M&A strategy: 5 great reasons to acquire a company
For startups and mid sized businesses hungry for growth
I’m Jo. I’ve spent 15 years in business and corporate development, working on deals worth over $100M. Follow me for more on growth strategy, deals and M&A.
We’ve all been there. Questing for growth and coming up short. Sometimes a well placed acquisition can be a solution (not always, but sometimes).
While most acquisitions, especially for big businesses, are prompted by a drive for empire building. However, there are times when more chivalrous and rational reasons are the force behind M&A.
Generally speaking, acquisitions are hard. Operationally. Financially. Legally. Culturally. Psychologically. But that’s a story for another day.
Today, let’s look at the 5 golden rationales that almost always lead to positive outcomes. Not to mention, get investment committee’s on board with your vision for them. Because let’s face it, ‘it’s a unicorn’ isn’t going to cut it.
Spoiler alert, Leonardo Dicaprio, Ninja Turtles and Imagine Dragons ahead.
1. Buying funnels
The first rationale is buying funnels. Funnels are the sales engines of a business. At a basic level, this is anything that creates top line synergies. Scaling organically is resource and time intensive. Building sales and marketing teams alone can take 12–18 months from green light to firing on all cylinders. It’s impossible to have a 100% batting average when it comes to hiring and getting the right people on the bus, and then in the right seats, takes time, patience, courage, and money. Once you’ve got them, building performance and social funnels from scratch, and optimising them to deliver, is a long and strenuous process demanding constant attention and iteration to deliver. Often this all needs to be replicated when growing internationally and into new products, as the need to calibrate to different customers arises.
In comes the acquisition. It allows you skip that whole ramp up and just bring in ready made funnels. They’ll come with their own content and distribution engines, relationships, email lists, and everything else you need to use them.
Take the asset’s funnel engine, plug in your product engine, and you’re off.
Strategically, if you’re a mid sized player, merging with another mid sized player is an effective way to rapidly overpower the market leader. Similarly, buying a top player in another market gives you access to a whole new funnel. If there’s targets with customer funnels in complementary verticals, that’s a brilliant way to extend your ecosystem with a ready made funnel. This works in B2B and D2C. It’s effectively buying relationships. Emails. Customers.
The rationale for a funnel acquisitions is simple to quantify. Unit economics and customer insights allows clear comparison of key data points between your business and theirs. The gaps is the opportunity. These types of acquisitions hinge on:
- Customer lists. Clean and simple, these are warm or hot leads for future sales, cross sells, and up sells.
- Conversion ability. A funnel starts with addressable market and gradually gets shaved down to cold leads, warm leads, prospects and sales. Each of those is a conversion moment. Your acquisition target may be better than you at any or all of the conversion points.
- Accelerating scale. Sometimes your model will only work at a certain level of volume. Getting there organically is always possible but can take more time than you have run rate to support. Buying funnels gets you there faster and enriches your cash generating capacity.
Watch out for looking at too many data points. You want to understand the 3–5 KPIs that matter for your business and focus there. Decide them up front before looking at the target’s numbers to avoid being swayed.
And in the name of love of money, don’t ditch the target’s sales and marketing teams as ‘synergies.’ The team and the funnel are one so retain that team as long as you can. If you need to optimise to make the case work, look at trimming your own team. This rationale turns to dust if you ditch the people that build and operate the funnels to begin with. Bake in 3 years of knowledge transfer in the business plan.
2. Buying efficiencies
You may have killer funnels but be loss making. Exploring targets that have efficient product or service delivery is a strong way to level up what you do. The case is even stronger if the business has weaker funnels than you. This becomes a clear case of putting a strong sales engine together with a strong delivery engine.
Look for synergies in 3 places:
- Asset, investment and capex efficiency. So many things can be built once and monetized across an increasingly larger base. This works when you’re building similar assets or capabilities and can combine forces to tackle the problem jointly.
- Optimising opex. An acquisition may allow you to combine and remove a material portion of opex. Good contenders are licences, locations, software maintenance, research, agency services and brand marketing. Anything that you need to spend anyway but becomes more and more efficient with scale.
- Reducing marginal cost. If you’ve found a business that delivers your product in a more efficient way at a unit level, you can bring that in house and replace your own methods. Tightening up efficiencies is a never ending quest.
All efficiency led transactions shine in the detail. This is meticulous work in scrutinising unit economics and cost base. Understanding process, tools, and teams plays a huge role, as efficiencies are often driven by interplay of many things. You want to get under the skin of how the target does what they do so you can bring that in house and have them do it for you.
If you have any questions, most can be addressed with this Disney clip.
3. Buying cash flow
While funnels are about revenue generation and efficiency is about cost optimisation, cash flow is pure value extraction. It’s the orchestration of rationale 1 & 2. I’m calling it out separately because it’s distinct. Acquiring a cash flow generative businesses can be the equivalent of securing a funding round that comes in over time. Not all businesses with good funnels generate substantial cash. Not all efficient businesses generate substantial cash. Not all business that do both generate substantial cash.
Cash generation is a unique cocktail of pricing, product/market fit, funnels, efficiency, working capital management, supply chain, and demand.
The value these assets bring is two-fold. First, they have nailed the blueprint for cash and, safe to assume, to do so have tried everything imaginable. Now that they’ve hit the holy grail, rather than churning through that process yourself you can tap into their human capital and experience and access it. Acquisition gold. Second, you’re buying funding. They’re a cash generator. Buy and don’t break, and you’ve secured a credit line that never comes due.
Ever seen Wolf of Wall Street? It’s like buying this guy.
4. Buying people
This one can be one of the most challenging for an investment committee to understand. Why can’t you just hire?
Buying people isn’t about buying individual talent. It’s about buying the collective ability to fire on all cylinders. It’s about a squad that delivers in a way you can only dream of. You can hire talent, but you can’t hire chemistry. One of the biggest challenges CEOs and founders face is building a team that has it. You can’t force it and it’s a product of the individuals involved, other individuals around them, the product, the market, and leadership. And steering development of chemistry is hard.
That’s why acqui-hires can be attractive. You skip the searching, building, pivoting, manevering, breaking, fixing, and mixing. It’s an ensemble that’s been through it, and you get the benefit of deploying them on your vision.
There are 2 really challenging things about buying people, or acqui-hiring.
- Getting an investment committee to understand the need. Building the case is challenging because it’s often hard to substantiate. There may not be a compelling revenue, cost or cash case. And they’ll want you to hire instead. To get this through the best route is showing them what will be forgone without the investment. What progress will look like without this acquistiion. Make them feel the pain you will face. Try demonstrating the timeline to develop this team organically vs buying it. Show the business impact of that delay on revenue, customer KPIs, & delivery. Financial and non financial. If there’s a chance a competitor would buy them, include that, and show what the benefit will be to the competitor and how far back that will place you. And, importantly, show where this team is better than your (check the ego, skipping this step will often lead to the brunt of the picture you’ve just painted being placed on you.)
- Integrating the team. This acquisition type is about buying the secret sauce. The chemistry. The culture. You’ll need to think long and hard about how to integrate them into the day to day of your business. Have long and hard discussions with the target about the reality of your business. Don’t just paint a rosy picture trying to seduce them. They need to know what they’re getting into both to assess whether it will work for them and to get comfortable with the idea of what it will be like. Have them spend time with your team, push yourself to be more open and transparent than is comfortable. Don’t be worried about scaring them away, there’s something here they find compelling otherwise you wouldn’t have made it this far. Trust that. What breaks the integration isn’t usually the reality of the acquirer’s business. It’s the target’s miscalibrated expectations. So help them calibrate.
5. Buying a speculative strategic foothold
Sometimes you face an opportunity that is hard to quantify.
The target doesn’t make any money. They have high costs. They operate in a market that you don’t fully understand. When you look at the business, you struggle to call it that. Maybe there’s in a space that feels overhyped. Or maybe it’s so nascent it’s pre-hype and you’re onto something so early it’s terrifying. While there are very few assets in this world that can truly go to 0, you realize you’re looking at one that can.
But it’s grabbed your imagination, and while you can’t make a case to justify any valuation rooted in data, you also see there’s a potential this thing could 10x. Or 100x. Or completely revolutionise your market.
So you can’t ignore it either.
You need to do 4 things:
- Don’t put all your eggs in a speculative basket. Unless you’re a specialised fund taking a systematic approach, make sure you box in the amount of funding you’re willing to spend on uncertain projects to something you’re comfortable losing entirely.
- Present it as acquiring an option (yes, just like derivatives). You’re buying the option to succeed in something. If it turns out to be nothing, you’ve sunk some money. If it flies, everybody gets one hell of a bonus.
- Run the numbers. You can’t just leave it at intangible — it’s bad form and the act of searching for something quantitative will in and of itself deliver valuable intel. Substantiate your rationale with market trends, generational behavioural cohorts, and case studies. Play the logic out. You need to rationale a decisions made based on belief. An investment committee won’t give you a green light without that.
- Don’t forget this is a decision made on vision. On belief. This is the stuff of fairy dust and you’ve going to have to hold that belief through long periods of darkness before it pays off. Speculative acquisitions fail for one of two reasons. Either the market doesn’t pan out or the market doesn’t pan out before you lose interest. Pick these types of acquisitions for the long haul or you’ll find yourself running away licking your wounds minutes before it 10x’s.
Speculative strategic acquisitions are always about vision. They’re about beliving in what you can’t yet see. They’re about deconstructing the status quo and replacing it with a view of the future that is fundamentally different.
And they feel like this…
Let me know any questions below.
Happy buying and selling.
