There is a growing trend for large companies to buy SMEs and start-ups purely to acquire the talents and knowledge of the people.
When a big business engages in ‘acquihiring’, as it’s known, it performs a ‘team lift’ to acquire valuable talent but not the smaller company’s customer base, networks, capital assets or even its technology and products.
For example, Apple’s CEO Tim Cook told CNBC business news channel that the tech giant buys a company “every two to three weeks” and had bought 20 to 25 small businesses in unannounced deals in the six months to May this year1. Elsewhere, Facebook bought London University-based blockchain start-up Chainspace, purportedly to acquire its development team to strengthen its position in the crypto sector2.
And it is not just tech companies that are acquihiring, explains M&A legal specialist Nina Searle, partner with UK national law firm TLT.
“It’s been happening for a long time in professional services because that’s how firms in the sector have always expanded,” says Nina, who is seeing an increasing amount of TLT’s M&A transactions include acquihire elements.
“As the tech revolution gathers pace, there’s been a marked shift towards SMEs being acquihired by tech companies and small life sciences start-ups bought by big pharmaceutical firms. Primarily they’re firms that might be regarded as disruptors or potential threats.”
She adds: “These buy-outs are highly secretive, rarely making news as larger businesses acquihire stealthily – they don’t want rivals to know their strategic direction or what technology or skills they’ve access to.”
For any entrepreneur, having a major player wanting to buy their business sounds highly attractive, offering a chance to exit with a fantastic deal, maybe to start a whole new business or even retire.
But as Nina points out, it’s not that simple. “Typically, when a small business is acquihired, we expect to see a proportion of the purchase price deferred. For example, a portion of the purchase price may be paid up front and further tranches paid in successive years.
“This is to incentivise those moving to become firmly embedded in the new company – so buyers often want to bring founders with them.”
Potentially this opens up new opportunities for developing the entrepeneur’s original business idea, with better routes to market, distribution channels and marketing support plus enhanced salaries and benefit packages for all.
“Above all, you have to be sure it’s right for you," says Nina. “Giving up autonomy, freedom to pursue ideas and development and fitting in with a corporate culture with strict compliance isn’t for everyone.”
“That means doing in-depth homework on the purchaser to find out what its intentions are, why it wants your business especially, and how you fit into that: in short, perform full due diligence before you start negotiating.”
That advice is firmly supported by Percy Emmett, Senior Lecturer of Enterprise and Entrepreneur in Residence at De Montfort University.
“Acquihiring can be a double-edged sword. Learn as much as possible about the buyer and its motivation for acquiring your business specifically, and consult fully with corporate business advisers and lawyers before agreeing anything.
Tech companies may be just buying your business simply to ‘take it out’ before it becomes big enough to be a rival or negatively disrupts the sector to their disadvantage, he says. “You’ll be promised a nice contract and development incentives, but they may actually be planning to drop you and your team fairly quickly. By then, your personal brand may be damaged if you’re trying to start-up again.”
Percy says SMEs are also sometimes acquihired to handle overflow work and smaller projects. “However, acquihiring does offer clever entrepreneurs a golden opportunity to learn more about running business effectively, to come out with useful skills to run a new small business in a much smarter way.”
1. www.cnbc.com, May 2019
2. www.wired.co.uk, June 2019
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.