Start-up acquisitions - 9 questions to ask before heading into M&A
Mergers and Acquisitions ("M&A") can be an effective way for companies to accelerate growth. As tech valuations have plummeted from its heights achieved late last year, it may be a great opportunity to find many "wonderful companies at a fair price", making M&A more accessible and attractive option also for startups and scaleups. M&A is however often easier said than done with reportedly more than 2/3 of M&A transactions failing to deliver the expected benefits [1].
If you're wondering if M&A could be for you, and whether you're ready for it, consider the 9 questions below. If you are not able to answer these 9 questions, you're likely not ready to jump into the M&A process, at least not yet.
1. How does the acquisition fit into your overall strategic vision?
There are many valid reasons to consider M&A as part of your growth plan, including gaining access to new and complementary audiences, technologies, capabilities, team, products, or any combination of these. You need a clear vision, and goals for M&A before going any further with it.
2. Why is M&A preferred over alternative approaches?
There are alternative approaches to achieving the same targets you've set yourself (as raised in question 1 above) and M&A should normally NOT be your first consideration for achieving these.
Normally the answer includes an underlying assumption that 1 + 1 > 2, meaning you expect the combined business after the acquisition to be somehow superior to the two stand-alone businesses separately. In order to achieve that, think how can you add value to the acquired business (and not only what can you gain from it).
3. How will you identify the right acquisition target?
Executing a transaction can take up a lot of valuable resources, and it is easy to get overly vested in the process once you start. To avoid ending up acquiring a company that is not right for you, make sure you create your checklist before you head into the M&A process, and follow up against the checklist repeatedly during the process itself.
4. How will you value the transaction?
Setting a price tag for early-stage companies can feel more of an art than a science... and it mostly is. To complicate further, in transaction processes you don’t only care about what is the business worth as a stand-alone company, but rather:
The transaction will be worthwhile if you pay less than or equal to how much it is worth to you. It is important you understand what determines this value to you.
P.S. Don’t forget to account in also the costs of the acquisition and integration process itself. The total transaction costs, including external advisory as well as internal resource costs can easily amount to 10%-20% of the total transaction value [2], especially if it's your first time executing an M&A transaction, or if you're looking at smaller acquisition targets.
5. How will you finance the acquisition?
It is rather common to pay for the acquisition with a combination of 1) offering equity in your own company (so-called share swap), and 2) cash pay-out, especially in start-up transactions [3]. It is a good idea to consider the available financing and plausible transaction structures as early as possible, as this will determine the maximum size of the business you can consider as a potential acquisition target.
6. How will you run the M&A process?
It is rather common to complement your internal team with external advisers, but you need strong contribution from key internal decision makers and operational teams to execute the transaction effectively. Even if you have the most thorough execution plan put together by industry veterans, it is inevitable that you will face unexpected challenges along the way. Your success in the process will depend on how fast and effectively will you be able to react to these challenges.
7. How will you minimise risks and ensure alignment through the process?
An M&A acquisition is a long-term commitment, and you want to make sure you’re making the decision on the best available information. If planned and executed well, due diligence can help mitigate and value risks, and perhaps even more importantly allow you to test for the strategic fit and signs for the presence of any potential “red lines” early in the process.
8. How will you ensure cultural alignment in the combined business?
M&A will inevitably test the strength of your current company culture.
It is a good idea to consider the founders of the acquired business as your “co-founders” or “co-visionaries” for the future. Make sure you’re ready to be transparent and to open a discussion on common values, vision and business plan with the potential acquisition target early on in the process.
9. How will you integrate the acquired business?
The acquisition does not end at signing the papers - this is where the hard work really begins. Failed integration is one of the main reasons for the reported failure of acquisitions, making it arguably one of the most important parts of the entire process.
If you don’t have readiness to execute on integration, you shouldn’t go for the transaction in the first place.
Closing thoughts
M&A transactions can often receive unproportionately large media attention, sometimes more than they deserve. While M&A can be an effective part of a company's overall strategic growth, it definitely does not have to be. M&A is not the right choice for majority of companies. Hopefully the list of topics raised in this article will help you in the path of figuring if it is something you should and could consider.