“Acquihires” – Can acquihires provide a way out of the crisis?

03.07.2020

Acquihires are a trend from the US start-up and venture capital scene, which will also start gaining importance internationally as a result of the current crisis. Similar to the increasingly popular pre-seed investment structures, the focus is on the founders or key people and their personal networks.

What opportunities do acquihires offer?

Established companies often have difficulty finding good employees who can help them advance their innovation and growth plans. Start-ups, on the other hand, are finding it difficult in the current crisis to achieve planned sales, secure further rounds of financing or even avoid bankruptcy. Exit channels are also limited in the current market environment.

In view of this, an acquihire offers start-ups the opportunity to structure a successful exit and the acquirer to gain an established team, which would otherwise need to be built up over a long period of time. The investors of the target company, in turn, can use this deal structure to avoid refinancing or even liquidating the target company. Instead, they can report an exit as the result of an acquisition by an established company and avoid tying up capital. The possible failure of the start-up can be transformed into a success story, with advantages for all parties involved.

In contrast to conventional exit strategies, an acquihire focuses less on the business plan or the assets of the start-up company but more on its founders and their team. The purchase price is also usually based on the team’s value to the acquirer, rather than the business plan.

A prerequisite for an acquisition is the cooperation of all stakeholders involved.

Legal and practical issues of acquihires

Acquihires must be carefully structured and planned. The following checklist gives you an initial overview of the most important issues:

  • Should the team be transferred via an asset deal or a share deal?
  • Which elements regarding the deal structure and the course of the transaction should be regulated in the Letter of Intent (e.g. confidentiality, transaction process, non-competition and non-solicitation)?
  • Who are the key people and how can they be identified and convinced to participate in the transaction?
  • What are the risks of a transfer of business undertaking according to Section 613a BGB (“Bürgerliches Gesetzbuch” - German Civil Code) if not all employees will be transferred? In addition how can the transaction be structured to avoid these risks?
  • How will the due diligence be focused on the issues relevant to the deal?
  • What other assets are to be acquired and what risks does this entail in relation to Section 613a BGB?
  • How can an appropriate valuation be found in order to determine the purchase price?
  • How will the founders and the other employees concerned participate in the purchase price (differences between share deal and asset deal)?
  • What are the tax specifics for the parties involved?
  • Under what conditions and employment contracts will the founders and team members be taken on by the acquirer?
  • How should the acquirer design the incentive and retention schemes for the new team?
  • How can investors be convinced and become part of the solution.
  • How can a takeover that violates existing contracts of the start-up company be avoided?
  • When and how will the transaction be communicated?
  • Will the start-up be dissolved after the employees have been transferred (asset deal) and how will its creditors be paid?
  • How should non-compete obligations be regulated?
  • How will the acquired team be integrated into the acquirer?

How to successfully implement an acquihire:

Our M&A and employment law teams collaborate closely on acquihire transactions and have many years of experience in venture capital transactions and management participations - both in pre-seed investment structures and in later stage phases. As a full-service law firm with years of experience advising medium-sized and international groups of companies, we can also support the seamless integration of the new team. Please feel free to contact us.