The Eject Button of Exits: Opportunities and Perils of Acquihires

Founders, executives, and investors in professional services firms should be generally familiar with the motivations, elements, and commercial considerations that attend “acquihires.” These transactions not only present a viable (if not optimal) path to exit a professional services business, but they also present attractive opportunities to assemble qualified teams, import unique knowledge and capabilities, and ultimately grow or defend market share. This article seeks to help the leaders of professional services firms understand the circumstances in which they might be involved in an acquihire (either as seller or buyer), the motivations of each party in such circumstances, and common structures for acquihire transactions.

1. Why would my company participate in an acquihire?

• Sellers: Generally, the opinion of business and academic commentators from the tech industry on acquihires is that they occur because of financial distress felt by a selling firm, and are alternatives to outright liquidation of the company. This has generally been my experience as well counseling professional services firms, with acquihire transactions tending to be quick matters led by buyer-competitors, with the goal of re-homing employees who would otherwise be terminated if the target elected to shutter its business. For many sellers, an acquihire represents an opportunity to capture some value associated with the winding-down of their business and signal a graceful, if not successful, exit to the market. 

• Buyers: Buyers pursue acquihires for a range of reasons. These include:
  • acquiring qualified, cohesive teams, particularly in preparation for periods where additional capacity is needed;
  • stifling competition by onboarding talent that might otherwise flow to competitors following a liquidation of a target;
  • capturing goodwill, institutional knowledge, and customers;
  • entering entirely new markets or geographies; and
  • gaining new expertise or capabilities.

While one or multiple of these motivations have galvanized acquihire transactions from the likes of Meta, Alphabet, Amazon, Microsoft and other large tech companies, the same logic motivating these players also animates purchases among consulting and professional services businesses. Indeed, large consulting and advisory firms such as McKinsey  (acquihire of Hypothesis, a digital product consultancy), Deloitte (acquihire of the SAP team of VACS Technology Pvt. Ltd.), and KPMG India (acquihire of Shivansh Solutions, an SAP specialists consultancy) have each completed notable acquihire transactions within the past three years in order to strengthen certain of their respective technology consulting capabilities.

2. What does an acquihire transaction look like?

It is difficult to generalize about the terms of acquihire transactions, as the details of such transactions are infrequently disclosed to the public. However, I note my experience and that of other legal practitioners and commentators:

• Price:
  • Acquihires in the tech industry have historically been priced on a per engineer basis[1], however among professional services firms, I have not witnessed any sale prices expressed similarly. Instead, for such firms, prices often reflect the motivation of the buyer for approaching the purchase and the presence or potential for competitive bids to be issued from other parties.

• • In the most dire situations, right before a seller shutters its business and liquidates, most or all of the purchase consideration is allocated towards the compensation packages of the acquihired employees, with little or none going to the target’s business or assets, which may not be purchased at all. In these instances, the benefit to the seller may arise from the buyer’s assumption of payroll liabilities (or sometimes severance obligations) to the seller’s employees, allowing the business owner to retain more cash in a subsequent liquidation.

• • Sellers in the midst of a turnaround, but that have attractive assets or client relationships, are more likely to see valuations that include some take-home pay for the seller, however even that consideration is frequently subject to earn-outs, seller financing that is favorably discounted for the buyer, or otherwise given as retention bonuses, profits interests, or phantom equity that cannot be realized upon for a period of years or until a future sale transaction.

• Structure:
  • As noted above, there may be situations where an acquihire does not include a purchase of a sellers’ business or assets. In those situations, the “deal” simply involves the seller executing a covenant not to sue the buyer for hiring its employees, with the buyer separately relaying offers to the employees it chooses to hire.

• • In transactions where a buyer sees value in a seller’s client relationships, the buyer is more likely to structure the deal as a purchase of some or all of the seller’s assets, with the buyer leaving the seller to settle the liabilities of the business.

• • Stock/equity sales are rare among acquihires, and generally are pursued where customer contracts or governmental permitting would make an asset transfer prohibitively slow or impossible.

• Process:
  • Acquihires tend to be built for speed and simplicity.

• • For companies on the verge of liquidation, there may be limited or no due diligence conducted by the buyer, with the majority of the process dedicated to informing employees of the transaction, negotiating offers, and onboarding.

• • Larger transactions tend to feature many of the same steps as in traditional M&A transactions (LOI, buyer diligence, purchase agreement negotiation, customer reference checks, etc.), however even larger transactions are often completed on a compressed timeframe, with many capable of closing within forty-five to sixty days of an LOI.

3. Is your company contemplating an acquihire?

For professional services firms, there may be good reason to participate in an acquihire, if not to capture qualified talent from a flagging competitor as a buyer, then as a more favorable option to shuttering as a seller. While this article highlights the motivations for pursuing an acquihire, and some common shapes that such deals take, the pursuit of an acquihire transaction (either as a buyer or seller) is attended by a litany of financial, tax, legal, and other considerations that impact the potential for success of the transaction, and the potential for a participant to realize optimal results.

If you are interested in, or are participating in, an acquihire transaction and want to speak more about your goals for it and how those may be accomplished, I’d be delighted to speak with you at mlclark@winstead.com.

[1] Naftulin, Danielle. “So You’re Being Acqui-hired.” Cooley Go, https://www.cooleygo.com/acqui-hire-basics/.