5 ms·

The problem with this was explained to me by a M&A consultant... it's roughly the same amount of work for the acquisition team of a large company to buy a tiny

by beat 12y ago

The problem with this was explained to me by a M&A consultant... it's roughly the same amount of work for the acquisition team of a large company to buy a tiny company as it is for them to buy a much larger company. The problem isn't the cost, but rather the due diligence and bureaucratic bandwidth of the acquisitions team. So this is unlikely to become much of a trend, simply because it's too much work for the acquiring companies.

threefour 12y ago
I could see how that would be true in some cases, but in cases where the startup hadn't launched yet I would assume there's a lot less to audit.
vonmoltke 12y ago
I don't understand. Why doesn't the amount of work required to perform all the due diligence activities not scale with the size of the company?
- Alex3917 12y ago
  Because they're not evaluating the things that scale. They're evaluating the founders, which is constant, and also the legal paperwork, which grows only linearly. The cost of valuating the company, negotiating, getting board consent, etc., are all basically constant.
  - vonmoltke 12y ago
    > Because they're not evaluating the things that scale. .. also the legal paperwork, which grows only linearly Um, that is something that scales. > The cost of valuating the company, negotiating, getting board consent, etc., are all basically constant. I don't see how that can be, though. If the company is just my friend and I, your "board consent" is just getting the two of us to say yes (assuming we are not structured as an LCC, in which case it is irrelevant). The cost of appraising a purchase is generally related to how much it is claimed to be worth. Ditto with negotiating; a higher price tag or larger organization brings more things to haggle over.
- drb311 12y ago
  I'm foxed too. Due diligence is about assessing risk. The lower the valuation the less you're risking. Hence I'd expect early acquires to require far less due diligence. What am I missing?
  - nerfhammer 12y ago
    Liabilities. While a lower valuation company would presumably be less likely to rack up some huge liabilities somehow, that is not necessarily the case.
- marcosdumay 12y ago
  Even worse, why doesn't the amount of work scale with the selling price of the company? I smell people not capable of doing cost-benefit analysis.
rdlecler1 12y ago
You're not doing the same amount of DD on a $5M acquisition as you are a $300M acquisition, just as seed VCs aren't doing the same amount of DD as a growth-stage VC. The former may not even have aquifer financial yet and the acquiring company is mostly concerned about the talent of the team and the software. They may not even care that much about a couple of the founders--just needing them for a smooth handover.
- jmathai 12y ago
  While it might not be the exact same amount of DD it is still a good amount. I think it's the law of diminishing returns.
wooyi 12y ago
I've been involved in a micro acquisition. From my experience, this is not true. Both the timeline, cost and effort from term sheet to closing was small (in comparison to larger acquisitions)
lhh 12y ago
I've worked in M&A for several years. In terms of actually processing the transaction, yes it's generally true that it takes about the same time to process a deal regardless of size (there are legal, accounting, regulatory, basic DD, etc steps that happen in every deal). That's totally independent from the "go" or "no go" call that call that ultimately needs to be made by the acquirer though, which is the actual driver of the deal. It's a lot easier/quicker to make the "go" call when the stakes are low. Once an acquirer decides with conviction that they want to do a deal, it's pretty smooth sailing. The pain comes in when the acquirer feels the need to do deep dive due diligence and negotiation, which tends to make the larger acquisitions a lot more intensive.

by beat 12y ago

threefour 12y ago

I could see how that would be true in some cases, but in cases where the startup hadn't launched yet I would assume there's a lot less to audit.

vonmoltke 12y ago

I don't understand. Why doesn't the amount of work required to perform all the due diligence activities not scale with the size of the company?

Alex3917 12y ago
Because they're not evaluating the things that scale. They're evaluating the founders, which is constant, and also the legal paperwork, which grows only linearly. The cost of valuating the company, negotiating, getting board consent, etc., are all basically constant.
- vonmoltke 12y ago
  > Because they're not evaluating the things that scale. .. also the legal paperwork, which grows only linearly Um, that is something that scales. > The cost of valuating the company, negotiating, getting board consent, etc., are all basically constant. I don't see how that can be, though. If the company is just my friend and I, your "board consent" is just getting the two of us to say yes (assuming we are not structured as an LCC, in which case it is irrelevant). The cost of appraising a purchase is generally related to how much it is claimed to be worth. Ditto with negotiating; a higher price tag or larger organization brings more things to haggle over.
drb311 12y ago
I'm foxed too. Due diligence is about assessing risk. The lower the valuation the less you're risking. Hence I'd expect early acquires to require far less due diligence. What am I missing?
- nerfhammer 12y ago
  Liabilities. While a lower valuation company would presumably be less likely to rack up some huge liabilities somehow, that is not necessarily the case.
marcosdumay 12y ago
Even worse, why doesn't the amount of work scale with the selling price of the company? I smell people not capable of doing cost-benefit analysis.

rdlecler1 12y ago

You're not doing the same amount of DD on a $5M acquisition as you are a $300M acquisition, just as seed VCs aren't doing the same amount of DD as a growth-stage VC. The former may not even have aquifer financial yet and the acquiring company is mostly concerned about the talent of the team and the software. They may not even care that much about a couple of the founders--just needing them for a smooth handover.

jmathai 12y ago
While it might not be the exact same amount of DD it is still a good amount. I think it's the law of diminishing returns.

wooyi 12y ago

I've been involved in a micro acquisition. From my experience, this is not true. Both the timeline, cost and effort from term sheet to closing was small (in comparison to larger acquisitions)

lhh 12y ago

I've worked in M&A for several years. In terms of actually processing the transaction, yes it's generally true that it takes about the same time to process a deal regardless of size (there are legal, accounting, regulatory, basic DD, etc steps that happen in every deal). That's totally independent from the "go" or "no go" call that call that ultimately needs to be made by the acquirer though, which is the actual driver of the deal. It's a lot easier/quicker to make the "go" call when the stakes are low. Once an acquirer decides with conviction that they want to do a deal, it's pretty smooth sailing. The pain comes in when the acquirer feels the need to do deep dive due diligence and negotiation, which tends to make the larger acquisitions a lot more intensive.