Small acquisitions and acquihires are a more common phenomena that happens due to multiple reasons including access to new technology, access to new markets and building leadership teams. If managed well, it can bring exponential benefits to both the buyer and the seller. However, if you handle an startups acquisition poorly, your business could take on the mistakes of a broken organization and heavy losses.
1. Have a Vision
Before even considering the option of acquisition, understand what is the vision of the company, why are you looking for acquisition and what you plan to achieve. There are multiple reasons due to which small acquisitions and acquihires happen. From the buyer’s perspective it is about ringing strong talent, access to new markets, expand offerings or bring a leadership team. From the seller’s perspective, it is about finding a home or merging with large companies for growth.
Define the characteristics of the company that you think would value your customer base, revenue, technology/IP, people and operational capabilities.
3. Identify the target companies
Make a list of companies based on the characteristics identified in step 2. Create a scoring methodology based on your preferred criteria, to score the identified companies and reach out to Tier 1 companies first that have a high score.
Tier 1 companies generally are the companies that have high funds, a history of making acquisitions and play in the same business segment.
Tier 2 companies are generally companies with high funds, but not so acquisition is friendly. They may not be present in your core segment, but in an adjacent market and may expand in your market.
Tier 3 companies are small companies with minimal funds, but your business can provide them value. They may offer equity or merge with you.
4. Looks for connections to make a formal introduction
Look for people with relevant Job titles in those companies who can be interested in your proposal and identify mutual connections. It can be the founder, corp dev, strategy team or product team itself.
Look for connections in your team, VC, advisors and other companies that can introduce you to the other party. This will increase your response rate significantly and add credibility to your email.
5. Do Your Research and Due Diligence
Create a data bank on the top companies you are interested in. Assess company strategy by reading their blogs, articles, online news and interviews to analyze their business direction, product roadmap and the white spaces that your company can fill in.
This can help you in writing a strong introductory email and can also help you in negotiations.
6. Start the conversation and get the banker help if required
Use the help of your mutual connections to drop an email to the other part. In case of no mutual connections, writing a strong, cold email can also be helpful.
In case of received interest for follow-up calls, sign a non-disclosure agreement between the parties (if you have some intellectual IP).
Consider working with an advisor/banker to drive this process for you. Selecting the right advisor who has experience in your market and geography is crucial here.
7. Conduct Valuation
If both parties are interested in each other, getting a third-party valuation is always useful. Sometimes “buyer” can get the valuation done or can ask the “seller” to do it. They can sometimes share costs between them too.
There are multiple ways to conduct valuation for small acquisitions and depending on your stage, sector and geography, a third-party valuation company can help you with this.
In the case of acquihires, understand the best practices around valuation in these scenarios and use it for negotiations. Stay tuned to our upcoming articles to read more on this.
8. Make / Get a First Offer and negotiate accordingly
Who gives the first offer is always a question. In both the cases, give a reasonable offer based on the funding capacity of the buyer, assets of the seller and synergy generated between the companies.
Keep a room open for negotiations and reach the end where both parties are happy.
Signing the deal is not the end. There are multiple things like post acquisition integration, that needs to be worked upon.
GrowthPal is one of the most unique digital investment banking company with its own AI/ML based deal origination platform. At GrowthPal, we can help you to acquire and get acquired in a right way. Also if you are a company and looking to acquihire early stage start-ups or growth stage startups, we can help you find the right companies for your business. We have a rich start-ups database of fintech startups, Saas startups, IT services startups, D2C startups among many others. Reach out at [email protected] for more details.