing the deal process
- The playbook: Defaulting to no and debating the deal internally
- The playbook: Structuring the deal
- The playbook: Pre-planning the integration
Why Most M&A Fails
While I believe that well-executed M&A can be a very valuable part of a toolkit, it’s important to recognize that most acquisitions made by most companies are poor decisions.
M&A hypotheses are usually presented as a “1+1=5” scenario; you put together two companies, have some “synergies,” and suddenly the combined business is worth more than either business standalone.
In the vast majority of cases, this is overoptimistic. It’s helpful to think about this equation:
Value of Combined Business = Value of Acquirer + Value of Acquiree + Synergies — Dis-synergies
There are two very common mistakes that buyers make:
- Over-optimism on synergies. It’s easy to imagine how everything can go right in a deal, without thinking through how hard it is to execute. The best way to solve this is usually to i) have a base case and a stretch case plan (and make sure the deal makes sense in the base case, and is a home run in the stretch case) and ii) make sure that executives on your team sign up for the numbers. It’s shocking how frequently deals happen with revenue targets that the head of sales doesn’t sign off on, for example.
- Not acknowledging the dis-synergies. Every deal has dis-synergies; these are usually: distracting the teams (both the deal process & the integration are major distractions for both companies), culture mismatch or culture dilution, reducing the acquiree’s incentives and/or sense of mission, and increased organizational & technical complexity. Under the right circumstances and well managed, these dis-synergies might create an “Integration Tax” of 10–20% — slowing down the business by that amount. But it can also be 100% if not well managed.
As a result, instead of “1+1=5”, many deals end up “1+1 = 1.5” (or even “1+1=0.8”). So it is critical to: i) understand the dis-synergies ahead of time, ii) create a plan to minimize them (and obsess over this post-transaction), and iii) make sure that a deal is still valuable even in the scenario of a base case success + some dis-synergies.
The Four Types of Deals
Often, when making the case for an acquisition, a variety of rationales are presented. It’s usually helpful to put the deal into a single bucket — everything from deal structure to integration approach depends on which bucket you put the business in.
There are four types of deals that I’ve seen successfully executed:
- Buying a team. This is usually a simple deal & integration, where you’re effectively hiring a team. I’ve seen this work successfully with very small businesses (1–5 employees), and also businesses that get you expertise in a new market (for example, we built Datavant’s public sector strategy via an acquisition of a team who understood how to sell to the government). The main considerations in this kind of deal are: i) is the entire team up to your talent bar, ii) making sure everyone on the team wants to join and is bought into the mission/culture/roles, and iii) avoiding internal compensation disparities between an acquired team and your pre-existing team. Once you make the acquisition, you’ll also often think through whether you want them to continue to operate as a group or split across the organization.
- Buying a product. This is usually the trickiest type of deal, and often looks good on paper but rarely works. In this scenario, you’re buying a product that you believe you can bring to market more effectively than the acquiree — but you’re not in love with the acquiree’s business model, team, and standalone traction. I’ve seen it work in cases where it’s an adjacency to your core business (for example, expanding into a major new product line) with substantial customer overlap but without much technical overlap. But you will need to consider i) whether you will ultimately need to rebuild the product in your own architecture/stack, and ii) why your team will be able to sell it better than the acquiree standalone. These two points usually make the synergy/dyssynergy balance come out strongly against this type of deal.
- Buying a set of customers. This is a move where you believe that your product can quickly gain share by applying it to an acquiree’s base of customers. I’ve seen this play work most successfully in high network effect businesses. To pull this off successfully, you need to think through customer-by-customer what their reaction will be (and obsess over your messaging), how you will manage feature gaps that inevitably exist, and how long you’re willing to run two products in parallel.
- Buying a business. The biggest acquisitions are when you are acquiring the whole package — you like the team, the product, and the existing market traction PLUS you believe that you can grow faster together. These are the most expensive deals (there’s a great company on the other side), and usually the highest upside. The key considerations here are around how to actually drive synergies while maintaining the “magic” that makes the acquiree’s business fire on all cylinders. Facebook + Instagram or Google + DoubleClick are probably the canonical examples of this type of deal (and there are thousands of failed examples where the magic was lost).
Clarifying the bucket upfront is extremely valuable — and will give clarity to the entire deal team and the acquiree on what’s important and what to expect.
Finally, in my experience, rationales that are not on this list generally don’t work (for example, “because it’s distressed/cheap,” “because otherwise they’ll compete with us,” “because we need to grow faster,” “because if we don’t buy them Company X will,” etc.).
Five Prerequisites to Consider M&A as a Strategy
I don’t believe you need to be over a certain size to consider M&A (or that you must consider M&A over a certain size). Instead, I think there are a few prerequisites to be ready to consider M&A as a company:
- Extreme clarity on your vision & strategy. M&A can work very well as an accelerant to a well-defined strategy. It is extremely distracting if your strategy is poorly defined, as you will chase ideas that are non-core and be too slow to disqualify shiny objects.
- Clarity that this is a top priority. For your first deal to be successful, you need to make a deal & integration a top-3 priority of the CEO for 2+ quarters. If the opportunity doesn’t rise to that level, it’s not worth pursuing.
- Ability to have one of your top performers put everything down and focus on the deal. I’ll talk more about the role of the “Deal Quarterback” below, but you will need a superstar focused exclusively on making the deal & integration going successfully. If you can’t spare that from other priorities, it’s not worth pursuing M&A.
- Ability to manage legal counsel well. The speed of the deal will most likely be determined by legal negotiations; you need to hire external counsel and be ready to project manage the deal closely.
- An exceptional CFO and/or deep fluency in your numbers. Deals are complexifiers for finance teams; you will need someone great thinking through the details and mechanics.
On the other hand, a large balance sheet isn’t critical (you can structure equity deals and earnout-based deals if there’s truly a 1+1=5 scenario).
The Playbook: Executing the deal process
Once you begin to get conviction in a hypothesis, you’ll want to optimize for speed+quality deal execution. Because M&A is generally a massive distraction for both businesses, speed & decisiveness are critical to not lose business momentum. You will have a team of advisors who believe you should negotiate more, spend more time being thorough on understanding risk, and maintain optionality on aspects of the deal; a big part of your job is to champion velocity over these concerns.
At many companies, deals can take a 3–6+ month timeline. This has always struck me as slow, and part of your job as CEO is to cut through the noise to speed it up. At LiveRamp, we acquired two companies for ~$200 mm. in a 2-week period; speed is just a matter of prioritization and strategic clarity.
This is the rough playbook I’ve followed:
Step 1: Build a close relationship with the acquiree CEO. Selling a company is a deeply emotional decision and an exhausting process, and when the deal finally closes you need the CEO to lead their team through the complexity of integration. It’s valuable to earn as much trust as possible early in the process; then throughout the process you’ll want to check in to ensure you and the acquiree CEO feel like you are on the same team and excited about the same vision, rather than opposing teams.
Step 2: Assign a “Deal Quarterback” who is full-time on the deal, and create a “Deal Team.” The best Deal Quarterbacks I’ve worked with are hungry generalists who may be thinking about M&A for the first time, but are able to grasp the cross-functional complexity of a deal and project manage phenomenally well. The Deal Team should generally include the Deal Quarterback, the executive(s) who are going to be accountable for the success of the deal (usually the “Deal Champion”), plus finance/legal resources as necessary. If you aren’t ready to designate a superstar Deal Quarterback to drop their other work entirely, and if there’s not a strong “Deal Champion” who sees the deal as a key priority, it’s not worth pursuing a deal.
Step 3: Tell the acquiree CEO you’re interested in buying them. Being direct is helpful, and this is often easiest over a dinner when possible. You want to paint the vision for them and get them excited about joining forces, and you want to find out i) if they’re interested, ii) what matters most to them in a deal (autonomy, financials, team success, pushing a mission forward, etc.), and iii) general level of alignment on strategy. If they are generally aligned, work out an aggressive timeline with them for how to get to a go/no-go (both sides will want to move quickly); this will both increase the probability of a deal happening and help to create momentum for the deal happening quickly.
Step 4: Write down your hypothesis for why the deal makes sense, a pre-mortem of why an acquisition succeeds and why it fails, and what open questions you have. Share this with your Deal Team and the acquiree CEO. Honing a brief deal memo with a very crisp thesis is helpful for clarifying your thoughts, and aligning everyone’s thinking about the deal. You want to know if the acquiree CEO agrees with your hypothesis and the risks. This is also where you’ll begin to articulate a value framework for what needs to be true for a deal to make sense financially.
Step 5: Get a “101 Management Presentation” from the acquiree CEO to your Deal Team. This should be a basic overview of the business as they would tell their story. Use it to build high-level familiarity for everyone on the deal team, and also to hear how they frame the opportunity.
Step 6: Have a real debate within your Deal Team. More on the mechanics of this debate below, but this is a good time to kill a deal where you don’t have extreme conviction; the volume of work is about to explode if you proceed further.
Step 7: Work with the acquiree CEO to answer questions that block a “Letter of Intent.” This should be a fairly narrow list: i) answer the “open questions” that are critical to answer to understand whether the fundamental deal rationale works, ii) answer questions required for determining valuation/deal structure (for example, income statement, balance sheet, cap table), and iii) understand the acquiree’s high-level requirements on what it would take financially to get a deal done. Many companies look for too much immaterial detail at this stage; in practice, you’re really trying to understand whether your core hypothesis makes sense, not everything about the acquiree (during diligence, you’ll have an opportunity to confirm the details — right now you’re just trying to confirm the core thesis)
Step 8: Negotiate and sign a Letter of Intent. The LOI is usually 2–6 pages, is non-binding, and covers the high level deal terms. Ideally, you front-load as much of the negotiation to this step as possible, as this is the key moment to align on what the deal should look like. You also want to be fairly certain that you want to move forward once you’re at this point (assuming nothing surprising comes up in diligence).
Like any major negotiation, your goal in negotiating is to understand what motivates the seller (and what are non-starters), understand and articulate what motivates you, and find positive-sum ways to bridge those gaps. While there are a few zero-sum points in a deal, there are a lot of variables in play (amount of payout to shareholders, certainty of payout, level of control, outcome for employees, what happens when key employees leave, etc.); this means there are many points that one side or the other might care a lot more about and usually pretty reasonable compromises to be made.
Step 9: Run 3 workstreams in parallel, with an aggressive calendar:
- Deal execution. In this workstream, your goal is to manage the process (and manage lawyers) to move the deal forward as quickly as possible and avoid the thousand minor details getting in the way of the big picture and key terms [more on this below]. There will ultimately be a 50–100+ page contract that goes with the deal, and 50–100 pages of “ancillary agreements” — so the complexity is very real, but can still be navigated swiftly.
- Diligence. In this workstream, you are trying to figure out show-stoppers. These depend on what you’re acquiring (Team, Product, Customer List, or Business). For example, a single low-performer might be a show-stopper if your goal is to acquire a team, but probably isn’t if you’re acquiring a business; similarly, lots of churn may be an issue if you’re acquiring a business, but not necessarily if you’re acquiring a team and plan to shutter the product. The main mistake companies make here is asking generic questions and not defining upfront what is a show-stopper based on the deal.
- Integration/Day 1 Plan. This is the most important workstream, and for many companies the most poorly run. You want to set up the momentum to hit the ground running immediately when the deal is announced/closed. More on this below.
Note that these three workstreams all need to move in parallel, and are all complex. They are also interrelated: you may decide to add incentives to the deal based on some of the day 1 plans, or you may find an intellectual property risk in diligence that you need to protect yourself from in the deal. So having a tight Deal Team, a superstar Deal Quarterback, and daily standups are important.
Step 10: Turn everything you learn into a final deal memo, and have a final debate. There’s a lot of momentum at this point in favor of the deal, but it’s important to still step back before you make a final decision and give yourself another chance to get to no based on what you’ve learned.
Step 11: Sign the deal, announce, close, and get started! In most <$100 mm deals, this can all happen the same day; in larger deals or more complex deals, there may be weeks or months between signing and closing. After you sign, make your first call to the acquiree CEO to congratulate them. It’s a big day for them, and the emotions are always bittersweet — and you need them engaged for the next leg of the journey.
Step 12: Keep the deal team focused on the integration & early success. Remember that closing an acquisition is the starting line, not the finish line. Now you need to relentlessly make it successful, keep the team’s focus, and continue the project management discipline throughout the integration.
Things to do in parallel with all of the above…
- Consistent debate. Have the deal team constantly decide if they still champion a deal in light of information coming in. Every day, you’ll get more information that will build or diminish conviction — both on the details of the business, as well as subtle things like cultural fit, attitude, responsiveness, and trustworthiness. Try to break the pattern of defaulting to yes once deal momentum kicks in.
- Navigate your internal stakeholders. Depending on your Board dynamics, make sure they’re able to move at your pace. If you have organizational puzzles associated with the deal, make sure you’re getting ahead of it.
- Ensure the Deal Champion is project managing tightly. Good M&A (and integrations) have the most complex project management I’ve ever seen. A good Google Sheet (with clear tasks/owners/deadlines) & daily progress email is critical to maintain public accountability and disseminate information to your deal team.
- Bring on vendors and get them briefed. In particular, almost every startup will use external legal counsel…you’ll want them up-to-speed before you start the LOI process.
- Keep a great relationship with the CEO and ensure they are excited. This can get lost in the thousands of details and you limp across the finish line feeling like adversaries rather than teammates.
The playbook: Defaulting to no and debating the deal internally
Because i) most deals fail and ii) you’re gaining information throughout the deal process, it’s incredibly important to facilitate good debates within your team on whether a deal should happen.
I’ve generally run this as:
- Focus on the question of “If this company were free, would we buy it and make integration a top 3 corporate priority?” People can get distracted by whether it’s a “good deal,” but fundamentally, feedback from the full team is most helpful on is whether it’s a net major accelerant to your strategy, or a net decelerator. (Most deals that I’ve seen companies do either have 3–100x return, or 0-to-negative return — rarely does price matter much on the fundamental decision).
- Begin each “debate” meeting with everyone doing “Thumbs Up” if they are a champion, “Thumbs Slightly Up” if they like it but don’t champion, “Thumbs Slightly Down” if they don’t like it but are persuadable, and “Thumbs Down” if they’re a “veto.” Get the champions and detractors speaking up to push debate (and play devil’s advocate if nobody takes the other side)
- To do a deal, ultimately, after lots of debates, the person who owns the number needs to champion it, I (as CEO) need to champion it, and I need to make sure nobody is a veto. Everyone else is just an input to the decision-making process, but not a decision maker.
- Killing deals quickly is important, as low-conviction opportunities can linger for a long time, adding distraction to the business. If there isn’t a champion, it doesn’t make sense to pursue…even if it might be interesting.
The Playbook: Structuring the deal
There are lots of permutations to how deals can be structured, and in general, if a deal is truly 1+1=5 –there’s always a way to structure it where it’s win-win.
At a high level, there are 4 main currencies at play in a deal:
- Guaranteed cash. In general, sellers will often optimize for cash because of its certainty, and at a minimum will want to see substantial skin in the game from you. However, cash is most likely the currency that you have the most real constraints around, and cashing out the seller reduces their incentives for the future.
- Guaranteed equity in your company. Equity helps to align incentives. The main challenge with equity for private companies is that it has an “unknown” value; if you’re close to a fundraise round, you may be able to piggyback on that round’s valuation, but otherwise you’ll be debating how to value it. That said, it’s usually good to have at least some equity in a deal for go-forward employees.
- Time-based retention incentives (cash or stock). This encourages go-forward employees to stay at the company, and is usually structured over 2–4 years.
- Performance-based “earnout” incentives (cash or stock). These can be extremely effective at bridging a valuation, as they pay out based on an outcome that you define upfront. For example, you could agree to pay out $50 mm ONLY IF a new product line drives at least $10 mm of revenue. However, you will quickly need to negotiate how exactly to measure performance, and how much autonomy the team has to achieve the goal (What if you want to shut down the product in two years because your strategy changed? What if the sales team doesn’t drive leads? Etc.). Moreover, this restricts your degrees of freedom in the future: what if the acquired company has a superstar who you want to take on a broader role, but they are needed in their current role for the team to maximize their odds of hitting their earnout? I’ve found that most earnouts I’ve structured are often renegotiated a year later, but that the initial earnout structure was a great way to bridge a gap to get a deal done and clarify “what matters most” in an integration.
Many deals have a mix of all four of these mechanics, and the right structure is dependent on what you’re trying to accomplish (if you’re buying a team, time-based retention is helpful; if you’re buying a business, earnouts are helpful), as well as what the acquiree is trying to accomplish (How risk tolerant are they? How much leverage do they have in the negotiation?).
There are a lot of terms in most M&A that don’t matter much, and part of your job as CEO is to keep the focus on the core terms and not let the deal become too complex. A good example is escrows; frequently, there’s an escrow for ~10% of the deal value, and a huge amount of negotiation goes into the mechanics around it (as well as a large amount of emotion for sellers). The reality is I’ve never seen these used in a material way, and so I usually just eliminate this mechanic from deals to simplify the structure.
However, there are two seemingly “small” terms that will matter a lot:
- Tax structure — small changes in the deal may impact whether the acquiree has to pay income tax or capital gains
- Treatment of employee stock — typically, the amount of stock outside the leadership team is small as a percentage of the deal value — but you want to be extremely careful to treat employees you’re acquiring well (assuming you want to retain them). There are complex mechanics around unvested stock and option treatment that come up in every deal.
Overall, the key is to approach the negotiation as a “win-win,” looking for how to turn a 1+1=5 deal premise into a deal where both companies feel like they got a great return.
The Playbook: Pre-planning the integration
Ultimately, the thing that makes or breaks a deal is execution. The reason most deals fail is because they are executed poorly: integrations are complex, and require you to make it one of your top personal priorities to maximize synergy and minimize dis-synergy.
Integrations can take a number of different forms, and they depend on your business objectives. If you’re acquiring a team, you probably want to quickly shutter the acquiree’s products, revamp the org chart on day 1, and harmonize tech stack, culture, compensation, and a number of other internal cadences. On the flipside, if you’re buying a large thriving company and trying to accelerate it, you may choose to do a “do no harm” approach, allowing the complexity of two different internal teams and cultures while focusing on a small number of key synergy points to focus on.
In a well-run deal, you answer many of these questions before the deal signs. This allows you to align employees and customers on the plan when the deal is announced, and maximize momentum when that occurs. It is alsomuch easier to make and communicate hard decisions upfront than it is to make them later.
Specifically, before a deal happens, you should answer:
- What are the most important synergies? Who is accountable for those and how will you track them relentlessly?
- What is the internal narrative around the acquisition at both companies? You’ll need to articulate the strategy, the culture, go-forward jobs, and the financial outcomes. The Deal Quarterback should put together a detailed project plan for how communications happen, as this is an emotional day that sets the tone for the future.
- What is the external narrative? You’ll want to brief the sales team of both companies on talking points, personally write the press release/blog post, and spend much of the announcement day calling key customers. In many deals, we designed a minute-by-minute “tick tock plan” of who we call in what sequence in order to control the narrative.
- What is the acquired CEO’s job and reporting line in the company and scope of role? Is this imminently going to change? Aligning expectations and goals upfront is key.
- Day 1, be able to tell all employees their go-forward “offer letter” — what is their charter, is their compensation/title changing, how do the deal terms impact them, etc. If there are changes to the org structure happening in the first ~6 months, go ahead and make them day 1. Are you going to consolidate finance teams? Sales teams? Etc.
- Is the goal to cross-sell? How will the sales motion work and who is accountable for this?
- Is the goal to consolidate products? Who is accountable for this?
- Do you want to consolidate brands, tech stacks, hiring processes, etc.? How quickly will you do this, and who will decide and what first principles will guide tradeoffs? If you’re planning to integrate much in the first 6 months, it’s often helpful to do it out of the gate.
You’ll want everyone on both teams aligned on those points, clear accountabilities, and the Deal Quarterback and yourself focused on eliminating blockers and championing progress against these goals. In the end, the deal will most likely succeed or fail on those first few months of momentum.
In this guide, I walked through why deals usually fail, what kinds of deals can succeed, and my playbook for running deals. These have been my biggest takeaways:
- You can (and should) do a deal 10x faster than “normal” by staying focused on the things that matter most.
- Default to no — integration is always harder than expected, so a deal needs to be great to make it worth the distraction.
- Get to no quickly unless you have conviction.
- Obsess over the integration — that is what makes or breaks a deal. Devise the plan before you sign the deal.
- Focus on whether a deal is worth the distraction more than focusing on price.
- Win-win deal structures are always possible with a good deal
- Assign ownership on the deal and integration early in the process — form a Deal Team and assign a full-time Deal Quarterback early.
- Write down a deal memo to make the hypothesis as crisp as possible, debate it frequently internally, and share it with the acquiree for discussion.
- Building the relationship with the acquiree’s CEO is critical — don’t let it become transactional.
- Even with great M&A, it’s just one tool in the toolkit — and you need to compliment it with a phenomenal organic growth engine.