How To Know When To Buy A Company
“I’ve made a huge mistake.”
It’s funny when G.O.B. from Arrested Development says it, but not when you say it yourself shortly after acquiring a new company.
Since I’ve been CEO at Ivanti, we’ve acquired 10 companies. Those companies range from over $100 million in yearly revenue to just over $1 million. And I’d say that nine of those 10 acquisitions have been a success.
That isn’t always the case. At a previous company, we acquired a lot of companies and ran them into the ground. We had a very strong culture, we were very process driven, and we knew who we were. As a result, it was hard to bring someone in from the outside. Especially if they had an entrepreneurial mentality from a startup, for example. Needless to say, most of those unsuccessful acquisitions ended with people leaving the company.
Our culture was so strong that it was rigid. We didn’t look at ‘how can we merge what we both do well’ when we acquired a company. It was more about ‘you have to do it the way we do it.’ Something that never works.
Our CMO tells a story about an acquisition he was involved in as the acquiring company. They were getting ready to sign the final documents and went out to dinner. The CEO of the company that was being acquired snapped rudely at a waitress for not bringing béarnaise sauce immediately. Our CMO looked over at his colleagues and immediately knew that they had made a terrible mistake. They could tell from that single interaction over dinner that the acquisition was going to be difficult.
So how exactly do you know if you should buy a company? How do you know if you’re ready? And what are the factors to look at when you’re considering buying a company? In my experience, here’s what you need to know.
Read The Fine Print
There are three things every acquiring company must consider: the culture, the maturity, and the market share.
Culture is huge. When we do an acquisition we look at the culture—not only of the management team, because they will often leave the business first—but the first line managers and the people on the ground. That’s the culture that has to mesh. And it’s not always the same culture found among the execs and the ground-level employees. The executive team at the company you’re considering buying can have a very different culture, set of values, and priorities than the actual people doing the work.
Then there’s maturity. At Ivanti, we find that we are more successful when we acquire a fully-formed business rather than when we acquire a startup. One of the reasons is that when a company our size―$500 million a year in revenue―buys a small company―only $1 million a year in revenue―it becomes very hard to get internal buy-in from our teams regarding the importance of that technology, and of that company.
That tiny company isn’t moving the needle in terms of revenue and we have a hard time focusing on it. And so the acquisition’s failure becomes a self-fulfilling prophecy. When you’re considering a company, make sure that they sell the product in the same way that you would sell a product. In other words, the sales motion has to match. Your sales team must put that product in their bag and sell it. Otherwise, the acquisition will fail.
Finally, if you want to buy a company that does the same thing you do because you want to consolidate the market and get more market share, that’s difficult to execute on.
Recently, we’ve experienced this with a major acquisition. Naturally, you want to rationalize the products because you can’t continue to support and develop two products (or more) that will do the exact same thing. But the customer base is used to doing things in a very specific way, and they like their current product. I’m talking about everything from basic UX/UI to functionality, from training to the invoice process, and even how they’re training their employees to use the product.
Customers don’t want to change. It is a fool’s errand to say ‘we’ll get them to migrate to our product after the acquisition.’ It just doesn’t work. It causes them to go look at the competition and you may wind up with a high attrition rate.
Get All Your Teams Involved
It’s important to know everything before you sign the deal. You don’t want to buy a used car only to find out that someone crashed it into a tree a few months before or stashed a body in the trunk for a few weeks. Involve a broad team at your company to help evaluate the possible acquisition. Sacrifice secrecy for in-depth analysis. We can do that as a private company, obviously, but you can’t do that if you’re a public company.
However, involving a broad group of people does two things: First, it allows various disciplines within your organization to evaluate the deal. That means the chances of ‘missing something’ are far less likely. The CMO, for example, could see something that the VP of product may not. And the legal team might see something that the finance team could miss.
Second, when you finally execute the deal you have more buy-in because your team will feel ownership and will want the acquisition to succeed. This works much better than just a handful of people knowing about the acquisition until the press release goes live. We bring a large management team to the acquisition table. This surprises other companies, but I believe that’s a huge reason why nine of our 10 acquisitions have been wildly successful.
Be Aware Of Differing Attitudes
When someone goes to work at a startup they see visions of dollar signs dancing in their heads. Here’s the problem: the big multi-million dollar exit rarely happens. Most startups fail. Most that don’t fail only get acquired for a fraction of what the employees hoped for and very few people make significant money.
That means one of the things you may have to deal with is people who assumed they’d get $2 million when their company was acquired… and instead, only got $8,000. They’re annoyed. They’re frustrated. And they definitely aren’t motivated to work. They were sold the dream of equity, and most of the time that dream underperforms. Some people can’t handle that and won’t make the transition.
To assuage frustrations, we try to focus on the positives of working for a larger company. We can provide better compensation, better benefits, more opportunities for innovation inside the company, better access to resources due to scale, and even the opportunity to live internationally.
Growth vs. Profitability
Growth is like a drug. The high-growth company is sexy, gets a lot of press. and makes you feel cool when you buy it. But keep this in mind: it’s very difficult for a company that isn’t used to actually making money to suddenly start making money.
A lot of acquiring companies want to buy a high-growth company with the thought that ‘once we acquire them we can make them profitable.’ As Lee Corso of College Gameday says: “not so fast my friend.”
It’s tough for a company to figure out how to grow and be profitable. My experience is that if a company doesn’t know how to make money and they are only focused on growth, it’s hard culturally for them to flip the switch. They can’t just suddenly figure out how to start making money. If a company is losing a lot of money, even if they are growing rapidly, we walk away. Because it is extremely unlikely that they’ll ever have the discipline needed to actually be profitable.
Ultimately that’s for you to decide. Do you have a strong enough, but pliable enough culture to absorb new employees en masse? Do you have an accurate vision of the products and processes you want to integrate? Do the finances make sense? Do you have enough information about the company you’re buying?
We’ve had great success acquiring companies that fit nicely into our IT software portfolio here at Ivanti. But, we also pass on more deals then we consummate. Buy with caution so you don’t turn into G.O.B. from Arrested Development and make a terrible mistake.