Buyer and Seller Power Dynamics in Acquisitions
You can find a lot of discussions about the selling process, but you don’t find a lot of conversation of power dynamics.
Background: In 2017 I sold my company to GoDaddy. I was an executive at GoDaddy for three years post-acquisition where I spent time with CorpDev talking to, and buying companies, and have spent time advising PE and VC firms in their acquisitions. Today I am a Founder at CleanBrowsing, NOC, and Trunc.
What are Power Dynamics?
In every engagement there is a power dynamic. It’s a mechanism that describes the relationship between two people, or entities.
When I go to my CrossFit gym, the coach is in a superior position. They have the knowledge, I am there to learn. The same applies when I go to BJJ, the professor retains the knowledge I seek. I attend with the intention of having an open mind, learning, getting better.
These settings are easy examples, but how does this apply to a company? to the process of buying and selling companies?
Power Dynamics in Acquisitions
Acquisitions have multiple phases, and power dynamics can shift dramatically between each phase. To help simplify the thinking, I’ll break down a very simple process as follows
- Phase I – Engagement
- Phase II – Due Diligence
- Phase III – Assimilation
This also assumes a larger company is buying a smaller company. Think a strategic acquisition doing a tuck-in of your product / service, vs a merger, or a financial acquisition (where a VC / PE is buying your company).
Phase I – Engagement
The power sits squarely on the one being approached.
If I am the seller, and I approach the buyer. The buyer has the power. They know I want to sell. I must now prove to the buyer why they want me.
If I am the buyer, and I approach the seller. The seller has the power. The buyer now has to show their cards, demonstrates why this makes sense, and convince me to do something I don’t want to do.
This is a bit of an art, and I’ve seen it go good and bad. You want to show just enough interest, without sounding desperate, while still reserving the option to pull out if you need to.
The best configuration for a startup is always to have the buyer approach you. Having the power in this phase is crucial to ensuring an optimal term sheet for the seller.
Phase II – Due Diligence
This phase is always a bit weird, and I have yet to see an instance where the power dynamic was in the sellers favor.
In almost all instances that I have seen, power is squarely on the buyers shoulders. It’s the most important phase for the buyer, and also the most dangerous for the seller. You have signed the document, but more importantly you have made the mental leap to actually sell. You think you’re tough enough to kill the deal, but in many ways you’ve likely already starting spending the cash.
It’s also a period where things start to appear – “Oh, your math was wrong here, your unit economics are really this!, Oh, you don’t have these administrative protections in places, that’s unfortunate.” It’s through the process where you can find yourself looking at a very different proposal form the one you started with.
Term sheets are not set in stone. This means that things can present themselves during this phase that can force buyers to try and renegotiate. It’s also a very vulnerable time for a startup. No matter how much you try, operations will be effected by your distraction and the longer it goes the more you’re leaning into it – the harder it is to pull away.
Phase III – Assimilation
Call it what you will, but it’s assimilation if you are the smaller entity being sucked into the bigger entity. You can expect your culture, and style, to survive no more than 12 months inside the larger entity. The seller will have no power during this phase.
The first three months will be the honeymoon phase, by the following quarter you will be yesterday’s news. This is especially true if you’re a tuck-in, one very small piece of the organizational strategy. Make peace with this.
This can be the loneliest phase for many founders. It’s when you slowly see your role being dissected and distributed across other teams. When you see how replaceable you really are. As time passes you quickly see how little power you have.
Power Dynamics are Par for the Course
Anyone that tells you power dynamics don’t exist might not be as forthcoming as you need them to be (or just lying).
Never misinterpret someone’s friendly demeanor, or kind approach, as anything other than that person doing their job. Business, Corporate Development and Investor types have a job to do. They are managed and measured by the deals they are able to bring in.
So if you find yourself in this position, where you’re considering or wanting to sell your company you have to be cognizant of this power dynamic. Being aware of it will help how your approach your negotiations. From my perspective, the most important phase for a founder is always Phase I. Even when the power dynamics favors the buyer, there is always that sliver of power for the seller that helps ensure you create as favorable a term configuration as the situation allows. In almost all instances, Phase II and III go straight to the Buyer.
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