Hello 👋

Martin here. Welcome to another edition of Founders’ Hustle!

I produce content about entrepreneurship and building startups through the lense of my own experience launching and growing companies, and loop in others from time-to-time.

Today, I’m sharing insight into the very end phase of a founder’s startup journey— the “exit”.

Specifically, the “types” of buyer you will encounter and what their motivations are.

Here we go.

In a period of ten years, from 2009 to 2019, I built and sold two businesses with multi-million dollar revenue from scratch.

The first business was founded in 2009 and saw early success with a website that became among the top 1,000 most visited globally 1.5 years after launch (according to Alexa). It was sold by 2012.

The second business was founded shortly after the sale of the first and sold roughly a half a decade later, in 2019. In its first year of operation, revenue run rate went from zero to over $4m.

My experience selling these two businesses was quite different. In some regards, polar opposites.

While the first business sold within weeks (2 months) of initial discussions, the second business took over a year.

Throughout the sales cycle of both, we spoke with dozens of potential suitors.

After a while, I started to notice behavioural patterns in the buyers we were dealing with.

Most would generally fall within a certain “type” — basically, a “buyer persona”. This is based upon a combination of their own circumstances and how they interacted with us.

Figuring this out can be helpful in streamlining the sales process and maximizing sale value.

Managing how you interact with each buyer — based on their type — will save a lot of time and it’ll also make sure you focus your energy in the right areas.

1. The Engineer 🤓

The first type of buyer is what I refer to as “The Engineer” — financial engineer, that is.

“Engineers” take this concept up a few gears by minimizing the upfront payment and amplifying the “earn out” component in both complexity and proportion of transaction value.

They are generally not passionate about your specific product, market, or team. In fact, they are quite indifferent to this. You are not of strategic value.

Usually, your business just has to fall within a general industry or market they’re comfortable with.

Even then, the durability of your business model is not a major concern. The terms they propose will relieve them of any financial obligation in the scenario your company falters.

Their main objective is to buy cashflows as cheaply as possible. This is accomplished through carefully constructed acquisition proposals that seek to exploit both a huge asymmetry of M&A operational knowledge between buyer and seller, and, potentially, seller urgency to move fast.

When you receive a Letter of Intent or draft terms from this type of buyer there will be an attractive “headline transaction value” teased.

This looks great on the surface, but once you dig deeper into the terms the “headline value” will be contingent upon a complex patchwork of strategically constructed and potentially opaque mechanics — engineered to reduce the buyer’s risk and financial commitment to as close to zero as possible.

Don’t get me wrong, most acquisition proposals have a lot of conditions attached to the headline value, but, the degree to which I’m referring to here is outside the realms of “fair and reasonable”.

“Engineers” have no intention of negotiating to a “middle-ground”, whereas other types of buyers will (their motivations are different).

I experienced this firsthand when I received an offer from an “Engineer” for my first company.

This buyer proposed a healthy headline transaction value, but the majority of it was to be paid to shareholders over a period of years and financed by the ongoing profits of the business that we, the founders, would still be required to run operationally for the duration.

If there were no profits there were no payments to shareholders — a dynamic which encourages the buyer to “increase costs” and erode the obligation away.

While we were happy to entertain an “earn-out”, this was weighted too heavily in one direction. There was no upside. We passed.

This scenario is by no means exhaustive. There’s a plethora of other acquisition agreement mechanics a buyer can employ to acquire your company inexpensively.

Some are cleverly worded and do not look sinister to the untrained eye. Hiring an experienced M&A attorney is key to identifying them.

Based upon my experience there are two primary targets for “Engineers”:

• Companies that are desperate to sell quickly.

• Companies lured in by a high headline transaction value.

Avoid, if you can. Save your energy for a buyer with a vested interest in the team, product, and market.

2. The Strategist 🤩

“The Strategist” is a fantastic buyer type where high valuation multiples can be negotiated.

These buyers generally operate in the same or adjacent markets to your company. They seek to enhance their own suite of products, add defensibility to their business, and plug “gaps” in emerging consumer or business trends.

“Strategists” are purchasing your company for more than the sum of its parts — they are buying either massive growth potential or operational synergies that can unlock huge value within their organization and are willing to pay handsomely for it.

They’ve often been tracking an emerging market or product segment for sometime before making a move.

For real-world examples think of Facebook’s $1 billion acquisition of Instagram and $19 billion purchase of WhatsApp.

Once a “Strategist” has reached a point of conviction, they’ll often approach a company who were otherwise “not up for sale” with an initial offer. This can incept a bidding war.

It doesn’t always work out this way, though.

Sometimes an acquisition offer may come after an initial partnership or relationship. Other times, after long term networking and connection building — it’s never to early to start!

I’ve found it’s very difficult to convert a company into “Strategist” within a short timeframe by going in cold.

It takes a lot of convincing to get those high valuations. The stars pretty much have to align — the right mix of people, money, bureaucracy, inclination, technology, synergy, strategy, timing etc.

And, you approaching them is a weak signal.

If they’ve heard of your company before, there’s probably a reason they haven't been in touch about an acquisition.

The same goes for the reverse scenario. They likely just don’t see a great fit — at least not a high priority opportunity, anyway.

Strategists are more interested in acquiring products, intellectual property, and operational competitive advantage as opposed to teams and talent.

Those assets will be merged into the acquiring organisation’s infrastructure. All but essential staff from the acquiring company payroll will be cut, and founders are only hired for a handover period before moving on.

It is quite evident when you’re talking to a “Strategist”. A lot of questions probe for asset compatibility and viability. Particularly with technology, product, customers, and operational synergies.

They’re also very interested to learn about your product vision and how you see the marketplace evolving over the next few years.

3. The Investigator 🧐

“The Investigator” can come in many guises. Some legitimate in their purchase intent and some just plain nosy.

Chiefly, “Investigators” are curious. This is usually because they either operate in your market or are exploring doing so.

They want to “peel back the onion layers” and take a closer look at your business model, operations, customers, “know-how” etc.

Prior to obtaining the knowledge your business was available for purchase, they had no intention of engaging with you about an acquisition.

Now they’re aware it’s a possibility, they’ll seize upon the opportunity and want to learn more — whether they have legitimate purchase intent or not.

They don’t remain an “Investigator” indefinitely. If they build enough conviction to make an offer they convert to another buyer type at that point (which one will depend upon their behaviour and motivations).

I’ve dealt with numerous “Investigators” for both of my company sales processes. It can be a precarious situation — a double-edged sword.

Competitors are generally great candidates for acquiring your company, but if they don’t bite (for whatever reason) they could’ve gained access to commercially sensitive information in the exploratory phase, or, may utilize the sale process to their own advantage in some other way.

Even high-level discussions that naturally unfold as part of early acquisition talks invariably lead to the disclosing of information that you would otherwise be uncomfortable sharing with an active or “would be” competitor under normal circumstances.

Non-Disclosure Agreements give a false sense of security in such a context — their enforceability is difficult, practically speaking.

Disclose information in terms of quantity and sensitivity level in proportion to their signals of intent.

For example — the volume and seniority level of executives you’re speaking with, if they’re looping in their high paid attorneys, and the issuance of a Letter of Intent, etc, can be used as indicators.

Even with these signals, it can still make economic sense for them to do this knowing they will later walk away.

Take note of the questions they are asking. Do any signal real purchase intent? Are they concerned with the practicalities of business integration? Or, staff?

Be warned — anything can happen as a result of these conversations. Both good and bad.

For example, before selling my second startup we were in talks with a direct competitor regarding a possible acquisition.

After some initial due diligence they accused us of patent infringement (completely frivolous!).

The CEO of the company actually told us it would be hard to sell our business with a patent dispute outstanding, so we could either pay his company royalties starting from now and forgo a legal dispute or take our chances with patent infringement drawn into question.

It was basically extortion, so we stood our ground. After initially following through on their threat by opening a legal dispute, they later dropped it. We moved on and found a buyer.

4. The Chancer 😜

“The Chancer” is kind of like a less sinister and sophisticated version of “The Engineer”.

They are chiefly motivated by price and value but are more sensitive to market and industry. They typically like to stay within their “sphere of competence” or markets that overlap with it.

“Chancers” put in lowball offers with little intention of price manoeuvrability. The mechanics of the deal are pretty “vanilla” with little in the way financial wizardry.

They are not overly concerned by strategy or team talent and are relatively happy to pass and walk away with little negotiation.

Expect lowball offers to come in relatively quickly after initial discussions have started, sometimes via “backchannels”— they want to test the seller’s pricepoint sensitivity before investing any significant time reviewing acquisition viability.

Their offers thrive in situations where the seller needs to move quickly.

In that sense, they provide a functional role in what can often be a slow-moving and illiquid marketplace. Once you have an offer on the table, you can try to use it to drive more urgency from other buyers.

This is tricky to do in practice, though, since Letters of Intent can have short response timeframes before the offer lapses.

5. The Disciple 😍

“Disciples” are devout admirers and subscribers of an acquisition target’s team, talent, culture, achievements, vision, and products. They’ll pay high multiples to purchase them.

Sometimes this can take the form of “acqui-hires” — very early-stage startups with super talented, world-class, teams.

They may have some hard-to-build proprietary technology, some early customer traction, or not. A real-world example of this was Twitter buying Vine way back in 2012.

“Acqui-hires” are absorbed into “Disciple” corporate structure in various different ways.

Sometimes the team is split up amongst the organisation, other times they are left to run their own newly founded department, or, merged into an existing one together.

In other acquisition scenarios, the company being purchased could be further along and “proven” in the marketplace — Series A, B or later-stage funding.

They’re perceived as “hot” by the press and industry incumbents— a “rockstar” team with pioneering culture and flawless product execution and vision.

A “Disciple” largely allows the company to operate autonomously in order to “keep the magic” and sustain operational excellence. An example of this is Supercell.

“Disciples” are motivated by people, talent, and culture— a human-driven engine of creativity, growth and efficiency.

Products also excite them, but these are viewed more as the outputs of a finely tuned machine that will produce exponential longterm value.

Similar to “Strategists”, it is very hard to approach a company cold and out of the blue and convert them into a “Disciple”.

They have to be seeded and nurtured through stupendous execution.

“The Disciple” is among the most emotionally driven buyer type. Acquisition talks are less adversarial than other situations. They already “get you” so conversations quickly move to terms.

The target company can be so “hot” that the buyer has to “pitch” them on why being acquired for a high multiple would be awesome right now — almost like a courting period to establish compatibility.

Valuations can get sky-high. Due diligence can be minimal. Initial proposal to closing the deal can be turned around fast.

6. The Opportunist 🤑

“The Opportunist” is a buyer who either:

1. Jumps on a trend and wants to “buy into” it quickly without sufficiently understanding it.

2. Had no previous intention of acquiring your company but after being alerted to the opportunity becomes excited by the idea and makes a “fair” offer.

They are prepared to enter new markets despite having little pedigree or expertise in those specific domains. And, quickly.

Exploratory questions and avenues of due diligence inquiry are fairly standard and shallow in investigative depth since they’re not familiar with the nuances of your market, customers, and product.

For example, most lines of inquiry will revolve around understanding how the business operates and “sanity checking” core fundamentals — customer satisfaction, revenue distribution, suppliers, unit economics, costs, competitive landscape etc.

They’ll also try to apply their own KPIs or industry-standard KPIs to make an assessment, instead of probing for KPIs that are specific to your business and fully comprehending them.

Their approach is “top down” instead of “bottom up”, so they often overlook the subtleties of customer motivations, growth levers, and risk. Culture and identity can be vastly out of sync between buyer and seller.

“Opportunists” won’t fully understand what “moves the needle” for your business until after they’ve acquired it.

For a real-world example, consider Yahoo!’s acquisiton of Tumblr.

Depending upon the degree of conviction and underlying corporate agenda, “Opportunists” are less price-sensitive than “Chancers” so they put in decent transaction value offers — sometimes very high multiples.

7. The Collector 🤗

A “Collector’s” individual circumstance can vary greatly.

But, all of them have one thing in common — they like to collect businesses and assets. Some more frequently than others.

They generally have a good comprehension, or at least, take the time to understand the nuances of your business before acquiring it.

Unlike other buyer types, their motivations are balanced fairly equally between strategy, team, product, and financials.

Acquisition motivations are usually more incremental in nature — and pragmatic. “Collectors” want to supplement their existing assets and setup, not revolutionize their business or jump on a hot trend.

Put another way, they’re not expecting to unlock a new huge growth area that will transform their business “overnight” or plug an existential gap in expertise or product.

Examples can be diverse. Consider WPP’s historical approach to acquisitions under the helm of Martin Sorrell, or, a private equity firm.

“Collectors” take a very deliberate and considered approach. Exploratory questions and avenues of due diligence inquiry will be robust.

They are generally prepared to pay a “fair” amount for your business, but negotiations can carry on for a long time. Don’t expect super high multiples.

How “Collectors” each individually operate and conduct themselves is very different. I’ve dealt with some that were straightforward and relatively frictionless, while others were pretty aggressive in their approach and utilized choreographed negotiation tactics.

“Collectors” are relatively approachable to open acquisition talks with, even going in cold.

Until next time,

Martin

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