The journey of building a tech firm is filled with milestones.
First hire (first fire). First big investment. First big client.
However, what’s not often talked about is the milestone of making your first acquisition.
I realized this as I helped navigate more than 60 merger and acquisition (M&A) transactions, over the last 20 years.
Recognizing an acquisition opportunity is just the first step in what can be a long and complicated, yet extremely rewarding process. Just how long of a process will depend on the size of the companies involved, but there are always many moving parts.
Many technology, SaaS, and managed services firms, as they evolve, look for other companies to strengthen their offering and fuel their growth. What I’ve found is that the “when,” “why,” “what” and “how” is not always clear. Here are a few things we’ve learned together, over the years.
Be financially ready (and stable).
First and foremost, if you are going to start an acquisition, you’ll need the financial capacity to do it.
Your business needs to be in a healthy place, generating revenue with strong product-market fit. This is where a financial valuation shows you where your gaps are in determining this. An accurate value determination requires careful analysis of assets, a keen understanding of the business and industry, and the application of the most appropriate methodology (from the many available) to arrive at a Calculation of Value.
There’s plenty of people who might offer to value your company. Accountants, business brokers, and business advisers can all get you a financial valuation. The question you need to ask is this: “Do I want to have a valuation done that overvalues me so I end up being disregarded by potential buyers and investors?”
Despite their best efforts, the chances of an accurate financial valuation are low. Getting undervalued makes you easy prey for the shrewd investor looking to capitalize on your mistake. Statistically, people’s expectations of value are off by an average of 27%. A valuation is a small price to pay to get it right.
Determine if it’s the right time to acquire.
Beyond the financial capabilities, you also need the capacity in terms of team size and traction to make it successful.
Acquiring another company can seem great from the outside looking in but it’s a ton of work. The integrations of a new team, processes, billing, operations, delivery, and customers brings a lot of challenges, especially if you are not staffed appropriately to handle them.
Don’t underestimate just how time-consuming and resource-intensive acquisitions can be.
The other element on timing that is usually overlooked is your overall financial and operational maturity. What many buyers fail to grasp is the seller will resemble the buyer’s financial and operational maturity in 12 to 18 months.
This means that if you are an average performing firm and you buy a top performing firm you will diminish the value of your acquisition. The reverse is true as well. If you are a top quartile firm, then you should buy an underperforming firm for a lower transaction value and they will resemble your organizational maturity and you will be the one harvesting the transformation.
Ensure the company is the right fit for you (treat this like a marriage).
If your tech firm is equipped to make an acquisition, the next step is to figure out what type of company to acquire.
At iT Valuations, we take you through a process where we build a buyer’s profile then pursue prospects based on your cultural alignment, marketing alignment, and geography. Our process is straightforward, and in 6-12 weeks we’ll find you a possible acquisition target through this process:
- Out-bound calling and email campaigns
- Screening call campaign.
- Sign Non-Disclosure Agreement.
- Buyer/Seller introductory meeting.
The goal is to make sure that you get in front of sellers who add accretive value through increasing your existing offerings, or improving them, and increasing your total market opportunity.
Once your team and ours has identified a potential seller for you to acquire, we now spend time getting to know each other. You should want to know things about their culture, their values, their strategic roadmap, sales and marketing strategy, and their vision.
Your pending acquisition might make sense on paper, but that doesn’t mean it’s a match made in heaven. Acquisitions are rarely clean and simple – it’s the most unnatural transaction in business, with countless facets to consider.
As an example, If the two companies have radically different leadership styles, it could be hard for the employees on one team to adjust to life under different management and leadership styles. In short, if you wouldn’t hire the individual to your company because of cultural mismatch then you probably should buy their company.
Everyone on the same page (it has to feel natural).
For you to feel great about your acquisition, communication is key.
Take your time to outline the right roadmap from an integration perspective, and don’t rush it. Then, once this is developed, you’ll want to communicate this to your internal and external teams. As you implement this process, it should feel like a natural fit.
Once the ink is dry on the transaction paperwork, there will be pressure to unlock value, but you don’t want to diminish the value of what you’ve purchased. This is why a roadmap is so key. You don’t want anyone to feel blindsided, or rushed because of missed expectations or a lack of communication.
At iT Valuations, we help firms like yours determine value when it matters most, so you can be successful in acquiring other firms as a part of your growth strategy. Click here to get started.