Want to Supersize Your Business? Buy Another – CB

The journey from thought to IPO is a troublesome one. In this five-part sequence, we have a look at how founders scaled their startups and reached new milestones.

Robert Hyde realized he wanted a brand new technique.

“We can create new products, but it takes a lot of energy and effort to build and launch a product, and there’s only so much you can do at any given time,” says Hyde, the CEO of Payment Source, an organization that gives various cost options. Payment Source received its begin promoting pay as you go cost playing cards and vouchers when it first launched in 2014, and it rapidly expanded its product choices to handle tax funds in addition to facilitate e-commerce funds and digital wallets for retailers. But that successful technique might solely take the corporate to date. “You get to a point where you can get stuck,” he says. 

So Hyde appeared to a different technique: development by acquisitions.

“We kind of naively said, ‘OK, let’s go buy a company,’” Hyde says. “But we didn’t have a good sense of who we wanted to buy, why we wanted to buy them, even who we should consider.” In reality, pursuing development through M&A introduced an entire new set of questions to contemplate: How might the corporate establish the correct targets, and what did they should do to make sure a profitable acquisition? 

Hyde’s not the one founder who has discovered himself navigating this house. Amid the present gloomy financial situations—rising rates of interest, inflation and wages, in addition to financial uncertainty pushed by commerce wars and geopolitical battle—some leaders are eyeing M&As as a development technique. And for good motive. According to PwC’s 2023 M&A Outlook, “the fastest way to transform a business is through M&A, divestiture or other deals.” 

But creating a method for acquisitions could be intimidating, particularly for first-timers, says Dennis Ensing, an skilled entrepreneur and C-suite govt who has been concerned in over $500 million of financing and M&A transactions over the previous decade. “Often, when CEOs think about doing an acquisition, the companies they get introduced to may only be a fraction of what’s available and may not be at all consistent with who they should be looking at,” Ensing says. 

That’s why they want a plan.

Find your “why”

For many firms, acquisitions are a route into new worldwide markets. Virtual healthcare and wellness platform Dialogue acquired U.Ok.-based wellness platform TicTrac final yr, whereas cell retailer administration software program firm Tulip bought Boston-based retail SaaS firm Blueday Inc. and California-based scheduling and useful resource administration system Timekit. 

But many founders don’t take into consideration an acquisition technique till the chance to purchase one other firm comes alongside—which implies they’re often extra excited by making a selected deal work than making certain it makes strategic sense. This is the precise improper method to pursue M&A, Ensing says.

Instead, firms contemplating M&A necessity a transparent sense of their business methods, and the way and the place an acquisition will help them obtain these targets. Some firms may be seeking to improve their income by buying an organization with a complementary product to allow them to entry new prospects. Others could also be searching for a brand new product to supply their current prospects. Or, they might be struggling to rent expert workers. In these circumstances, concentrating on a selected firm for an acquisition can be utilized as a recruitment technique. This could be useful in sectors the place expertise are in excessive demand (assume generative AI specialists), nevertheless it’s a tough technique to tug off—it may be very unsettling for individuals to work at an organization that’s getting acquired, which will increase the danger of extraordinarily precious workers leaving simply after the deal is accomplished. 

“That’s why we really want leaders to sit down and do their homework,” says Ensing, who now works intently with promising tech firms at MaRS Discovery District, serving to them execute dozens of profitable mergers previously decade. “They need to be able to explain if an acquisition makes sense to achieve their strategic objectives.” 

Ensing factors to his most profitable deal, the place his govt staff at TransGaming efficiently argued for pursuing a selected firm by demonstrating how it will add income, improve income and actually have a multiplier impact on the corporate’s valuation. In the tip, the acquisition did ship a triple profit to the corporate’s backside line.

Identify your standards

Once a CEO determines the strategic causes to pursue M&A, they’ll have a clearer understanding of what sort of firm they need to go after. Many Canadian firms look to accumulate one other Canadian business. If the objective is to enter a brand new market, nevertheless, it’d make extra sense to widen the search.

There’s additionally the problem of what an organization can afford to spend. But there’s no rule of thumb to find out how a lot an organization can stand to spend money on an acquisition, Ensing says. “Affordability largely is about the experience they have integrating an acquisition, available capital and/or financial leverage and post-closing cash flow.”

Startups ought to take care to not overpay. A latest Financial Times article argued that, regardless of the oft-quoted stat that 70 per cent of mergers fail, thereby destroying worth, firms are spending increasingly more on M&As, to the tune of $5 trillion in 2021. It’s but another excuse to prioritize technique.

Write an M&A playbook

Next, firms have to make a plan—and formally doc it in a playbook. Hyde’s features a breakdown of Payment Source’s standards based mostly on the corporate’s strategic targets, a transparent profile of the perfect goal, the steps the corporate supposed to take throughout the acquisition course of and the deliverables related to every step. He additionally rejigged the corporate’s group construction to create a brand new place, chief development officer, in order that there was an govt answerable for Payment Source’s acquisition technique.

Your playbook must also embrace an integration plan, Ensing says. This ought to sort out what the due diligence course of will appear to be, the way you’re going to deal with cultural integration, who can be answerable for integrating the 2 companies, what governance will appear to be, in addition to any dangers or points that your integration staff might want to look out for. 

Start your search

Once firms have finished the pre-work they will begin searching for potential targets. Even then, it may be difficult to establish strong leads. Security software program firm BioConnect employed an advisor to construct an algorithm that will assist establish the perfect goal. Chairman and CEO Rob Douglas wished to zero in on firms with extra conventional worth propositions targeted on one-time hardware-only gross sales and with house owners of their late 50s and 60s who didn’t have a brand new technology to go their companies on to. His logic was that these kinds of CEOs have been possible waiting for retirement and could be extra open to having a dialog about M&A. This standards yielded a protracted listing of potential choices that wanted to be narrowed down. 

As a part of the choices of the MaRS Momentum program, which goals to assist promising startups cale to $100 million in income, Ensing stepped in to help each BioConnect and Payment Source by producing a brief listing of potential targets and even performing some outreach on behalf of every CEO. None of the prospects he recognized for both firm have been listed on the market—in any case, most profitable offers outcome from a sequence of delicate conversations with fellow founders who might not have ever thought of promoting their business. 

During these delicate conversations, it’s vital to transcend the apparent due diligence and get to know the leaders, says serial media and know-how entrepreneur and MaRS volunteer advisor Roger Parry, who’s a boss of a number of firms, together with YouGov and Oxford Metrics, in addition to non-executive director of Uber UK. “To reduce the risk—and there’s always a big risk — you need to really try and get to know your target well,” he says. “You need to understand their motivations. You need to understand their objectives. And ideally, your own management team should, if possible, talk to some of their customers and suppliers to really understand how that business functions before you actually consummate the deal.”

So far, BioConnect has accomplished two acquisitions and it’s seeking to make a number of extra over the approaching years. But it might take some time to search out the correct candidate. 

“That’s one of the reasons why we tell companies to start to build your thinking early around how and where M&A makes sense,” Ensing says. A roadmap is crucial in serving to founders perceive how an acquisition will help obtain their company technique—and when it’s simply not proper.

“Some companies get lucky and something comes along that is a perfect fit, but this is an iterative process. I don’t think you really know whether your playbook is up to snuff or not until you start evaluating some candidates. That’s why it takes time.” 

MaRS Momentum program works with high-growth Canadian firms to speed up their path to hitting $100 million in income. Is your business Canada’s subsequent anchor firm? Find out extra and apply to hitch this system.