Beware of fishing expeditions

A number of our portfolio companies have been fielding calls from strategic buyers expressing an interest in acquisition.  This is great news since many of the better acquisitions come when companies are bought and not sold.  For a startup, it can be quite flattering to have a large competitor or suitor express an interest in buying your company.  However, as an entrepreneur you have to be skeptical as many of these calls end up as just another fishing expedition from the strategic buyer. I have seen too many companies get overly excited about these acquisition feelers and waste time educating the potential acquirer only for the acquirer to either do nothing, build it themselves, or buy a competitor.  In fact, you have to recognize and assume that many of these initial calls are just fishing expeditions where a strategic buyer is just trying to get as much information as they can about a market and the competitive landscape.  You have to assume that they are talking to all of your competitors as well.  Before taking your first meeting, make sure you get as much information you can to gauge the real interest in your company.  Here are some questions you should be asking or thinking of during your initial conversation.

  1. Who is calling you, what is their role, and what have they acquired in the past?  You need to determine whether it is just a junior person screening or if it is someone with real clout and decision making power.
  2. Why do they want to enter this market and what is the decision making process by which they will make a build/buy decision?  If they are early in the process, you have to be concerned about wasting your time, educating a potential buyer about your market, and going nowhere with your conversations.
  3. Have they talked to anyone else?  In many cases, an acquirer may already know who they want to buy, but will still talk to other players to fully understand the market and the competitive landscape and to use you as negotiating leverage.
  4. What are they looking for in terms of an acquisition?  Revenue, product, management, both?
  5. Who is responsible for making the acquisition work, and how does the acquirer intend to integrate your company into the existing infrastructure?  Will the acquisition be run as a separate, stand-alone unit or will it report to a certain group.  Knowing this will further help you understand the decision-making process of the acquirer, and who you may need to influence to get a deal done.

Before your first meeting, here are some questions you should have answered yourself:

  1. What other acquisitions have they done, what multiples did they pay, and how recent were the deals?  If the buyer hasn't done many acquisitions or if they paid low multiples do not start thinking about pie in the sky valuations for your company.
  2. What is the company's market cap and how much cash is on their balance sheet?  If your selling price is too high for the buyer based on the buyer's market cap or cash on hand, don't waste your time educating them about your product and the market.
  3. Use your network to talk to some of the management or venture investors of companies that were recently acquired by the buyer to determine what their process was and to figure out if the opportunity is real or just a fishing expedition.
  4. What is the corporate culture?  Does the acquirer have an NIH (not invented here) syndrome or is there a history of openly collaborating with partners and looking outside for new technology?

Once again, it is always nice to have a large company call you and express acquisition interest.  That being said, go into the conversations with a skeptical eye and make sure you do not waste your time as these strategic discussions can quickly lead to a dead end if not managed appropriately.  The tricky part of the dance is trying to establish early in the process a range that the acquirer will potentially pay for your company assuming everything you tell them is true.  The sooner you can get to this answer the sooner you will know if you should continue talking or just walk away.  If you manage this process appropriately you may find yourself in a great place as many of the best acquisitions happen when companies are bought and not sold.  The downside is that these discussions can suck up lots of your precious resources and be a tremendous distraction to your management team.

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This post was written by who has written 358 posts on BeyondVC.

14 Responses to “Beware of fishing expeditions”

  1. Vince Wicker Oct 31, 2005 at 9:41 pm #

    Amen.
    While I’ve not been a “portfolio” company, we’ve been “sniffed” a bit in the past and the question I always end up asking myself is, “based upon what we’ve built and where we’re going, and who they are, do they have (1) the legs to make this deal (back to your what have they done in the past), (2) if I were an investor in their company would I purchase my company and why/why not, and (3)based upon your research and background inquiries, can this company make a decision?”
    This last one is critical. If they are slightly out of your “sweet spot” (i.e. if your spending time with them is not accretive to building your busienss), then this has got to smell right, fast. If not, you are leaving business opportunity, and stepping into an unfamiliar neighborhood and if they waste your time — you’ll call it a “learning opportunity” but you’ll never get that time back.
    Great post.

  2. Anonymous Coward Nov 1, 2005 at 12:50 am #

    This is also good advice for startups that are fielding calls from VCs who are on fishing expeditions!

  3. getvendors Nov 1, 2005 at 3:25 pm #

    We can very well relate to this scenario and I think a community share point where small companies can talk about such or similar personal experiences can be a good headstart to prevent this. Since, VC community is closely knit, if there is fear that word will get out on the street about fishing expeditions then soon it will become an adventurous activity for these folks as against the frivolous game in current setting. I just checked domain name fishingsharks.com is available. Of course, the initiative needs to come from a big fish otherwise it will be just dumped as whiners’ club.

  4. MBA Depot Nov 1, 2005 at 6:04 pm #

    I am not sure the proper etiquette since I don’t have a trackback capability, but I did post an annotated link to this article at:
    link to mbadepot.com

  5. Scott Maxwell Nov 2, 2005 at 3:06 am #

    Ed,
    Great issue and great points!
    Scott

  6. Scott Maxwell Nov 2, 2005 at 3:06 am #

    Ed,
    Great issue and great points!
    Scott

  7. Martin Tibbitts Dec 6, 2005 at 9:51 am #

    I think that it is important to be careful when analyzing these types of opportunities as a seller. Let’s face it, a potential buyer can easily be a competitor looking to understand the inner-workings of your company. This is a greater risk when your product or service is of the nature where it is difficult to patent.

    Martin Tibbitts

  8. Peter Dec 6, 2005 at 4:39 pm #

    “In fact, you have to recognize and assume that many of these initial calls are just fishing expeditions where a strategic buyer is just trying to get as much information as they can about a market and the competitive landscape.”

    There’s a name for this: brainsucking.

  9. matkinson Dec 13, 2005 at 11:50 pm #

    Ed, excellent post. Once of those “kind of knew it, but great to see it articulated” pieces of advice. The problem for many entrepreneurs is that it is hard to switch out of sales mode. After all, you’ve been pitching the business since its concept – selling to family (will you let me do this), friends (will you seed it), customers (will you buy some) and VCs (will you back it). The temptation is to give someone sniffing the full pitch without qualifying them first.

    Oh, and by the way, great timing. On the same day that you posted we had a sniff from a major CRM company and I was able to put your advice to good effect. In fact opened your blog during the call. Thanks.

  10. Dan Apr 8, 2006 at 7:49 pm #

    Yeah, we almost lost our shirts on an acquisition deal in the summer of 2005. I look back on it now and the only kind of fishing I’m interested in Brown Trout fishing… ;-)

Trackbacks/Pingbacks

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    Future competitors sniffing your private parts

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    Once again, great info from BeyondVC and the wary fishing expedition or as I like to call em Busine…

  2. FlatEarthVentures.com - Nov 4, 2005

    Got the magic call? Follow this advice

    During the heydays in Titan Key, we were getting quite a few calls from people that were interested in acquiring us. I even flew out to the West Coast once for a company that was pretty confident they would be buying us for $5M.
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  3. VC Circle - Nov 5, 2005

    M&A: Watch Out For Fishing Expeditions

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  4. Anonymous - Feb 7, 2007

    Beware of fishing expeditions

    A number of our portfolio companies have been fielding calls from strategic buyers expressing an interest in acquisition. This is great news since many of the better acquisitions come whencompanies are bought and not sold.

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