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Growth through mergers and acquisitions

Sometimes, your timeline and conditions are such that organic growth is just not enough. You may need to grow your software company through acquisition of one of two things: technology or client base.

There are many reasons technology should be acquired. The most obvious is that you are looking to close some product gap. When faced with a buy-or-build decision, sometimes it can be less risky and even less costly to go out and buy the product you need. Such a transaction can be very difficult and requires careful due diligence and a prescribed execution plan that ensures you will attain maximum benefit from the acquisition.

Sometimes, a technology may be acquired simply so as to take competition out of the landscape. Perhaps you are behind the curve technologically and need some time to catch up. Buying a more technologically advanced competitor can not only remove competition but can also help with your learning curve.

It should be noted that in technology acquisitions, it can be a bit more difficult to derive a proper valuation for the company you are buying. Whereas, when buying a competitor purely for their client base, the math can be a bit easier to calculate.

Client base acquisition is a good strategy when you are competing in a space where there are a lot of smaller and less sophisticated competitors. Often times, you may find competitors of yours that may have some small niche. This could be a geographical emphasis, or some small demographic of your client base. Instead of trying to enter a new area within our market, you could acquire a competitor who already has a foothold in that market and folder them under you.

The calculation of a client base acquisition is easier because you can make some assumptions on how many paying clients from the acquired company you will retain or transfer to your product, over time. You can also look at their historical revenue numbers, their pricing strategy, and make some assumptions for maximizing the extracted value from the transaction. You can also compare the cost of clients acquired to your customer acquisition costs (CAC) and loosely determine if you are underbidding or overbidding.

Ultimately, acquisitions of any kind are tricky and require a lot of work. The most important part of an acquisition is not negotiating a good purchase price. It’s the implementation phase. Your investment thesis might be sound and your purchase price might be competitive. However, if you don’t execute properly on the plan, the transaction will not meet its objectives.

This is where very detailed acquisition and integration planning and execution come in. Both the planning and the execution are of paramount importance to your success. When research says that most acquisitions fail, what they are really talking about is that acquisitions fail to meet the buyers’ expectations. This comes down to poor analysis, poor planning, or poor execution.

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