7 tips for how to use mergers and acquisitions as a competitive tool
A successful acquisition can be a transformative event for a company. By acquiring a firm with a complementary market position or product set, acquisitions can serve as a tool for accelerating growth and bolstering market position.
And the power of acquisitions applies not only to big, listed companies with billions of revenues but also to startups that may just be a few years old.
However, all acquisitions are not created equal, and if a CEO or founder is to set down this path, there are some important guidelines to consider, especially in the context of managing and scaling a startup.
Here are the seven key elements that every early stage founder should consider before going down the road of M&A.
1. Getting the “why” right.
In the ordinary course of business, as a founder, you will sooner or later come across one of your competitors or another seemingly attractive target coming up for sale. It is undoubtedly tempting to consolidate a former competitor, but before setting down the path and investing significant time and resources into an M&A process, it is crucial that you answer the question of whether this acquisition ultimately makes strategic sense.
In other words, does acquiring this business fit in with the roadmap that you, the board and the senior management has laid out? Or does it represent a deviation from the path that can potentially lead you down a rabbit hole with unintended consequences and distractions? Only you as a founder can answer this question, and it is imperative you do so accurately. After all, strategy is as much about what you say “no” to as it is to what you say “yes”.
Again, it is important to stress that the ultimate responsibility here lies with the founder CEO. There will be many parties involved here that will try to push for a transaction, including certain investors, advisors, the management of the company being sold, just to name a few. But the buck stops with you, and before going down a long and resource intensive path, it is important to know whether this fits your strategy.
I have found that a useful question to ask yourself in these circumstances is “would I be happy to acquire this company if it was free?” This is a good way to focus your thinking on the strategic costs the business you are buying comes with - because they all come with costs, whether they be explicit or implicit.
The other question to ask yourself is “what will I have to stop focusing on as a result of acquiring this business?” If this acquisition is going to distract you from your core focus, it may not be worth doing even if it comes for free.
2. Getting the “who” right.
Assuming that you are comfortable with the strategic rationale of doing this deal, the next big set of questions you need to answer all pertain to people related issues.
First and foremost amongst these is determining who will run the new business. This could be its current CEO or founder, or it can be somebody from your organization. However, the founder of that business may not be interested in staying on, or there may be nobody in your organization that is qualified to run the business. Without the right person in place to run the business you are acquiring the likelihood of future problems goes up exponentially.
Once you have identified who will run the business, it is also imperative that you put a good incentive plan in place for that person so that they are not only motivated but also aligned with your overall goals and strategy.
Another answer to this question may be that nobody senior will run the business as it will be fully integrated into your company, or what is being bought is something more concrete like a customer list, some IP, or another valuable asset. Even in these cases, it is important to think about who will integrate these assets into your core business, and what the costs will be for doing so.
3. Determine the value of the business.
Only once you know that the acquisition fits your strategy, and you have identified the person or people that will successfully run and integrate the business, it will now make sense to start thinking about how much the business is worth in dollar terms.
This is by no means an easy question to answer.
First of, you should triangulate a theoretic value based on a number of valuation methods: For example, you should consider not just looking at revenue multiples but also a simple discounted cash flow, as well a sum of the parts valuation if the firm has several business lines.
Once you have a range of theoretical values, apply a practical lens to those to see what makes sense. You know this industry well, so trust your gut instinct. Don’t trust the valuation framework blindly. If this is a truly strategic target, you may in fact want to pay more. Or perhaps the company will go out of business in a matter of weeks if a sale does not take place, in which case you may want to pay less.
4. Factor in all the hidden costs as you do your diligence.
Once you have determined a valuation range for the business, now you need to subtract all the costs associated with buying it. This could be integration costs, legal costs, or potential liabilities that the business comes with. If you buy a business that is going to be subject to subsequent lawsuits, you may find that the business in fact had negative value.
At this part in the process you will also be doing detailed due diligence to figure out exactly what kinds of hidden costs may be lurking around. Doing the diligence thoroughly is paramount, and depending on the size of the business and your budget, you will want to consider getting other professional advisors in addition to your legal advisors.
Finally, don’t forget that the biggest cost is likely going to be the distraction and time commitment involved in doing the deal. Generally speaking, the earlier stage your company, the bigger the cost of this distraction, and going back to step number one above, if you think the distraction is going to be significant enough it may not make sense to pursue the acquisition in the first place.
5. Getting the “how” right.
The “how” is probably not the most important step in the process. That is, unless you get it wrong.
You can buy the shares or just the assets, and each one of these have their pros and cons. In the end, the best advice we can give here is to get the best advisors you can. This will surely include separate legal and tax advisors, but may also include many other advisors such as regulatory experts.
The main takeaway here is that you should get solid professional advisors, and in critical cases, make sure that you get more than one opinion as no advisor is perfect.
6. Getting the “when” right.
Timing matters in business, and this certainly holds true in the world of M&A. If this is a distressed asset sale you may only have a few days to complete your diligence and make your bid, whereas in some cases moving slower may buy you time and let you uncover the fact that there are in fact not many bidders - which you can then factor into your pricing strategy.
Or, sometimes you may have identified a good target, but the right strategy may be to wait for market dynamics to change further so that you are in a more advantageous position when making your bid.
7. Preparation matters.
As a startup, it is extremely unlikely that you will be in a constant “M&A mode”. In reality, you and your organization will be spending most of their time growing your core business.
However, even in these circumstances, it will make sense to have one person on your team spending some of their time scouting the landscape of potential acquisitions. The benefit of this is that sometimes when these deals come about they move very fast, and if you have done your preparation, you can move nimbly and quickly, which can be a unique competitive advantage.
M&A, especially during the early stages of a company, is part art and part science. While there is no definitive formula for success, the above considerations can be useful litmus tests. And if you still need to talk to somebody about, you know who to call!
In partnership with our friends at Fiat Growth, we've published a guide on B2B Fintech Go-to-Market to share best practices and provide frameworks to help founders think about what to do and when to do it for all things go-to-market strategy.
A successful acquisition can be a transformative event for a company. Here are seven key elements that every early stage founder should consider.