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Navigating your first acquisition can be both a terrifying and thrilling experience. Growth is one of the core goals of every startup, and making the right acquisition can be a game changer. At the same time, the odds aren’t in your favor, with studies suggesting that two out of every three acquisitions fail. So how can you ensure that your first attempt at inorganic growth isn’t your last?
At DesignCrowd, we’ve acquired three businesses in the past five years and experienced the good, the bad, and the ugly that inorganic growth has to offer. Here are some of our key learnings on what you can do to give your company the best chance of success.
Be crystal clear on your investment thesis
In my experience working as an advisor on mergers and acquisitions for large listed companies, I was gob-smacked at how often executives from the same company would express different views on the rationale for doing an acquisition. How can you hope to have a successful acquisition when you are unclear about what success would look like?
An investment thesis is a clear and concrete statement about how the acquisition will add value to your company. A good investment thesis will contain specific objectives that advance the overarching strategy for your business. It’s something you should be able to capture in one or two sentences and something that everyone on your leadership team can articulate in basically the same terms.
The investment thesis is the backbone of all your acquisition (and post-acquisition) activity. It is not only used to inform your data-collection efforts before completing the transaction. It’s the measuring stick by which the success of the acquisition should be subsequently tracked and judged.
Identify the “threshold issues”
Your investment thesis is a hypothesis that needs to be tested by examining the key (threshold) issues that will impact your ability to realize value from the deal. Before embarking on due diligence, take time to identify these key issues and map out what data you need to collect to evaluate each issue thoroughly.
Focus your diligence efforts on these threshold issues, rather than developing an understanding of absolutely every facet of the business you’re looking at. Threshold issues are for every acquisition, as they’re inextricably linked to your investment thesis. That said, some common threshold issues include customer economics (growth rates, acquisition costs, lifetime value, churn), staff capabilities (breadth, depth, engagement), and cultural fit.
As a startup, the possibility of breakthrough growth can be very seductive and can influence your ability to think objectively about the deal. In addition to having a clearly articulated deal thesis, you need to find ways of staying objective when evaluating whether or not to proceed with the acquisition. Think of yourself as a judge, weighing the facts and data that you have before you, rather than a principal who really, really wants to do a deal.
It’s also useful to have multiple people involved in due diligence. Gathering different perspectives and being open about potential concerns helps to ensure objectivity. Create specific checkpoints in your diligence where you review the threshold issues with your team and make a formal go-or-no-go decision. Always return to your investment thesis and gauge whether proceeding with the acquisition will still deliver value as you had expected.
Invest time in communication
So, you’ve made it through diligence, and you’ve decided to proceed with the deal. At this point, it’s easy to become laser-focused on nailing the operational aspects of executing the transaction, but getting the communications right for all stakeholders — like customers, employees, and your board — is no less important. The most perfectly laid integration plans can be blown to pieces if your communication isn’t timely, transparent, or empathetic enough.
Acquisitions mean change, change creates uncertainty and uncertainty creates resistance. Communication is the antidote to this nasty post-purchase toxicology. Building a robust communications plan for all stakeholders will help you to reduce uncertainty and get buy-in. Put yourself in their shoes – what questions would you want answered if you were them? Use this lens to inform the content of your communication and create space for them to ask you questions openly and directly, as this process helps them to participate in the change, rather than feel like victims of it.
Doing the deal is only the beginning
“To buy or not to buy?” is only the start of your journey. Acquiring a company and realizing the benefits of your acquisition are two different things. Achieving the objectives of your investment thesis will hinge on how you approach integration of the new entity.
Most startups are used to traveling at the speed of light, but faster isn’t always better when it comes to integrating a new business. Integrating most companies takes time and ongoing effort. As a starting point, it’s useful to deeply understand what you’ve just bought, before charging full speed ahead with integration. You will also need to dedicate resources and attention to these post-acquisition activities, which can be really challenging in the context of a startup, where so many projects demand your attention. Be realistic about your integration timeframes given everything else you need to tend to.
Chris McNamara is the chief operating officer at DesignCrowd.com, an online graphic-design marketplace that recently acquired Worth1000.com. He previously worked in mergers and acquisitions as a consultant with Booz & Co. McNamara holds a master’s degree in business administration from the Stanford Graduate School of Business.
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