Has your growing tech startup been struggling to receive more funding? You and your team have a game-changing idea, but the cash flow still needs to arrive.
Or is your company looking to hire top talent in the tech industry, and you are struggling to attract the right candidates?
My name is AJ! I recently sold my business for multiple seven figures. Now, I aim to help entrepreneurs by answering all their burning questions!
Knowing several successful entrepreneurs, I’ve seen how an acqui-hire agreement can mutually benefit large corporations and small startups!
Whether you’re considering a new strategy or expanding your understanding, stay open to the potential benefits of an acqui-hire. It could be the solution you’ve been looking for!
Key Takeaways
- An acqui-hire is when a large business buys out a small company, typically a startup.
- The primary purpose of an acqui-hire agreement is to secure the employees and talent they have.
- Acqui-hiring can be beneficial for tax purposes, both for small and large businesses!
What is an Acqui-hire (Acquihire)?
An acquihire is when one business buys out another company specifically to acquire the employees.
Good acqui-hiring is effective because it allows the acquiring company to secure a lot of new talent at the same time.
Another reason companies acqui-hire is to secure a group of employees who are used to working together.
Typically, acqui-hiring occurs with tech startups!
Definition of Acqui-hiring
The definition of acqui-hiring is stated as the following:
Acqui-hiring is a buyout a company performs primarily for the skills and expertise of its key employees.
Therefore, rather than acquiring a business for its products or services, acqui-hiring focuses on the knowledge the staff has, benefitting the entire company.
How Does the Acqui-hire Purchase Work for Employees?
Employees are the most valuable aspect of an acquihire.
Therefore, the acquiring company aims to make the transition process as smooth as possible to retain the knowledge and expertise of these workers.
For employees, an acquihire typically involves the following things:
- Salary negotiations with their new company
- New contracts
- A new workplace
- Getting used to working with a new team of executives
Employees must ensure the new company is transparent regarding paychecks and job security.
What Are the Advantages of an Acqui-hire?
Numerous companies acquihire because it comes with several advantages.
For instance, the core benefit of an acquihire is that it allows a company to build up its team in one shot.
If a company chooses to interview, segment, and hire employees instead of acqui-hiring them, it is time-consuming and has higher employee turnover rates.
Also, an acquihire enables the acquiring company to get employees with specialized skills who they can quickly integrate into the existing workforce.
In addition, acqui-hiring ensures job security and stability for the acquired staff members, allowing them to avoid looking for new jobs.
Further, an acquihire is an effective way for a company to access cutting-edge technology and innovative ideas from key personnel.
Other benefits of an acqui-hire include the following:
- A company acquires employees with technical skills
- There is no need to train employees (which is costly)
- Companies save money
What Are the Disadvantages of an Acqui-hire?
Although acqui-hiring has several benefits, there are a few disadvantages worth noting.
For employees, one disadvantage is that they will likely have to change their place of work.
Also, startups are usually the businesses involved in an acquihire.
Therefore, another disadvantage from an employee perspective is that they have to get used to working for a larger company and stricter rules involved in a corporate environment.
From a business perspective, some disadvantages of an acquihire include the following:
- It is a significant risk
- New employees may need more time to adjust than expected
- Company founders may leave after the larger company acquires the smaller business/startup
The most significant disadvantage of an acquihire is the risk factor involved.
The company that buys out the smaller business assumes all the employees will transfer to a new company.
However, some employees might choose to leave, resulting in losing talent.
How are Acqui-hire Purchases Structured?
The acquihire process has no set rules or standards because the actual value of this asset purchase is the employees, not the company.
Most of the purchase money involved in an acqui-hire goes to the employees.
Also, the company making the purchase determines the cost of the acquihire purchase on a per-head basis.
A “per-head basis” means the company primarily pays for the number of employees they will acquire after the purchase.
Further, some details a buyer should be aware of regarding the acquihire process include the following information:
- Structuring the deal: Ensure the company buys the smaller business in total rather than the people and assets; this leads to a delay because of liquidation.
- Purchase effects: Will it impact your board of directors or investors?
- Post-closing liabilities: The company must limit or get rid of these liabilities for stockholders
- The purchase price: Is it fair?
- Taxes: Are there parachute payments or any tax implications?
General Acqui-hiring Steps
Here is what typically happens during an acquihire.
Keep in mind that these steps aren’t universal for businesses.
Still, this step-by-step guide will give you a general idea of how the process works.
Step 1: Get Approval from the Board
The company that wants to acquire another firm must get approval from the board of directors.
Therefore, companies must start making deals and buying out smaller businesses with careful review and decision-making.
Board approval requires a thorough review by executive team members, such as the CEO and CFO.
Also, some companies need shareholder approval before proceeding with any deal.
Once everyone agrees on an acquisition plan, the process can move forward.
Step 2: Structure the Deal
The company that wants to acquire another firm must decide how to structure the deal.
In most cases, companies choose an asset purchase agreement (APA) instead of a stock purchase agreement.
An APA is one of the most common acquisition agreements because it allows buyers to choose which assets they want for their company.
In the case of an acquihire, talent acquisition is the primary asset a buying company wants to get.
Therefore, these companies might structure the deal with an employee contract agreement.
For example, the buying company may have a set amount of time the new employees must work for them to ensure the company’s product gets off the ground correctly.
Structuring deals demands considerable attention.
The larger business must consider several things, including the following:
- Employee compensation
- Contracts
- Amount of the deal
- The items that are considered intellectual property
Step 3: Assessing Post-Merger Liabilities
The acquiring company must assess all potential post-merger liabilities.
These liabilities can include things such as:
- Employee benefits
- Tax implications
In addition, the buying business must ensure they are getting a fair price for the purchase.
Therefore, buyers should conduct due diligence before signing anything.
Step 4: Explore Alternatives
In addition to acqui-hiring, there are other alternatives companies can explore.
One alternative is a strategic partnership.
A strategic partnership is a type of agreement that allows the two businesses to benefit from their respective strengths.
Also, this partnership gives each business a chance to work together without merging or acquiring the other firm.
As you have seen, an acquihire demands a lot of paperwork and considerable attention before things move forward.
Further, a joint venture is another option for larger companies looking to purchase a startup.
Joint ventures are a type of partnership that involves two companies sharing resources to create a new entity.
Therefore, a joint venture is an excellent option for businesses that want to work together without fully merging.
Lastly, a spinoff is another way companies acquire talent and assets without going through the acquihire process.
In this situation, a company can buy out investors without taking on the business.
Companies have several other options to pursue and pitch if an acquihire situation seems like too much.
Step 5: Research Tax Questions
Step five involves researching relevant tax questions.
For instance, companies must research and answer any tax-related queries before moving forward with an acqui-hire.
In some cases, the larger company might have to pay taxes for the employees that transfer over in the deal.
The tax considerations are one reason why it’s essential to explore all the possible tax implications with a professional accountant.
Professional accountants should be able to tell you what type of taxes you must pay, which should help you plan accordingly.
The acquihire process can go completely sideways if one company does not consider the tax side of the deal.
That said, taxes can be an expensive aspect that businesses do not consider.
Step 6: Plan Compensation for New Employees
The last step in the process is to plan out what type of compensation each employee will receive after the deal is done.
Creating compensation plans means that both parties must agree upon a salary and benefits package for each new employee.
Also, it’s important to note that companies do not have to pay employees directly from their cash reserves.
Instead, they can use stock options or other forms of compensation to pay for new employees.
In addition, it’s essential that companies provide an incentive package that entices employees to stay at the company after the deal is done.
An incentive package could include things like:
- An additional bonus
- Vacation time
- Any perk that makes the job more attractive and worthwhile for employees
Since employees are the primary reason for most acquihire situations, the acquiring business must fairly compensate them.
Otherwise, the startup could look for a different target company to buy them out.
What Is a Soft Landing?
“Soft landing” is a term in the tech industry to describe what will be an eventual acquihire.
So, instead of worrying about seed funding, the startup team uses the phrase “soft landing.”
A soft landing is when a small company proves successful, so much so that a larger company buys them out.
Usually, soft landings happen when startups don’t raise enough capital during their first money-raising attempt.
Some startups aim to be bought out by a larger company, as it indicates the business was a success and has the potential to earn money.
Especially in the tech industry, employees who are part of startups quickly realize that running a business is complicated, and they would instead be bought out.
Why Do Acqui-hires Happen?
Acqui-hires are an extensive process that requires a lot of communication and negotiation.
Therefore, you might ask, “Why do certain companies consider an acquihire?”
Here are four reasons acqui-hires occur!
Allows for Expensive Hirings
When companies want to hire talented individuals, it can sometimes put them in a tricky spot.
For example, when a highly talented applicant wants a job with wages higher than an existing employee, it can make the company look bad.
Therefore, contract and compensation negotiations can take longer than anticipated.
However, with an acquihire situation, the business can bring in several employees without negotiating various salaries the same way regular hiring demands.
It Has Tax Benefits
Another reason acqui-hiring happens is because it has significant tax benefits.
For instance, employees do not have to list their bonuses from the acquisition as salary.
Instead, they can list the funds as a capital gain.
Why is this beneficial?
Capital gains have a significantly lower tax rate compared to salaries.
The purchasing company can also take advantage of tax benefits.
For instance, the buying business can write the acqui-hire purchase agreement off in ways that are best for tax purposes.
Therefore, everyone can take advantage of tax benefits when an acqui-hire exists!
Venture Capitalists Remain Happy
The prominent people who fund startups are venture capitalists.
Typically, venture capitalists have several connections and work with larger corporations, too.
Large organizations must remain close with venture capitalists because they aim to buy out startups through an acqui-hire situation.
That way, big companies like Facebook or Google can acquire the best talent in the industry.
An acqui-hire protects a venture capitalist because hiring talented employees from a startup to a different company can ruin their investment.
As a result, acqui-hiring keeps venture capitalists happy!
Failure Seems Like Success
Startups are expensive and time-consuming.
While a business owner may have had a good idea that has potential, the business side of running a company is an entirely different ball game.
Therefore, instead of a company founder taking the fall for a failed startup, an acqui-hire is an excellent alternative.
With an acqui-hire situation, the failure looks like a success because all the employees still have jobs, and a more prominent business purchased the startup.
Without an acquihire, the startup would be dead in the ground, its products or services with it.
Acqui-hires allow them to avoid failure and continue offering their products or services.
How is an Acqui-hire Company Valued?
How an acqui-hire company is valued depends on the size of the deal itself.
If the purchasing company is making a significant investment in cash or stock options, then the valuation process looks very different from a smaller acquisition.
For more significant deals, companies typically rely on “earnouts,” which involve tying part of the purchase price to specific milestones or performance goals that need to be achieved by the acqui-hire company.
Earnouts allow the purchasing company to pay a lower price initially and then increase the deal’s value if the business meets specific goals.
Companies usually rely on standard valuation methods such as the discounted cash flow analysis (DCF) for smaller deals.
The DCF method considers factors such as:
- The company’s current and projected cash flows
- Competitive environment
- Potential future growth
Further, companies can use the DCF method to evaluate both private companies and publicly traded stocks.
No matter which method, companies must clearly understand the valuation process before entering into an acqui-hire agreement.
Acquisition Vs. Acqui-hire?
Here is an example of how acquisitions and acqui-hiring differ!
Imagine you have two toy boxes.
One box has a super cool, limited edition action figure that everyone wants, while the other has a whole bunch of cool, but not as unique, action figures.
If a kid comes along and buys the first box to get the one special action figure, that’s like an acqui-hire.
The kid is interested in the one special toy (or, in a company’s case, a particular team or employee) and not so much in the rest of the box.
On the other hand, if the kid buys the second box because they want all the action figures inside, that’s like an acquisition.
The kid (or company) is interested in everything the box has to offer, including all the action figures (or, in a company’s case, the team, product, technology, customer base, etc.).
In both cases, the kid ends up with a box of toys, but what they value in that box and what they plan to do with it can be very different.
Closing Thoughts
There’s everything you need to know about an acqui-hire situation.
Acqui-hires are beneficial because companies get an entire staff of talented employees without going through the long hiring process.
Also, startups can “save” their company by being bought out by a bigger one!
What questions do you have about acqui-hiring? Let us know in the comments section below!