Ep. #773 - What is an Acquisition?
In this episode of Startup Hustle, join Matt and Matt for Part 47 of “How to Start a Tech Company” while they discuss what an acquisition is.
Covered In This Episode
For entrepreneurs, one of the best endings for their startup is to have it acquired. But the process of acquisition is more complex than you think. That’s why Matt and Matt are here to define and clarify everything about tech company acquisitions.
The Matts explain what acquisition is and important things that founders should know. They also talk about its effects on the company culture and employees. In addition, Matt and Matt dissect the reasons why bigger companies acquire tech startups.
Join Matt and Matt in this Startup Hustle episode to learn more about tech startup acquisitions.
Missed the previous episode? Click here to listen to the entire series.
- Introduction to Part 47 of the series (0:08)
- What is an acquisition? (1:27)
- Acquisition vs. Merger (2:50)
- Acquisition in tech companies (7:06)
- The pot of gold at the end of the rainbow (9:25)
- Why companies make acquisitions (11:21)
- Hostile takeover (13:29)
- Natural attrition and attrition from acquisitions (19:19)
- Culture clash (26:43)
- Earnouts (28:58)
- Employees after acquisition (32:45)
- Wrapping up (42:41)
All businesses evolve at their own pace. They mature at their own rate, and they get acquired when they get acquired.Matt DeCoursey
Ultimately, people’s goal should be building a company that solves a real problem that people care about and people want to use and not just being focused on the exit part of it. But for a lot of people, that is the long-term goal, to sell it.Matt Watson
There are a couple of different reasons why companies make acquisitions. Sometimes it’s to increase their revenue. Sometimes, it’s because they want to show growth, they want the revenue, they think they can move into the space, and they have the horsepower to acquire the shortcut to getting their product out.Matt DeCoursey
Sometimes they’re acquiring the company because they really want the team. They got something else they want the team to work on. That’s a bigger idea. But they really need the talent to go work on this other idea.Matt Watson
Get a headstart for your business through Wix. The website builder platform gives you more than 900 free and customizable templates. Join over 200 million users and have an e-Commerce-ready website instantly. Sign up now!
Check out Startup Hustle partners for more affordable business solutions!
Following is an auto-generated text transcript of this episode. Apologies for any errors!
Matt DeCoursey 0:00
And we’re back. Back for another episode of Startup Hustle, Matt DeCoursey, here, with Matt Watson. Hi, Matt.
Matt Watson 0:06
What’s going on, man?
Matt DeCoursey 0:08
47, dude. 47 of 52, the homestretch is near. And we’re getting acquired.
Matt Watson 0:16
Matt DeCoursey 0:18
Well, wait, wait, never mind. I saw acquisition. And I got excited. Actually. What is an acquisition? is what we’re talking about not talking about getting acquired? I’m sorry, man. I know. I like to, probably like this episode might be but we’ll find what determined that at the end of the show, I think it’ll, you know, but now, we’re this is something you know, a couple of things about and you’ve got to you’ve had a couple companies get acquired, and we’re going to talk all about that. Do you want to give everyone a quick reminder before we get started about who’s who the today’s show is brought to us by?
Matt Watson 0:59
Yeah, today’s episode of Startup Hustle is sponsored by Wix, helping you create a website, you’re proud of. Discover the platform that gives you the freedom to create, design, manage and develop your web presence exactly the way you want. Go to wix.com and check it out.
Matt DeCoursey 1:15
Wow, that was excellent. Now we’re training, Matt, because you’re gonna start hosting, you’re gonna start hosting your own weekly show with us.
Matt Watson 1:22
Very soon, very soon. Yeah, 700 episodes later.
Matt DeCoursey 1:27
So hey, you know, everyone, all businesses evolve at their own pace. They mature at their own rate, and they get acquired when they get acquired. And yeah, so now it matters, you’re well aware, an acquisition is when one company purchases most or all another company shares, they gain control of the company, or often purchase more than 50% of a target firm stock or other assets and allows the acquirer to make decisions about the newly acquired assets without the approval of the company shareholders in most cases, and, you know, there’s a lot of other things that go into it. And you know, there’s, I mean, when you think about an acquisition, what comes to mind?
Matt Watson 2:12
Well, most people, that’s the goal, right? They want to create something and then sell it and make a bunch of money and retire on an island somewhere, I guess, with little food drinks with umbrellas on them. I guess that’s what they have in their mind. I mean, I don’t think that’s really the way it works. But that’s everybody’s dream is building something and selling it. And, you know, I mean, ultimately, people’s goal should be building a company that solves a real problem that people care about, and people want to use and not just being focused on the exit part of it. But for a lot of people, that is the long term goal is to sell it.
Matt DeCoursey 2:50
So yeah, I mean, I think for most people, the term acquisition means your company gets bought by someone something somehow and, you know, there’s a lot more to it than that. Now, you also you’re here on the in quote, Wall Street m&a, mergers and acquisitions, as a merger the same as an acquisition?
Matt Watson 3:09
Not I mean, at a high level, yes. There’s a legal technicalities. No, not exactly. I mean,
Matt DeCoursey 3:18
imirt, a mergers machine, two companies together into one parent company. And you see this happen a lot. There’s like a lot of different reasons for mergers and mergers and acquisitions. And sometimes on like a really high level, really big companies end up merging together because they can’t compete.
Matt Watson 3:38
Well, and I’d say at a high level, merger and acquisition sort of mean the same thing, it’s more of a technical, more technical details about how the the legal transaction is actually executed, on whether it was actually a merger or an acquisition at the high level. Like it’s I don’t think it really makes much of a difference to anybody. You know, we went through this with stock fi, we we would have preferred to do a merger. But that would have meant the company that acquired us would have acquired more of the potential liabilities. So they wanted to only acquire assets. So we sold them our assets of the company. And the company still exists as a shell, the you know, LLC, like operating company, legal companies still exist. And they didn’t want to acquire the whole company because they would have also acquired all the liabilities that came with it. However, they also would have acquired like all the legal contracts and other things like that. So like agreements you have with vendors and things potentially move over a little easier, I believe, where if it’s an acquisition and they only acquire the assets, they’re just buying the assets and the company still lives on it. A lot of it’s just kind of technical differences.
Matt DeCoursey 4:52
Well, there’s and there’s a whole lot of levels of acquisition, like you mentioned, like acquiring a company’s assets, you know, and for those of you You don’t know where I worked in the music industry for a long time and and went through a really turbulent time when the internet came out because it just kind of flopped a lot of it put retailers that couldn’t compete with things like Guitar Center, in a in a bad spot, and you saw musical instrument lines go out of business, and then people will just acquire the name, right? Like, because the name had brand value. And that’s an example of acquiring a company’s assets, but shoving its liabilities off to the side. So some of these, you know, like for, you know, a musical instrument manufacturer, like Gibson guitar might have a really big name, but they might have accumulated a shitload of data along the way. Now that name is very recognizable, and that has value, but the liabilities or the debt or do notes, it could be a ton of different things could be
Matt Watson 5:49
an employee that got fired a year ago, that now wants to sue you for some HR
Matt DeCoursey 5:53
those or move on those move on and to form of vapor or bankruptcy or non existence. And, and that’s the way it goes. And, you know, I also worked for a chain of retail stores at one point that went through an acquisition. And, you know, it was that there were certain parts of the company that the acquiring entity won, and then the rest of it, they just shut it down. And well, you went through some of that advanced solutions. And you know, this is that was your first company that was acquired. And you mentioned that you guys had four or five things that you built or ran or dead and auto trader only wanted one of them.
Matt Watson 6:32
Well, so it was it was a whole process. It was a platform, basically in the platform had several products. And you know, they acquired all of it. But over time, they shuttered various products over time. And part of this because they had acquired like 15 companies, and there was overlap. So there was like, we did websites for car dealers, but they had another company, they acquired that that’s all they did was websites for car dealers. So they didn’t want us to do it anymore. They wanted that other, you know, subsidiary company to do it. So yeah, over time, they kind of shuttered various product offerings.
Matt DeCoursey 7:06
So in a real talk kind of way, when it comes to an acquisition in a tech company, and you know, here we are 47 episodes later about how to start a tech company. Here’s the reality is, is software companies usually operate at a loss for a while. Is that fair to say?
Matt Watson 7:21
Man, a lot of them do because they’re in growth mode. They’re trying to improve your product or acquire customers.
Matt DeCoursey 7:27
Yeah, so So you’re spending way more than you normally would in standard budget for marketing or sales, and sometimes product development, and stuff like that. And you just don’t show a profit on paper. Which means that a lot of times the founders you say like, why is it found? Why are founders of SAS with acquisition? Here’s the thing is, a lot of times founders have been making jack shit, absolute acquisition, that’s like the big prize, like you’re living, you’re living like on peanuts, and then all the sudden, here’s the end of the rainbow, and there’s the leprechaun with the pot of gold. And, you know, it’s like, oh, and you know, then you get the island and the fufu drink. But that doesn’t always work out that way, either. But, you know, but But that’s really why that’s such a big prize, because it’s just, it’s like a, I mean, I don’t want to say a lottery ticket. But the check could be like that. Now, the reality is, a lot of companies get acquired. And the founders don’t always get paid as much as you think they would. Because along the way they have taken in investments have no, there’s a million different things. Now, here’s the thing is when the acquisition, quote, party starts, well, there’s an order in which people get to line up and pull gold out of that chest at the end of the rainbow. And a lot of times the founders or signs, and sometimes investors are different people along the way. Because that’s, that’s that whole order of operations that occurs during fundraising. And, you know, it’s like what liquidation preference is the term for that? Yeah. Which means some people get paid first. So you might read, like, So and so company gets acquired for $10 million. And, you know, you’re, you’re like, wow, those founders just got 10 million bucks. Did they though, because probably not, right? No,
Matt Watson 9:25
no, the VC that just invested probably got there, you know, 3 million back plus a another 3 million from their liquidation preference or minimum returns or whatever. And then there’s other investors to pay back and whatever, and the founders got a million or 2 million bucks or something, maybe you just never know. And
Matt DeCoursey 9:42
that’s, and that’s not like, and in that situation, I mean, we’re not trying to sound so highbrow that we’re holding a check for 2 million but, I mean, the thing is, is it doesn’t always equate to, it’s like it’s like you know, if you someone asked you about your business, and they’re not really savvy about business In the US, Oh, you did $7 million in sales. And some people literally will think, Oh, you made $7 million last year, it’s a big difference between sold and what you quote made right at the end of the day, because they are very, very different. And a lot of times, you see, some of these companies will do huge sales, and lose money. So I’ve
Matt Watson 10:22
got a couple angel investments I’ve done over the last 10 years that have been close to selling a couple times. And honestly, their goal was, was really just to be able to sell and make the original investors whole. Like, I’m just gonna be lucky to get my money back at this point, like, um, there’s not going to be like a home run or a Grand Slam or anything, I’m just hoping to get my money back. And they’re, and they’re trying to be good stewards of that, too. Right. They’re trying to find a deal that will let the investors be made whole, and let the investors get their money back. And sometimes that’s just the way it goes.
Matt DeCoursey 10:55
I think we’re investors together in one of those, but we’ll leave it at that. Yeah. But that’s the way it goes. So that’s the thing. That’s what you sign up for, you know, and when you, you know, we’ve had so many different investors and founders, and you know, people on the show, and you know, the VCs and the funds, and the people that work at that that have been here on Startup Hustle, they’ll tell you that, you know, we’re hoping one in 10 work out. Well.
Matt Watson 11:21
So Matt, why do you think that bigger companies do acquisitions?
Matt DeCoursey 11:26
Well, there’s, I think there’s a couple of different reasons. Sometimes it’s to increase they, they see an area where they can, they need to increase their revenue, they and a lot of times with publicly traded companies will buy another company, it’s because they want to show growth, they want the revenue, they think they can move into a space, and they have the horsepower to acquire the, quote, shortcut to getting their product out, they want a vertical product that stands up next to what they already sell. So you look at something let’s we’ll use the example of a payroll processing company that might have a half a million small businesses that use them to send out payroll, and you look at a company like Giga book, which doesn’t have half a million users, well, that company might want to acquire something like Gigaba, because they’ve already got 500,000 potential users and clients that are already paying them that are already using them. And they say, Hey, here’s a product that would go really, really well with what we’re already selling. So they want to build a suite of other products. So they think that acquiring a company like that, that they can, they can add users build revenue and grow that company without having to go through crazy levels of customer acquisition costs, research and development or something like that. In some cases, they just want to get rid of their competition to like, Absolutely, there’s Yeah, so you know, Jack Welch was the, the the main guy at GE for a long time. And he did a very controversial thing, like 30 years ago, because GE does all kinds of stuff. And he said, If we’re not number one, or number two in an industry, then we are going out of business in that industry. And he sold off everything they have, or they weren’t number one or number two, because and you can look at this and so many cases, okay, man, what are two, department store type, like general stores that are big, you have Walmart, who’s what’s the other one?
Matt Watson 13:29
Matt DeCoursey 13:31
and then you then when you get to number three, it gets real thin. And those are the two monster players named three different makers of razor blades.
Matt Watson 13:43
Gillette, I don’t even know who well it’s
Matt DeCoursey 13:46
one chick, chick. And when you get to number three, it’s like way down the line. Yeah, and so, so a lot of times, it’s like number one and number two, and you’re gonna find that a lot. And that’s often referred to and say this three times, really, as an ogre sloppily. That’s when two or three companies have 97% or more. I think that’s the number. Don’t quote me, don’t quote me on that. Don’t make comments on my accuracy listeners, but that’s what that is. But so these acquisitions occur a lot of times and then there’s another one, that a lot of times acquisitions can occur, because the acquiring party went belly up, and it’s now like a fire sapphires. They’ll have so so the acquiring party is like oh, we can get that for 10 cents on the dollar. And then they’re buying that and they get a lot you know, like so my mom worked for TWA Airlines for a long time. And this is a another kind and it was acquired by Carl Icahn, who’s a very well known investor today, who then just turned around and sold the whole thing for parts. Because the parts, all the airplanes, the routes, the terminals, all that shit was worth way more than what he acquired it For. So that’s I mean, that’s a hostile takeover in some regards, but, I mean, buying it just to sell off the parts. So I mean, those are some of the reasons. And guess what, Matt? That’s for of about 400.
Matt Watson 15:12
Well, so you were just talking about acquiring your competition. And I think one of the things that’s interesting, there isn’t a lot of spaces, you see your competition coming, right? Like, if your Facebook and something like say clubhouse comes out, they can sit back and they can just watch it, they can just see what happens. And they can decide like, well, do we want to go try and acquire that thing as a threat to us? Do we want to build our own version of it? What do we want to do? Right, and at any time, they can stroke a big enough check if they want to, to basically make them go away and decide to roll it into their,
Matt DeCoursey 15:46
that’s what they did with Instagram. That’s what they did with the gram.
Matt Watson 15:49
Yeah. And so and this definitely plays out in b2b software, a lot were like VinSolutions, you know, we can only grow so fast. And it’s not a consumer based product. It’s not like overnight, we grow like 100 fold, we’re growing at a slow pace, right? And our competition can just sit back and they can just see us they see us slowly the snowballs just slowly getting bigger. And at some point in time, then they decide you know, what, what are we going to do about them are we going to acquire them just so we can add them to the list of names of our product, like you go buy a product, and you’re you’re buying our product under seven different names, and we win every way. And that happened in automotive, there was one company that owned a whole bunch of different things, and you would never know them all. But the point is, like a lot of times your competition sees you come in, and they just sit back and wait, and they start to figure out what do we want to do. And one thing we haven’t really talked about yet, as well as like the size of acquisitions, because a lot of these companies don’t want to acquire things when they’re very small. They want to wait till they’re doing 510 20 30 million a year in revenue. They don’t want to acquire something that’s got a million dollars in revenue, that hasn’t proven and doesn’t have product market fit and has all sorts of problems to figure out. They don’t have time for that shit. They just want to buy stuff they can they can pour fuel on the fire, unless they’re acquiring something that’s more of like an aqua hire, right? Where they’re like, Okay, we’re gonna hire this thing, because we really want the team. Maybe we’ve got something else I want the team to work on. That’s a bigger idea. But we really need the talent to go work on this other idea.
Matt DeCoursey 17:21
Well, you know, that is a great one to add to the list, the Aqua hire, like a lot of times, you see big companies will acquire much smaller companies, because they want that level of expertise. You’re saying we
Matt Watson 17:36
don’t know anything about that? Yeah, we don’t know anything about that.
Matt DeCoursey 17:39
A lot, the cutting edge and emerging technologies, you’ll see that like there’s an AI company somewhere that is about to get acquired. Because some huge conglomerate needs that level of skill expertise and whatever. And you know, like, I mean, there’s there’s a lot of reasons now, you know, when it comes to acquisitions, I mean, I think the more common one, the more common approach is the Vert adding a vertical product, though, like that’s kind of what happened with natural and sacrifi. Right. They wanted to, they wanted a product that slotted right in to the application performance monitoring and management space. And that’s what you have.
Matt Watson 18:24
Yeah, so they did more server infrastructure monitoring, which had also a different user persona, then our application monitoring or application monitoring was more developer centric. So they had, they were products that were complementary to each other, but didn’t really have a lot of overlap.
Matt DeCoursey 18:42
So and then some of it is there’s a, there’s a hub and spoke model that works out really well. And you see this a lot as well. So I mentioned having worked for a chain of retail stores that sold musical instruments a long time ago. And so some industries are fragmented. And this was one that was a really good example. So you know, and this was 15 years ago. So musical instrument stores were very regional at the time, and they a lot of them did band and orchestra instrument rentals. Matt, did you ever rent a trumpet
Matt Watson 19:16
or something like that? I played the drums in middle school.
Matt DeCoursey 19:19
So for band and orchestra Reynolds, that’s a cash cow for a lot of those companies because they buy a trumpet for 100 bucks and rent it out for $20 a month for like infinity. So that’s a stable pillar and a commonality that this particular chain and acquiring party saw. So what they did was they they bought six different chains of stores that had anywhere from one to seven locations, and then they mush them all together. So now what you run into is, is you have a lot of redundancy. So the cost of running 40 locations from a management and center For, like centralized operations perspective, is a hell of a lot cheaper than running 10 stores. Meaning like, once you have an accountant, once that accountants like working on it, it’s not a whole lot more work to enter 40 items as it would be to be 20 things cost and so there, so you have one marketing department, you have one, you know, you know, set group of buyers and a lot of stuff. So you dollar cost average that over 40 5060, now 70 locations, and it becomes, so you trim out a lot of expense, and you can take six different parts that might just be breaking, even, when if you put them together, and you do an accurate, efficient job of that, you may have a wildly profitable company at the end, as opposed to six individual units that were just kind of getting by. And you know, you’ll see that a lot. That’s the, that’s the consolidation effect, you know, and you see a lot of acquisitions. And then that happens a lot too, with the cut, when you see companies that are, you know, going bankrupt or losing money or whatever, then they will just, you know, the bigger company comes, the bigger, healthier unit comes along and just snaps them on. And they fire half of the people that work there, because they don’t need three people doing the same thing as one now, from a human perspective. That’s not always real exciting. From a business perspective, though, it makes a ton of sense.
Matt Watson 21:39
Yeah, it does. And, and, you know, we saw a little bit of that when Netro acquired stock fi right, like, there was some there was some natural people in the stack by side that say decide to leave, they’re like, Okay, you already have a director of marketing. I’m currently the Director of Marketing, I don’t really see the need for there to be two of them. I’m going to take this as my own moment to just leave. And we saw some of that, right, where there were some natural attrition. We didn’t like I could go
Matt DeCoursey 22:09
the other way too, though. The acquiring party. Might that Yan so that’s kind of like that mix, you mentioned Aqua hire. So that’s like when you know, the answer thing is if you have to think about it, if you’re a business person, it’s your job to make the best decisions on behalf of your business for your employees and or your shareholders. So if you have three people that suddenly do the exact same thing, who does it the best? Or? Or is one person that does it similar in quality to the other person 60% of the cost?
Matt Watson 22:44
Well, and that’s the shuffle you have, right. And like when Netro acquired us, they hired me as the Chief Technology Officer. So now all of a sudden, there was printed, there was a whole bunch of people that had a new boss, right? Like, oh, we acquired this company, but this guy came in and now he, he’s in charge, right? So even though they acquired something they didn’t, they weren’t necessarily, you know, it’s like, who was in charge was flipped, right. And so you see some weird mix up there. And overall, that was a challenge for me, because, you know, I’m coming in as an executive to an existing team. And I didn’t really feel like I had a lot of control. Even though I have the job title, I didn’t really have any control, I was still kind of, you know, a little powerless to really affect things. And that was frustrating for me. And you know, I left there three months ago or so. But yeah, those those acquisitions are always tough.
Matt DeCoursey 23:43
That chain I used to work for the very first day I showed up to work was the first day after post acquisition. But I had nothing to do with that, right? I was just hired. But everybody there just made the assumption that I was part of the wagon train that rolled in with the acquiring party. So I got to deal with what you were dealing with. But for none of the same reasons. I had nothing to do with I was just hired to do a job. But because of the timing, and when I showed up, it was really weird man, I had to like, I mean, it was they were treating me almost like I was a spy,
Matt Watson 24:20
like you should have started two weeks
Matt DeCoursey 24:24
or two weeks earlier, two weeks earlier would have been eliminated on either here guys, come on, dude, it was it was a lot to climb through because you know, and I was a zone manager. So I was in charge of 1/3 of of store model across 15 different locations. And, you know, I’d go to these new places and they just assumed that I was there. I’d show up on that very first visit. And they everyone was like sweating bullets. They thought I was there to like fire people. And I’m just like trying to do my job it was you know, they’re speaking of doing a good job. Where do you go when you want to create, manage and grow your business online, because Wix is the leading website creation platform, you can create a site with designer made templates that can be customized for your business. And they look great on all devices, reach new audiences with intelligent SEO tools as designed to get you found on search engines. So you manage it all from one place, you can do it at home, you can do it at the office, you could do it on the go, and never miss a thing when it comes to your business. You can join over 200 million people already doing it when you head over to wix.com and get started. And, you know, thank you X for sponsoring this episode. And I’m still completely enamored and impressed with the fact that 200 million people, I mean, wow, that’s, that’s now that’s what that’s worldwide. But to give you context, that’s equivalent to roughly half of the US population.
Matt Watson 25:55
Yeah, that’s insane. Good for them. Yeah.
Matt DeCoursey 25:59
I mean, right. So when we met, when we talked, we just kind of, we kind of give a little bit of a precursor to this before we thanked Wix and encourage people to go check out what they’re doing. But there are drawbacks. With acquisitions, as we mentioned, and like you kind of talked about, you know, you we both kind of experienced, well, culture clashes of sorts, but when you take two companies and put them together, it’s kind of like, I mean, it really does, like imagine like a jet to jagged pieces that now get put together, it’s, there is a period of well, much like you mentioned, you have a lot of anxiety. Prior to acquisitions, the
Matt Watson 26:43
the culture clash, part of this is a serious problem. Because if you’re a small, nimble company that is pretty lean, and mean, you make decisions quickly, you get things done. And all sudden, you get acquired by this large company that is very process driven and slow, and, and there’s a meeting about meetings about meetings, and, and oh my god, it is the biggest, most painful culture change in the world. And I’ve been through that. And it’s tough. I mean, if you’re the guy that’s used to getting shit done all the time. Now, all of a sudden, it’s like, everything just grinds to a halt. And then like months go by, and nothing gets accomplished, and you just want to beat your head on a wall. It’s just not, it’s not fun. And there’s a big cultural change.
Matt DeCoursey 27:31
If only someone had recorded a timeline video of an acquisition occurring, we won’t be able to see what oh, wait, we did that. We did. We did that had, I’m going to make sure we put a link in the show notes to that. So I dropped off a GoPro and a microphone at Matt’s house prior to the acquisition, and despite some kicking and screaming on a few days, when he didn’t want to record I really pushed him to do it. He did thank me afterward, because it showed the timeline. But I mean, Matt, I honestly can say that I watched you age. Yeah, during that, because there’s a lot of strats. And you know, like, regardless of what it is, you know, your deal isn’t closed until they put the money in your bank,
Matt Watson 28:17
like six months.
Matt DeCoursey 28:19
And it takes five or six months. due diligence process. Yeah. So, you know, when you’re a founder, there’s a couple of things that you need to I think you need to expect one, I think most of the time these deals don’t go through compared to do go through.
Matt Watson 28:37
Um, I mean, there’s definitely a chance they fall apart. But but even if they don’t they do go through I would say, they are not extremely successful after they go through is I would say likely you they do happen, but the outcome of them is not necessarily as as, you know, wonderful as everybody thought it was going to be.
Matt DeCoursey 28:58
Yeah, and another one, and let’s talk about this for a second. Cuz a lot of times it’s you’re not necessarily it’s not like the acquisition occurs, and then you’re unemployed. I mean, a lot of times, now you want to talk a little bit about the kinds of requirements and things that are possible, when it comes to earn outs and how those work and like really, I mean, you know all about that. So I’m just gonna sit back and listen.
Matt Watson 29:22
Yeah, another common thing in a lot of acquisitions is an urn out, which is a performance based clause basically. So they so let’s say they offered to sell the, to buy the company for 10 million, and you’re like, I want 12. They’re like, Okay, well, we’ll give you 12. But 2 million of that is basically tied to performance. It’s like over the next 12 months, you’ve got to accomplish X, Y and Z. And then you’ll get that extra $2 million dollars. And earn outs are a good way to negotiate price from that perspective. It’s a good way for the buyer to try and keep keep you interested and keep your head in the game to try and You know, keep the business running for a period of time. But honestly, earnouts are a disaster, I would avoid them at all cost. And the reason why is it you start off the relationship in a really bad way. Because it’s like, hey, they acquired you, and they want your help doing X, Y, and Z and planning for this thing, and strategic goals and integration and all this stuff. And immediately, the first thing that should come to your head is like, Fuck all of that I have an urn out, and every bit of that is distracting me from my earnout. So no, thank you, I’m not having any of those conversations, I have work to do, and I have a goal to hit, I have $2 million at stake, I’ll talk to you in 12 to 24 months when the turnout is over. And that’s just not a good place to be. It’s it’s a bad way to start a relationship. And, but that that’s the reality of what happens. And it really starts creates really kind of sour relationships, if you ask me.
Matt DeCoursey 30:52
Well, it’s it’s a bit of indentured servitude, in some regards, just meaning like, you know, it’s like, cuz, in some cases, you talk about, well, why do you? Why would you want that? So, you know, we like to give our real life examples. So at Full Scale, over the last four years, I’ve been the face at the meetings, or the talking head and the videos, and we use videos to communicate with a couple 100 People that are overseas, and we do a lot of that, if all of a sudden, we announced that we had been acquired and then I was gone. It would just be it would be weird. It would be weird, because there would create a lot of uncertainty. And, you know, so the, the, the the spirit of continuity, and leadership and not wanting to erode, dissolve. And so because there’s so much anxiety around, why is the acquisition occurring, is this good is this bad. And really, in the end, people often flee to the highest ground, regardless of whether the floodwaters are visible or not, or whether they’re actually really coming. So so the companies that are acquiring you, they want to make sure that they’re not going to just blow everything up. Because right, especially in like an aqua hire, or type model, it like at Full Scale, all the sudden half of our people left, that would be a really, really bad thing. Because they’re in contract relationships with different clients. And that would not only affect our business, it would affect our relationship with a shitload of clients. So you want to maintain that stability. But it also is a challenging thing for a founder, because let’s look at it a couple of ways. One, you mentioned, hey, I want to focus on this earnout. Another thing is like, Okay, so let’s say you do get a check for 20 million bucks. How do you wake up the next day? Are you like, Man, I better get right to work, again, change, and has a little bit of an effect on you
Matt Watson 32:45
know, so actually funny story there. autotrader acquired us, they actually made a bet the autotrader executives made a bet on whether or not I would leave first, or are my main business partner who was basically in charge of sales would leave first. And they made a bet that I would stay and the other guy would leave the end. It was like a $10,000 bet or some stupid. Wow. And and I ended up leaving first I left like as soon as possible. I was there like six months and I left. And yeah, it was, it was funny story, because it got we had an urn out through the end of December. And it got to right after Thanksgiving, like being in December, and it got to the point where they’re not what sort of already over because it’s like we signed up a new customer in December or like, we don’t receive the revenue until January anyways. And if somebody cancels they, you know, doesn’t affect our revenue till January anyway. So that was basically over. And I went to Mike, who was the CEO, maybe business part. And I asked Mike and like, I don’t even know, I’m like, How long do we have to stay here? Like, do I have to stay here for a couple years, like, I got the big check. And I was good with all that. And whatever I needed to do, like, I’ll do it. And he’s like, I’ll never forget, he’s looked at me as like Matt, they abolished slavery a long time ago. If you don’t want to be here, they don’t want you to be here walking around like a zombie all day and not getting anything accomplished. So if you don’t want to be here, you can leave from like, Shit, I’m out of here. And that was the end of it.
Matt DeCoursey 34:13
Well, and now on the flip side of this, in some cases, the acquiring party doesn’t want they want to chop the head off of the snake,
Matt Watson 34:21
right? They want a new launch year round. They want
Matt DeCoursey 34:26
something new, or they’re Yeah, or they want so. Okay. So in in medieval times. You had a king and a queen. Yeah, it wasn’t like CO kings and CO Queens will feed typically. Yes, typically one king beheaded the other and there was a very strong reason for that. And that was they didn’t just move him a continent over because then there’s always the lingering question is this person raising an army and coming back for the For the crown and so, and you know, from a leadership perspective, it really can cloud the vision and the clarity of a company’s direction and mission. If there are too many cooks in the kitchen.
Matt Watson 35:11
Yeah, you’re absolutely right. Yeah. I mean, like, even after the, the acquisition of stack fire, right, like, there was still sort of the stack of a team. And then there was the net trio team. And even though we’re all supposed to be part of the Nitro team, there was always still like this little fiefdom of like the Syfy people, right. And, and especially for as long as I was there, and other key executives, were there, that would always sort of be there a little bit, right. And but if I leave, and a couple other people leave, or whatever, then yeah, ever the other leader has gone, the Rogue Leader has gone.
Matt DeCoursey 35:43
Well, and I don’t want to, you know, we talked about anxiety amongst the staff during acquisition. I don’t want to paint that as a picture. That’s always a terrible thing. Because there’s a lot of people that will the a lot, I think the smart people look at the acquisitions, like, oh, wow, I’ve got this much more of a company to grow into, and grow through and this many opportunities, and then a lot of times, it’s even a stability thing. Yeah, you know, I work for a 1500 person, company, as compared to a 10 person startup, that I’m wondering like you might they maybe they get better benefits, they yes, they might even get a big pay raise?
Matt Watson 36:30
Well, and that’s how we pitched it to our employees, right? When we got acquired, it’s like, well, now instead of working for our little company, now we’re owned by a much bigger company that’s backed by private equity and all that stuff. So it’s better job security, and there’s more opportunities and, and all that, but there, we still had a fair amount of employee turnover, because some people that may have had, like, just rustling the back of their head of whether or not they liked working for us or not, all of a sudden have a reason to rethink their future. Right? Or, or like, oh, well, now you change
Matt DeCoursey 37:02
you haven’t done that don’t like change. And yeah, I don’t want to, they don’t like they don’t like feeling like they’re blindly going into the unknown.
Matt Watson 37:09
And for some of them, it’s like, oh, you have a new boss now. And that gives them the that moment to say, You know what, I don’t know, if I really want to work for this person. Now’s the time that happened to
Matt DeCoursey 37:19
you. You are the boss. And then you had a boss. Yeah, I
Matt Watson 37:23
had a boss for the first time in my life.
Matt DeCoursey 37:26
Now, but now founders and entrepreneurs out there listening, because I openly admit I would be I’m not I’m not an employee. I’m an employer. Right? And it’s a different dynamic. It’s a different dynamic. I mean, it really is, and you’re like, Oh, I could deal with that. Okay, so really, when it comes to acquisition, you’re thinking about what price can you deal with that for, on some levels?
Matt Watson 37:48
Well, and that’s working in the corporate world in general, it’s how much bullshit Can you deal with actually survive the corporate world? But yeah, you’re you’re absolutely right. And that was one of the frustrating things for me, right? It’s like I’m used to making decisions and getting things done and all that kind of stuff. We’re now I’m part of a bigger executive team where I don’t have a lot of weight anymore. I mean, I can say, Yeah, we should do that. But I’m not really the one that can go kick people’s butts and get the stuff done. You know, there’s other people that have to do that. And it becomes much more
Matt DeCoursey 38:19
worthy. You’re the dethroned, caring, trying to collect taxes within the fiefdom, Matt? Yeah.
Matt Watson 38:27
It’s just a different world.
Matt DeCoursey 38:28
You can speak English. I’ve got something I need to tell you. Okay, Robbie. Yeah. Today’s episode of Startup Hustle was sponsored by Wix, helping you create a website that you’re proud of discover the platform that gives you the freedom to create, design, manage and develop your web presence exactly the way you want. Not the way a boss wants if you don’t need to, there you go. Go to wix.com. And check it out. You know, Matt, I gotta say, yeah. And thanks again, Wix. Look, if you are starting a business, and you want to start a business, do yourself a favor, and just go to Wix and make a simple website before you start trying to pitch people on your business because I get people in my inbox weekly, that want to work with me or us or whatever. And they’re like, emailing me from like a Gmail or Yahoo or an AOL or god knows what, and I just have a hard time taking him seriously. Like if you have an idea or a concept that you’re wanting, like buy a frickin domain, go to Wix, set up a simple website, and then email the people that you want, because I got a hard time taking you seriously as an artist, or when you’re sending me a Gmail.
Matt Watson 39:40
If somebody sends me an email from an AOL account, I’m just gonna assume at some old do not a lot of money.
Matt DeCoursey 39:48
That’s an old dude with a lot of money. Do not try to company. Do not try to pitch your tech company for really anything with a G Email, Yahoo or AOL address, go buy a frickin domain. Yeah, you can probably do that through Wix, too. I’m fairly certain you can and turn it on, set up the email and then do it. And by the way, man, that’s not a big investment. Now less than 50 bucks, not a big investment. Yes, overall. So, alright, so here we are, we’re at the end of episode 47. We’re here in the home strap match where you know, we’re getting close. You know, we’ve talked in over those last three weeks about, you know, last week, we talked about raising capital and later stages prior to that, for those that aren’t getting acquired or doing anything we talked about, is it time to quit? We talked about scaling your team during high growth. I mean, we were, we’re nearing the end. You know, we’re next week, we’re going to talk about the true preparation for the exit. So now we know what is an acquisition. We’re gonna get into some of the nuts and bolts about what it takes. Now look, I’m gonna prep everyone. The preparation for an exit. It’s not fun.
Matt Watson 41:06
No. It’s like getting a divorce.
Matt DeCoursey 41:11
I mean, yeah, yeah. Except for you might get paid on this one. I mean, and you say why? Because I mean, that’s what we’re gonna get into. It’s like, Now have you to inventory everything in your house right now? Just all of it cool without because I’d be like, I mean, that terrifies me. I just, I would just throw stuff away in favor of actually like counting it, or do whatever. But yeah, you know, preparing for an exit. So alright. So you know, in sports, like we use baseball as an example, they have salary, salary arbitration. And that’s when the two parties don’t agree on what the salary should be. So they, if you’ve been in the league long enough, they’ll let a mutual middle person decide who’s right and who’s wrong. Now, a lot of people they don’t put players through salary arbitration very much anymore. Because it basically as they’re putting you on trial, essentially, they’re saying, Well, you want 3 million, we want to give you a million. Here’s all the reasons why you’re only worth a third of what you think you’re worth. It’s a bad way. It’s not It’s or continue on. It’s not really a great way to build confidence and make someone feel excited about being involved with you either, but it’s uh, when it comes to the exit. There’s a lot that goes into that. And you know, we I mean, it’s tough that it’s its own episode and oh, man,
Matt Watson 42:39
I have battle scars. Yeah.
Matt DeCoursey 42:41
I know you do. I know you do, buddy. I know you do. Well, now. I’m going to see you next week because I’m gonna go mentally prepare myself for preparing for an exit.
Matt Watson 42:51
Alright, see you.