Mergers and Acquisitions

Suppose building is the only way to grow. A document tool company that wants electronic signatures has to hire for it, learn the regulations, and sign agreements with certification authorities — call it eighteen months. During those eighteen months, the companies that already have the feature keep collecting customers. So buying became the other option. Move over an organization where the people, the technology, and the customers are already attached to each other, and eighteen months turns into three. What the buyer is paying for, mostly, is that time.

The selling side has its own reason. Any company that has taken fundraising money has this scene scheduled from the beginning. What an investor put in exists as equity, and equity doesn't turn back into cash just because the business does well. It turns into cash when somebody shows up to buy it. The other route, an initial public offering (IPO) — listing shares on a public market so anyone can trade them — takes two to three years to prepare and comes with quarterly disclosure of results afterward. Mergers and acquisitions (M&A) is faster and the terms are negotiated with one counterparty rather than set by a market, which is why it happens several times more often.

The name covers two legally distinct things. A merger dissolves two companies into one legal entity. An acquisition buys the shares and keeps the target alive as a subsidiary. The procedure and the tax treatment differ, so practitioners separate them, but nearly every startup deal is the second kind. People at the table may call it a merger of equals; the moment one side is writing the check, the decisions move to that side.

It starts with finding a counterparty and ends with signed contracts and two organizations becoming one. Six months to a year is typical.

1. Contact. The buyer usually reaches out first, though a seller sometimes works through an advisor who circulates a list of candidates.
2. Agreeing on terms. The two sides exchange a letter of intent covering price and payment structure. Like a term sheet in a funding round, it isn't binding, but the number written there effectively becomes the ceiling. The reasoning behind that number comes from valuation, and this is also where the sides decide whether payment arrives as cash or as shares in the buyer.
3. Diligence. Due diligence (DD) is the process of examining a company closely before buying it — financial records, contracts, technology, personnel files, and any live disputes, over four to eight weeks. Most deals that collapse collapse here. If rights to the core technology sit under an individual's name rather than the company's, or if revenue on the books includes money that hasn't arrived, the price drops or the talks stop.
4. Signing and closing. The purchase agreement gets signed, money moves, and the shares transfer. Paying the whole amount that day is rare. Some is held back in case problems surface later, and some is paid out in one to two years conditional on results or on key people staying.
5. Integration. Products, teams, and working habits get combined, and this is the genuinely hard part. Signing isn't the end of the deal; it's where the work starts.

Five groups move a deal, and they arrive at different points.

1. The two chief executives. Present throughout. The conversations in step 1 happen between them with no documents in the room.
2. Investors and the board. They arrive in step 2. Who takes how much of the payment is set by the order written into the investment contracts rather than by ownership percentages, so this is where the founders' arithmetic and the investors' arithmetic meet for the first time.
3. Finance and accounting. Deployed in step 3. Assembling three years of books and tax filings into something an outsider can audit is most of what that period consists of for them.
4. Legal, in-house and outside counsel. Spread across steps 3 and 4. Confirming who owns what comes before arguing over contract language.
5. Everyone else at the company. They find out last, usually on announcement day, and until then the number of people inside who know fits on one hand.

That last item is late by design. Deals fall apart often, and telling people in advance about a deal that then dies leaves nothing behind but unease. Buyers usually handle the cost of the late notice by attaching retention terms to the people they most need to keep.

"They reached out about acquiring us, but I don't think we're ready to sit down yet."

Wait until there's more evidence to raise the price with.

"Once diligence starts, every contract gets opened. Let's clean them up now."

Messy paperwork today turns into a lower number later.

"This one is closer to an acquihire than a real acquisition."

A judgment that the buyer is paying for the people, not the product or the customers.

At Pagedeck, Grace looked at acquiring an eight-person company with an electronic signature product. Building it came to eighteen months against three months to buy, and the opening price was $4.5 million. Diligence turned up that 40 percent of the target's revenue came from a single customer whose contract had four months left. The price came down to $3.4 million, and $900,000 of that was set aside to be paid in two years if both founders were still there.

Where Grace actually spent her time was after the number. Which teams the eight people would join, when the two products' logins would be combined, what to promise the acquired company's customers — those questions arrived daily starting the morning after signing.

The most common belief is that being acquired makes the founders rich. Only the headline number reaches the press, so that number looks like the founders' share. In reality the proceeds are divided in a set order. Investor shares usually carry the right to recover the amount invested first, so if a company sells for $7.5 million and investors put in $6 million, the founders and the team divide the remaining $1.5 million by ownership. Negotiate without knowing that order and you learn your own number days before signing, when there is no room left to change the terms.

The second belief is that signing is the finish. The news coverage ends there, so the deal appears to end there too. But the reason for paying was the organization and the customers, and both of those are attached to people. Acquired teams losing more than half their members within one to two years is ordinary, and at that point what got bought is the code. Sign without an integration plan and the company runs two versions of the same feature for years, and the cost of maintaining both eats the eighteen months that buying was supposed to save.