Are you a startup? Learn what startups should know about mergers and acquisitions and the major differences.
Startup founders frequently associate mergers and acquisitions (M&A) with “Mad Men”-style procedures that involve dramatic office relocation and pricey rebranding.
However, the reality is that M&A isn’t just for glitzy corporations and doesn’t have to destroy company culture.
In reality, since the beginning of 2021, of 530 startup acquisitions, more than half were startups buying other firms. More startups are hopping on the M&A bandwagon to absorb rivals and benefit from the technology and talent of other startups.
They have also realised that deals don’t always come with high costs and complicated bureaucracy that larger organisations must deal with.
In this article, we will talk about:
- What startups should know before considering an M&A
- What is Mergers and Acquisitions
- The difference between mergers and acquisitions
- Building vs buying a startup
- 7 top lessons a high-growth startup learnt
What Startups Should Know About Mergers and Acquisitions
What startups should know before considering an M&A? Research is crucial before venturing into a Merger and Acquisition, whether you are the one buying or being bought, or you are merging with a company.
You must speak with “insiders” who are truly knowledgeable about the situation. Even a large company with a solid reputation could be untrustworthy and on the verge of collapse.
Researching about the company you want to go into an M&A is essential because;
- You can be forced to use something that is nearly antiquated and out of date. like purchasing GameStop, cassette tapes, CDs, etc., all of which were once popular but are now considered outdated.
- Although the business’s premise may be sound, it may be run by a bunch of utterly ludicrous individuals who are ready to trash it.
What is Mergers and Acquisitions
Mergers and acquisitions essentially involve buying other companies’ cash flow, revenue, and traffic, it is especially advantageous for startups that find it difficult to scale their operations.
As a result, the startups gain a larger market share. Additionally, they offer startups a good way to identify, develop, and test their value proposition.
Successful businesses selling out to global corporations are nothing new. But early-stage or mid-stage firms seldom acquire other startups (perhaps because the relatively low sums spent for the acquisitions don’t generate much of a headline!).
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Mergers Vs. Acquisitions
Two of the corporate world’s most frequently misunderstood terms are mergers and acquisitions. Both names frequently relate to the union of two businesses, but there are important distinctions in their appropriate usage.
| Mergers | Acquisition |
| When two independent organisations join forces to form a single, new organisation, a merger takes place. | An acquisition, on the other hand, is the taking over of one entity by another. To increase shareholder value, mergers and acquisitions may be undertaken to broaden a company’s customer base or increase its market share. |
| For two businesses to legally merge, they must combine into one new entity with a new ownership and management structure (ostensibly with members of each firm). Mergers are frequently made to cut operational expenses | An acquired company does not become a new one. Instead, the smaller business is frequently swallowed up and goes out of business, with its assets becoming a part of the bigger business. |
Building Vs. Buying
It makes sense for a business to purchase or merge with another business that already possesses a technology rather than creating that technology from scratch. Years of development time can be saved with these mergers.
Non-digital businesses have demonstrated increasing interest in digital deals as a result of the emphasis on technology capabilities in recent years and the requirement to obtain such capabilities to be competitive (defined as the acquisitions of digital products and services, new digital business models, and the digitization of the value chain).
7 Top lessons a high-growth startup learnt
The following are the top seven M&A lessons a high-growth startup learned:
- It is not as difficult as you might imagine
- You must have a strategy for integration
- It is crucial to align cultures
- You must encourage people to stick around
- Consider the value of your combined business
- Sek founders who are interested in being part of your story
- Set priorities and exercise patience
1. It’s not as difficult as you might imagine.
You might get knowledgeable about the ins and outs of M&As if you’ve expanded your firm, and comprehended money, and deal structuring. Obtaining funds is simple, despite popular belief.
You can ramp up more quickly by aligning with partners who have a “playbook,” as well as by being smart and strategic when it comes to taking on debt or rolling equity when your business is necessary.
2. You must have a strategy for integration.
You should consider how the new company will fit into your current business before concluding a deal. If you’re a high-growth company, you don’t want to ruin what you purchased, thus the advantages of buying a company should be obvious.
Keep in mind that you’re searching for profitable companies, not turnarounds you can chop and change. The good news is that those target businesses are already efficiently operated and don’t need much work to be optimised, which makes your task easier.
However, make sure to create a 100-day transition plan that will act as a roadmap for both you and the newly acquired business.
3. It’s crucial to align cultures.
You are acquiring more than just a business; you are also adding new employees, offices, and a preexisting culture. To ensure that every team member, regardless of location, has the same experience, make sure that all of those fit with your organization’s culture.
You may experience problems and some degree of dysfunction, for example, if you’re in hyper-growth mode but the firm you’re buying has a more traditional 9-to-5 mentality. Despite not being included in the P&L, culture is a crucial success factor.
4. You must encourage people to stick around.
Just because you purchase a business doesn’t guarantee that the new hires will stay on. Make an extra effort to inspire people and make it worthwhile for them if you want to keep them.
This process will go much more smoothly for you if you’ve put a lot of effort into cultural alignment and an integration plan to address queries and concerns and highlight benefits.
5. Rather than focusing on the standalone acquisition, consider the value of your combined businesses.
Although it may be enticing, the worth of the company you are purchasing alone is not as insightful as the value of your combined businesses.
For instance, some people questioned Instagram’s $1 billion asking price, but Facebook chose to spend that amount because having Instagram in their portfolio was far more valuable.
Describe the value in terms of what it means for your company’s present and future.
6. Seek founders who are interested in being a part of your story.
You’re doing something well if founders approach you and ask to buy from you. You’ve probably put a lot of effort into creating a business and culture that values its partners, employees, and clients, and that exceptional reputation is a great competitive advantage.
7. Set priorities and exercise patience.
It’s simple to get caught up in a problem-solving mode and want to do everything at once in the fascinating and fast-paced M&A environment.
To avoid becoming sidetracked from your main task, you must prioritise what matters most. After all, you are still in charge of a business.
Keep in mind that your acquisition should further your narrative. Be patient and ensure that your company and leadership receive the time and focus they require.
Conclusion
Nothing else compares to strategic mergers and acquisitions for helping you grow your company. You can use the insights above to advance your high-growth startup.
