On April 8th, I had the privilege to host the second of two successive weeks of M&A panel discussions: the first was about getting acquired, and this one related to being an acquirer. The panelists included Mike Potter, CEO and Co-Founder of Rewind; Erin Crowe, CFO of Martello Technologies; and Scott Simpson, CEO of bitHeads.
These entrepreneurs and executives, ranging from VC-backed to public companies, have a number of acquisitions amongst them, with varying levels of success. Below are some of the key takeaways that these exceptional executives learned from their acquisitions.
Set Your Strategy
First things first, you have to determine your strategy to determine if and how inorganic, strategic growth by acquisition figures into your overall revenue growth plan. Develop your strategic reasoning around areas of greatest interest and focus for the company, and why an acquisition might be preferable to building or partnering. One effective way to do this is to define your core capabilities within the overall market in which you operate, sketch out growth vectors, prioritize those growth vectors based on market size, growth rate and competitive pressure, and finally identify your closest adjacencies along those growth vectors.
Some of the reasons you may want to look at acquisitions include: taking out a competitor to increase your market share or your pricing power; expanding your product footprint; accessing new customers, channels, market sectors, or geographies; getting access to top talent; acquiring intellectual property; or purchasing intangible assets, to name just a few. Overall, acquiring is a feasible and strategic option for building and growing a business that most investors will value on par with organic growth.
Build a Pipeline
Once you have defined your strategy, including prioritizing your growth vectors and market sectors of interest, you can be both proactive and reactive. A proactive approach would typically include surveying the market, identifying potential acquisition candidates, and reaching out to them to learn more about their businesses and willingness to consider being acquired. This might be undertaken by your CEO, CFO and/or a Corporate or Business Development representative, potentially with the assistance of a buy-side investment banker or advisor. On a more reactive basis, a company (or, more likely, their sell-side investment banker or advisor) may reach out to your company regarding a process they are running to be acquired. In these cases, you will want to assess them against your strategy to determine how strong a fit they may be for you.
Ensure Alignment
Irrespective of whether it is as the result of a proactive, strategic outbound approach on your end or a reactive response to an incoming inquiry that meets your requirements, a strong degree of mutual fit is of the utmost importance for an acquisition to be successful. The concept of fit can cover a number of different areas of the business, including your growth strategy, technical stack, and culture to name a few.
Founders and CEOs of selling companies can often have requirements that go beyond the negotiated price of the transaction, which may include the existence or not of an earn-out and its structure, the amount of time required for the CEO and other key members of the team to be retained with your company, what the functional reporting structure will be post-acquisition, and any expectations around the retention of other employees in the company. It is not unusual for founders and CEOs of acquired companies to have challenges integrating into an acquiring company, and it is essential to surface and proactively address these issues for all concerned.
Due Diligence Thoroughly
The due diligence phase enables the acquirer to verify that the company they are acquiring is as they are representing themselves to be, to identify and mitigate risks and to finalize the provisions of the purchase and sale agreement. While there will often be a lot of pressure on timelines and from a lot of different constituents to move the deal forward, it is critical that you surface and address risks – whether it be through indemnities, warranties, other provisions, or elements of the transaction structure such as purchase price, earn out amount and timing, or escrow amount and timing to name a few possibilities. Failing to adequately identify and address potential risks could put the acquirer in a situation where the value of the acquisition is significantly deteriorated through unanticipated customer or employee churn, uncovered or unexpected litigation, or excessive technical debt, just to name a few examples.
The due diligence phase is also the appropriate time to work together to draft the post-merger integration plan. Doing so in collaboration with the company being acquired will enable both parties to ensure that there is the desired level of cultural fit, especially given how frequently cultural challenges can be the source of acquisitions not meeting expectations.
Integrate with Excellence
Integration is key to any successful transaction. In a Bain and Company survey, two out of the top three reasons given for disappointment with acquisitions were related to integration. You will want to co-develop, with the leadership team of the company being acquired, an integration plan to ensure an organized transitional period. Once the transaction has been closed and during the integration period, many employees may feel uncertainty regarding their future career, making it essential to continually check in with them.
Best practices mentioned by the panelists include assigning an individual who reports in to the CEO to oversee the integration and holding regularly scheduled integration updates, which can reduce in frequency over time. Many acquisitions may also require a transitional period in which the CEO of the acquired company aids with the adjustment; if there is no ongoing role for the CEO, this period will generally last between six months to one year.
Top Tips
At the end of the session, each of these successful entrepreneurs provided their top tips to entrepreneurs who may be looking at acquiring a company in the near future:
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Mike Potter: costs will likely be higher than initially expected; consider assigning an integration manager to facilitate the transfer of knowledge going forward; and acquiring can be viewed externally by investors as a viable path to growth.
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Erin Crowe, FCPA, FCA: don’t underestimate the potential cost of acquiring; begin envisioning the integration prior to closing the deal; and ensure you have the right advisors from the start.
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Scott Simpson: Ensure proper due diligence and risk mitigations throughout the entire transaction process; and know what you could be getting into.
The notion of acquiring a company is exciting and done right, can generate significant upward momentum for your company. However, an acquisition is not a panacea; the devil is in the details and acquisitions are much more nuanced and challenging to get right. Indeed, the proportion of acquisition that fail to meet the intended objectives demonstrate the criticality in investing the time to ensure the fit is right, identifying and mitigating risks, and preparing for and executing on integration, especially in the area of company culture.
If you are an Ottawa-area founder or CEO, feel free to reach out to me, Invest Ottawa or any of the CEO panelists if you are working through your strategy and considering acquisitions as an avenue to growth.
My name is Alexander Rink. Drawing upon over 20 years of experience growing early-stage companies, my team and I help CEOs and Boards of Directors of companies from $1M to $25M in revenues identify and resolve strategic and organizational challenges to accelerate their company’s growth in a capital efficient manner.
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