Lessons from Getting Acquired, A Framework for Finding Expansion Opportunities - Tactician: #00113

If you learn anything from getting acquired, it’s that you should read the fine print.

'You mean to tell me I now own stock, but I also have to attend yearly team-building in Siberia?’

Lessons from Getting Acquired

• Why Read: 

  • Gain valuable insights on navigating the complex M&A process effectively.

• Featuring:

  • Harry Glaser(@harryglaser), Co-Founder & CEO of Modelbit

• Link: 

  • “What I learned selling my company”

Key Concepts and Tactics:

• Build Key Relationships Early with Potential Acquirers:

  • Point: Cultivate relationships with key decision-makers at likely acquirers well before you need an acquisition offer.

  • "Build 3-4 key relationships with large potential acquirers. You can't bootstrap a relationship all the way to the level of trust required for a real M&A offer all in one process. When offers come, they'll come from key decision-makers who already know, trust and/or admire you. Work early to build relationships with key deciders at big likely acquirers. Ideally build go-to-market partnerships with them."

• Manage Valuations Carefully:

  • Point: Don't raise money at too high a valuation if your business fundamentals don't support it, as this sets a floor price for an acquisition.

  • "Your post-money valuation is a hard floor on your sale price. If your business is strong and growing fast, do not hesitate to take down that larger round. If it's not, but you're being offered a big round anyway, stop and think about whether you really want to raise your hard floor right now."

• Recognize the Infrequency and Unpredictability of Offers:

  • Point: Acquisition offers are rare and driven by mysterious internal events at the acquirer, not something you can force.

  • "Offers come infrequently. This is especially misunderstood by employees... Offers come when they come. When they don't come (almost always), the only thing to do is keep going... Offers are generated by events at the acquirer that will be mysterious to you, like splashy launches by a competitor, missed sales numbers, or internal reorgs."

• Understand the Narrative Drivers Behind Offers:

  • Point: Acquirers often make offers to reverse a problematic narrative about their business, which is key to price negotiations.

  • "Often, events at the acquirer have created a narrative that the decider feels they must reverse. Maybe consecutive misses have created a narrative that the acquirer is in decline. Maybe the relentless pace of launches from a competitor have created a narrative that the acquirer isn't innovating like they used to. The key decider needs a big, splashy move to reset the narrative. Understanding this real reason is key to successfully negotiating the price."

• Don't Count on Offers Closing:

  • Point: Even after receiving an LOI, there is a high likelihood the deal falls through.

  • "At some point, to make an offer official, the acquirer gives you a LOI with high-level terms. I was advised that 50% of signed LOIs actually close. I bet it's less. You will see the LOI and dream of trading stress for riches. Remember: Less than 50% chance of closing."

• Negotiate Key Terms Upfront:

  • Point: Get all important deal terms in writing in the LOI before signing, as you lose leverage afterwards.

  • "Negotiate everything you can in the LOI itself. The LOI gives the acquirer exclusivity, thus eliminating all your leverage. To a first approximation, you will lose every battle after the LOI is signed. If you care about it, get it in writing in the LOI before signing. This for sure includes price, re-vesting, exclusivity period, fundamental reps & warranties, and escrow."

• Keep the Process Confidential and the Business Running:

  • Point: Minimize who knows about the M&A process to avoid distraction, and ensure the company keeps operating in case the deal fails.

  • "Minimize who knows about the process. It is massively distracting. The process will make large and increasing demands on your time. More perniciously, a sense can creep in that the business doesn't matter any more outside of this transaction. You cannot allow that feeling to take hold."

  • "You must keep running the business until close day. Offers can and do blow up all the time. I have seen offers blow up the day before they were supposed to close... Wall off a few people in finance to work on the deal, and demand that everyone else hit their targets per usual."

• Understand the Likely Outcome for Your Business:

  • Point: Recognize that most M&A fails to deliver the hoped-for integration and results. Only proceed if that downside is better than staying independent.

  • "Picture them running your business into the ground and alienating your team. Now decide if you still want to do this. Most M&A fails... But you should also, in a quiet moment, understand that there's a very good chance this ends in a failed integration, a ton of employee churn, and/or a series of missed targets. If that outcome is worse than just staying the course, then maybe stay the course."

A Framework for Finding Expansion Opportunities

Why Read:

• Learn a framework for evaluating potential business expansion opportunities in an organized, risk-mitigated manner.

Featuring:

• Jason Cohen(@asmartbear), Founder at WP Engine

Link: 

• “Adjacency Matrix: How to expand after PMF”

Key Concepts and Tactics:

• Recognizing the Right Moment for Business Expansion:

  • Point: Consider expansion when facing bottlenecked growth, target market saturation, need for diversification, or when you can afford to invest.

  • "If existing marketing and sales channels are at their limit, i.e. when spending more time or money doesn't yield more output, or at least, not cost-efficiently. Then an expansion to a new channel, or new geography, or new market segment, accelerates growth... If you've already won 5% or more of your perfect market... Since you're well on your way to that already, you can afford to turn your attention to segments that are similar enough to be relevant, but different enough that they require effort to serve well."

• Ensuring Adjacency in Expansion Opportunities:

  • Point: Expand into areas that are close enough to current strengths to leverage existing assets, but different enough to open up new opportunities.

  • "The key idea is 'adjacency,' meaning 'close by.' The difference between incremental change and expansion is that expansion is 'somewhere else,' but the difference between expansion and something too far afield is 'adjacency.' You don't want to go so far afield that you're taking on too much risk, you're not leveraging existing assets, and thus it is too risky, and too costly, such that even if the opportunity is large and tangible, it's still a bad idea for you."

• Systematically Ideating Expansion Opportunities:

  • Point: Use frameworks like the Lean Canvas to brainstorm ways to expand or improve each aspect of the business model.

  • "If you want to be more systematic, you can use something like the Lean Canvas to ideate: Fill each box according to the existing business, then brainstorm ways that you could expand or improve on each box."

• Evaluating Adjacency Using the Adjacency Matrix:

  • Point: Assess the degree of change required in each functional area to support a new initiative, rating it as Trivial, Adjustment, or Overhaul.

  • "Now evaluate the 'adjacency' of your proposal by determining how much each of these activities must change to support the new initiative. Your only choices are: ✓ Trivial—Almost no changes required... ⚠️ Adjustment—Change-management required, but manageable within current processes, norms, and organizational structure... ❌ Overhaul—Major change needed: hiring for new skills or for capacity, significant retraining that might require new specializations, structural process or management changes..."

• Identifying Non-Adjacent, High-Risk Expansions:

  • Point: Recognize that ideas requiring overhauls in multiple areas are too far afield, unless you're willing to make a huge investment with high risk.

  • "In particular, when more than one area requires a 'full overhaul,' that's a deal-breaker if this is supposed to be an incremental, sustaining innovation. If multiple areas require a full overhaul, this is only acceptable if (a) you are willing to make a huge investment and (b) you're willing to take a large risk that it will not pay off, and this only makes sense if (c) the potential upside is enormous."

• Prioritizing High-Impact, Adjacent Opportunities:

  • Point: Select expansion opportunities based first on potential impact, using adjacency to rule out overly risky ideas or identify particularly low-risk options.

  • "However, whenever you are making an investment—doing something with substantial cost, time, risk, and only hopeful upside—I recommend solving first for maximal impact, and only secondarily for cost... In this context, the Adjacency Matrix is useful for completely ruling out ideas that are clearly too far afield, or identifying those which are particularly low-risk."

• Communicating Expansion Decisions Effectively:

  • Point: Use the Adjacency Matrix to help form a clear narrative explaining and justifying the expansion decision to the whole company.

  • "Finally, the Adjacency Matrix is useful in communicating the decision to the whole company—something leaders perennially fail to adequately appreciate and value. It's vital that the decision is simple to explain and justify, so everyone feels that it's natural, intelligent, and clear. The matrix can help form the narrative..."

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