The Art of Acquisition Comes Down to 4 Essential Variables
The number of mergers and acquisitions is soaring. Transaction volumes increased 70 percent in the first half of this year, and deal volumes have reached more than $1 trillion for the first time since 2007.
My company, CallidusCloud, has acquired eight companies in the last 20 months and dealt with a lot of entrepreneurs. Whether an entrepreneur is looking for his or her company to be acquired or interested in acquiring another firm, a thorough assessment of the enterprise in question is vital.
It all boils down to considering the guiding principles of the four Ts -- team, technology, traction and trajectory, as follows:
1. Build a team.
To find a company’s pulse, ensure that everyone, from the administrative staff to the CEO, holds unique characteristics that add value. Most important, the CEOs of both companies and the executives of the development, customer-success and sales departments should be able to answer deep questions about their products, clients and financials.
Remember there’s no one-size-fits-all type of entrepreneur. Some entrepreneurs with whom I’ve worked have founded six or seven companies, while others have been first-timers. One telltale sign of weak leaders however, is when a lawyer runs the transaction for a company and has all the say in every clause. Lawyers should be there to provide guidance but not run the show.
2. Possess the technology prowess.
An investigation of the company being aquired must examine how defensible its technology is -- an undertaking necessary to protect the growth potential and subsequent acquisition potential of the enterprise. If a company can do something that's relatively difficult but easily understood while using technology that it owns, then it has created a technical barrier that protects its value.
The technology involved -- or the intellectual property -- can be a design, a line of code or a process and will vary by industry and organization. For Coca-Cola, it's the secret recipe. For Pfizer, it's the formula for the latest breakthrough drug. Regardless of the type of intellectual property, every business should prioritize its protection. Is the intellectual property fully owned by a business? If not, then the acquisition may need to be reconsidered.
3. Assess the traction.
The company targeted for acquisition should show progress in terms of profit and demonstrate a healthy momentum. It’s a matter of finding balance. Don't underestimate a company solely on the basis of the fact that it's small and unknown.
Conversely, don't overestimate a company for being well-known and having a growing team. Look at the product or service and ask, Is this the best of its kind? Does it solve an industry problem? And does it have the potential to be the best in the industry? The more focused the enterprise the better, rather than its being a jack-of-all-trades.
4. Plan the trajectory.
Take a look into the crystal ball. What's lying over the horizon is just as important as what's currently happening. Take out the binoculars and if it's possible to see potential in the distance, then that's testament to how well a path has been laid.
A paper trail of accounting, taxes, agreements, contracts and transactions should be generated by every business, especially those in the early stages. When it comes to setting a company's valuation, tread carefully during the funding stages by not accepting too much venture capital.
Too often, entrepreneurs find themselves locked up in a deal, with venture capitalists not wanting to retreat from controlling a stake in the company.