Let’s talk acquihires!
This week we explore acquihires — to buy a company for the talent. The acquired companies product and technology is discontinued and their customers helped to migrate of the product. Why buy a company and not use the technology they built or keep their paying customers?
Before we explore this question and acquihires in detail it is useful to first understand the different ways a company gets talent in the door.
How do companies hire?
Companies mainly hire through their HR department but there are two other tools available. The first one is to use an external recruiting firm and the second one, you guessed it, is to buy a company.
Probably 90%+ of all hiring is done through HR, <9% through recruitment firms, and <1% through acquihires.
Let’s understand the three methods in more detail.
1) Hire through HR
Let’s think about the cost of hiring by assuming one week of full time work is needed to find and interview one great candidate. Then, the cost can roughly be estimated to ~$4,000/hire assuming $200K cost/annually for an average employee. The cost numbers looks high for a European company but about right for a tech.-company in the US. This is anyway, by far, the cheapest way to hire.
2) Hire through a recruiter
Once again, let’s explore the cost. A recruitment firm is typically paid two to three monthly salaries for a successful hire. This means, with the same assumptions, you pay ~$50K for a hire, ~12 times more expensive than when you hire through the HR department. The premium is payed for speed and expertise. If the own department is understaffed or missing knowledge to interview for a specific role a recruiting firm can be used to quickly meet that need.
3)Hire by acquiring a company
The cost can be anything from free to paying multiple months of salary in retention bonuses plus money back to investors. Also, time needs to be invested from HR, M&A, and legal to execute on the deal. The main advantage of this method is the possibility to get an entire team at once, potentially with expertise you are missing in the organization.
By this comparison, it is not obvious why you would buy a company for hire. So why do it?
Why buy a company for talent?
Firstly, acquihires are opportunistic by nature. You cannot afford to buy a great team that also has a great business, it would be prohibitively expensive. What you want is a great team that has built a great product but unfortunately has not found enough traction for a viable business. Since it is opportunistic by nature, it will never be your main recruiting strategy.
Therefore, the reason to buy a company for talent is simply that the opportunity presents itself. Typically, the opportunity will present itself through a connection in your network. Seldom will you see these opportunities from a banker since it is not enough money involved for it to be worth their time.
What to think about when acquhiring
While the financial piece is important in an acquihire, it is far more important to assess the people. The majority of your brainpower should be spent on how to retain the team once acquired. This means that you need to find a place in your organization where the team would enjoy to work in the long run.
That said, I typically think through three areas when assessing an acquihire.
1) Talent assessment
Do they possess skills you need in your organization? You would waste a lot of talent if you acquired a bookbinder when you sell e-books. Asses the skills for each employee and understand where they fit in your organization. Ask the executive team if the individuals would thrive in those positions. Ensure you can take most of the employees with you and that you can match their salaries.
Will they enjoy working at your company and stay for the long term? Explore broader questions, such as: How similar is the work culture? How long did they stay at their previous company? What motivates them?
2) Company price
What do you need to pay for the company? This all comes down to negotiation but to get a benchmark you need to do add up the total annual salaries and then take 20% of that. You would pay a recruiter that much to hire a similar team. Of course, through a recruiter you would hire individuals, now you have the chance to hire an entire team. A team could be more valuable but this basic analysis can ground your thinking on price.
3) Deal Complexity
Do a sanity check regarding how complex you expect the deal to be. It is not worth you time to spend months negotiating term sheets. Better move on and find the next great opportunity. Things to look for: Is the executive team excited about this opportunity? What are the most important points for owners and the executive team, and do you think you can meet them?
If your assessment in these three areas is positive that is a sign to progress with the deal. The next step is to create an offer, present it to the owner, and negotiate but that is for another week.