In recent years, acquihires have become a key M&A technique for businesses to recruit top talent on the cheap. So what is an acquihire, how do they work, and how can you pursue an acquihire for your business? In this article, we’ll go over some crucial tips for founders who are considering an acquihire.
What happens in acquihire?
“Acquihiring” refers to the purchase of a company primarily to recruit its key employees and team members. (The term is sometimes spelled “acqui-hiring” or “acq-hiring” as well.) This is opposed to M&A transactions for other reasons (e.g. increasing market share, owning intellectual property, or refining product strategy).
Typically, the purchaser is a larger, more mature company, often supported by a venture capital firm. This business is more interested in your company’s talent than in your products and services. The purpose of the acquihire transaction is thus to secure access to your team’s specialized knowledge and skill set. After the deal is complete, the purchaser can rapidly scale up its in-house capabilities.
This form of M&A deal is most common for highly in-demand skill sets and professions. Major tech companies such as Google, Facebook, and Apple are some of the biggest players in the acquihire space. Google alone bought 30 artificial intelligence startups between 2009 and 2020.
Often, though not always, acquihires are a sign of a failing company. (Otherwise, the purchaser would likely be interested in the company’s product as well.) According to CB Insights, startups that are acquihired have typically raised less than $5 million in funding.
An acquihire agreement can therefore save your company and its mission in some form, while letting you gracefully exit the startup. Meanwhile, the buyer also benefits by acquiring a strong talent pool of workers who are ready to hit the ground running at their new employer.
How much is an acquihire?
There are multiple ways of formulating an acquihire deal structure. Typically, businesses structure the transaction at least partially through the sale of stocks or assets. Still, most of the deal’s value goes directly into the hands of the employees whom the purchaser wants to acquire.
The cost of an acqui-hire is usually less than a traditional acquisition. This is because the purchaser is mainly interested in the company’s employees. However, these transactions aren’t free, since the purchaser needs to give employees some incentive to join up.
As such, an acquihire valuation is mainly based on your employees’ perceived value to the buyer. The purchase price is largely determined by calculating the costs of acquihire retention packages for your team members.
These monetary incentives increase the likelihood that employees will remain with the buyer post-closing. This arrangement also has tax benefits. Employees can declare their signing bonuses as capital gains, which are taxed at a lower rate than salaries.
How do I get acquihired?
Considering an acquihire for your startup? If you’ve put in the work to hire and retain high-quality talent for your business, it can be one of the most effective exit strategies. Still, it’s important to know how to navigate the process so that you can wind down the business smoothly and avoid unfavorable outcomes.
If you’re in the market for an acquihire, follow these steps:
- Start by generating a list of target companies for the deal. Your best bet is to look for larger businesses that are interested in entering your niche. This interest may be direct or indirect—for example, announcing new products or poaching employees from your company.
- Next, narrow down your list by focusing on the most promising targets. Do these companies share your core mission, beliefs, and values? Have they embarked on a recent M&A spree purchasing your competitors? How do they reward and retain high-performing employees?
- Build a pitch deck and reach out to people in your network to test the waters. When the time is right, ask for a meeting and be honest and transparent about what your company has to offer.
Below are some miscellaneous tips and tricks for making your acquihire a success:
- Your board of directors and stockholders will likely need to approve the transaction. This could be a major battle or a mere formality, depending on your situation.
- Make sure that the company is absolved of any outstanding liabilities or obligations in the post-closing period. This may include debt, contracts, or lawsuits that need to be handled with care.
- For the best chance at success, acquihire employment agreements should be personalized for each new hire. If you have the leverage, factors such as remote work, vacation time, job title, and organizational placement can all be negotiated.