Getting acquired: how M&A deals actually work

A strategic buyer is another operating company. It is buying capability, market share, a customer base or a team, and it values the target partly on what the combination is worth rather than what the target earns standalone. Strategics can pay prices that look irrational on the target's own financials, because the synergy is real to them.

A financial buyer — private equity — is buying cash flow. It values the company on its ability to service debt and produce returns, typically applies a multiple of profit rather than revenue, and usually requires the business to be profitable or close to it. Financial buyers pay less for growth and more for predictability.

Prices are set by comparison and by competition. Bankers and buyers look at what similar companies sold for, apply an equivalent multiple, and adjust for growth and quality. That gives a range. What determines the position within the range — and whether the range gets exceeded — is whether another credible buyer exists.

A single interested acquirer negotiating with a company that needs to sell will pay near the bottom of the range. Two acquirers who both believe the asset is strategic will pay well above it. Running a real process, even a small one, is usually the single highest-return activity in an exit.

Announced deal values are gross and often include components the founders may never see. An escrow holds back ten to fifteen percent of the price for twelve to eighteen months against warranty claims. An earn-out makes part of the consideration conditional on hitting post-close targets — and earn-outs are missed far more often than they are hit, because the founders no longer control the resources needed to hit them.

Then the waterfall applies. Liquidation preferences pay investors first, and in a deal below the last round's valuation, preferred holders can take most or all of the proceeds before common shareholders receive anything.

It typically begins informally — a partnership conversation, a competitive encounter, an approach at a conference. A serious buyer then submits an indication of interest, followed by a letter of intent that names a price and, critically, an exclusivity period during which the company cannot talk to anyone else.

Signing exclusivity is the moment leverage transfers. Diligence follows: financial, legal, technical, customer references, employment records. Prices are re-traded downward during diligence more often than they are raised, and a company locked into exclusivity with no alternative has little defence.

Buyers acquiring for capability usually attach a substantial retention package to key people, vesting over two to four years. That money is technically compensation rather than deal consideration, which changes its tax treatment and means it sits outside the cap table waterfall entirely.

This creates an awkward dynamic worth naming early: in a modest exit, the engineers with retention packages may receive more than founders whose common stock sits behind a preference stack. Handling that conversation honestly before close prevents a great deal of resentment after it.

The largest is negotiating from need. A company with four months of runway approaching a buyer has already conceded the price. Exits are negotiated best a year before they are needed.

The second is focusing entirely on the headline figure. The structure — how much is cash at close, how much sits in escrow, how much depends on an earn-out — frequently matters more to the founder's actual outcome than a ten percent difference in the announced price.

Garage to IPO surfaces acquisition offers as the company grows, priced against your revenue, growth rate and the current macro regime. Offers arriving during a downturn are visibly worse, which is the real dynamic compressed into a single number.

Accepting one runs the exit through the same waterfall the game uses everywhere: preferences first, then common. Career mode then lets you take the proceeds into a new venture, which is the closest the simulator gets to modelling what founders actually do after a mid-sized exit.