Acquisitions: AWESOME or a huge mistake
In the life cycle of your business, it’s natural to find yourself at points where making an acquisition, or being acquired, becomes a point of conversation. The idea of buying and expanding the empire, or selling and sailing off on a yacht, have both had a pull on me at various points, and acquisitions are a means to those fantasy endings.
I’m not going to be talking valuations and other details here, though I’d love to connect if you want to talk specifics, shoot me an email.
In our own decade of existence we’ve entertained such opportunities multiple times, and have actually completed a handful of acquisitions and one divestiture. While each has been different, they’ve all been incredible learning experiences, and I hope to help you learn from our mistakes and avoid some common pitfalls.
Types of Acquisitions to Consider
Acquiring a competitor
This is one of the most common types of acquisitions and has the benefit of being in a product/space that you already know, which should reduce some of the complexity risk. However, sometimes acquiring the competition can create monopoly concerns and lessen client goodwill. It can also be a little too familiar and not encourage you to fully challenge your team to look at things through a fresh lens, which can be one of the big benefits of acquiring and injecting new life and perspective into a product or business. Another big negative of this type of acquisition is that it does little to diversify your revenue streams, if you were making all your money selling a widget and now you’re selling two similar widgets, you haven’t really reduced your risk that widgets may go out of style.
Acquisition to diversify
This should be further down your business path, but at some point you may find yourself looking to diversify out of your main product/segment into other businesses to stabilize your future income. You’ll come at it with less direct expertise, but also fewer pre-conceived ideas that may keep you from trying new things. While this doesn’t give you the easy lift of acquiring in your existing space and realizing economies of scale, if done well, it can allow you to even out seasonality or reduce other dependencies you may have in your existing business.
Acquiring Talent/Team
One of the most potentially exciting benefits of an acquisition can be new talented team members and even if this isn’t something you’re looking specifically to do with an acquisition, team fit should absolutely be considered. The very best acquisitions bring talented new team members that give lift to the entire organization, conversely a great product purchase can be undone by terrible team fit and can actually risk the entire company culture! Something we haven’t always done well when considering acquisitions is the team fit component. I recommend interviewing as many team members as feasible ahead of an acquisition to identify potential problems and opportunities within the future staff before finalizing.
Unexpected opportunities
Most of our own business buying and selling has actually fallen into this category, we weren’t really looking to purchase or sell, but an opportunity presented itself and we were open to the idea. That’s the biggest take away here, be open and be ready. By open, it simply means that we don’t hold any of our products so sacredly that we can’t imagine a life after them, and by ready we mean we have legal and financial guidance at hand, and sufficient resources to act when opportunities present themselves. While being ready and open have been huge drivers of our success, we’ve also gotten better at knowing when to say no quickly, rather than chasing every potential rabbit trail.
Things to Consider When Looking at Acquisitions
Take some time to think about possible best and worse case outcomes. Where will you be if this blows up in your face? What are the best outcomes for the acquisition? Don’t underestimate the opportunity cost of focus creep! Like building a home, it will often cost more and take longer than you originally budget. The best acquisitions are usually the ones that have been the most fully vetted, where all sides come to the end with clarity and understanding of the benefits and risks.
Impact to Cashflow
Often we start entertaining an acquisition because we believe it will add revenue and income, while the revenue piece is easier to confirm, the income side can be a challenge as you’ll inevitably find unexpected costs and challenges. Don’t assume that just because you have a marketing team that you can cleanly fold in the marketing of this product, accounting, etc. If there are good reasons to move forward even if it doesn’t mean a financial windfall, you may be onto something worth further exploration, on the other hand, if it looks too good to be true…you know the rest.
Impact to Culture
I mentioned it in passing earlier, but let me restate, your culture will be impacted by adding people and/or products to your team. You must be aware of this and work hard to make the impact positive and not allow new and different cultural elements from the acquired have an outsized impact. When possible, you should work hard to deeply integrate the teams and remove silos, which will allow culture to permeate more fully and quickly. It will take intention to help new team members who already have allegiances to fully embrace the new reality, and not everyone will, that’s a topic for another day.
Impact to Focus
At the end of the day, this is the sneakiest of the challenges that an acquisition can bring, and the reason we’ve actually been on the sell side before. For us, our best work happens when we can laser focus on a small set of problems and solutions, the more options we have, the less effective our progress. If you decide to expand via acquisition, know that you’ll be moving a lot of focus initially into the transaction, and then into the important work of integration and running a larger business with more moving parts. That could mean that you actually slow down, and not necessarily just to then speed up, in a worst case outcome, not only does the new business or product not provide lift, but it adds drag and things can go the wrong direction. This is why it’s due diligence and deep understanding of the potential risks and challenges is so important; and why NO is often the best outcome.
All of these areas to consider may make it sound like I’m against buying and selling, not at all! In fact, I believe some of the most exciting opportunities ahead of us are in work related to businesses that someone else has started and we’ll one day take on, but we’ll do it with our eyes wide open and ready to roll up our sleeves for hard work.