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An 'Acquisition Aficionado' Offers 3 Tips on When to Cash Out vs. Double Down

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What do , and Medtronic have in common? Each acquired a dozen or more technologies and companies in its path to category leadership, and such acquisitions are becoming the norm these days. Certainly, most companies are not hitting record growth rates through organic growth alone. In fact, in 2014, global were at their highest level in seven years.

Related: LinkedIn Buys Another Startup, Its Largest Acquisition So Far

I concur with this trend: In my experience, building companies through a careful combination of organic and inorganic growth is the best approach to scalable and systematic growth. And I follow that philosophy close to home: In less than two years here at Welltok, we’ve made four small acquisitions.

Going back further, I've actually been a kind of acquisition aficionado. I offer as proof the approximately 50 mergers, acquisitions and divestitures I’ve been involved with through my positions as an executive, a member of boards of directors, the founder (and seller) of TriZetto and a consultant. So, you might expect that I’ve learned a few lessons along the way. Here are some of them: 

1. Decide: Should you acquire or be acquired?

Strike a level of intellectual honesty. Ask yourself whether what you offer is a product, a line of or a that will win in a sector? If your is growing at a sustainably fast rate and the are supportive in fueling the business forward, you are in the position to consider becoming an acquirer.

Alternatively, if your business entity provides a customer-accepted product or solution that you spent many years refining -- but the growth rate isn’t capturing the imagination of the capital markets -- your business is more likely in line to be acquired.

The other time to consider putting up the for-sale sign is when you are enjoying a fast growth rate, but serving only a relatively small niche in a bigger play market. Even if your business entity is doing well, at some point you might think about selling to a larger organization with the available resources to further the vision. Finally, a business that presents a sustained value proposition to the industry it serves -- even if it's not currently growing or is even on the decline -- could be an acquisition candidate. 

2. Take steps to keep the founders on-board (assuming you want them).

Often, CEOs or investor groups will oust co-founders upon an acquisition due to the pre-conceived notion that those individuals are unmanageable cowboys who will be disruptive. In contrast, I believe that true entrepreneurs still have a lot of potential value to contribute after they “sell,” even if those contributions occur as part of a new regime.

I’m proud to say that four out of the original five co-founders of the company I am currently leading are still full-time employees; so are the founders of our three recent acquisitions.

This philosophy of retention is part of what I call the “abundance theory”: These talented entrepreneurs are being enabled to continue to build their vision, by being given the fuel and the capacity they need to take their mission to the next level.

Co-founders typically have a very distinct and essential role that caters to their individual strengths and passions. If given the freedom to continue work on their vision, they can create localized “tribal cultures” within the organization which then play to these co-founders' domain expertise, and provide them a space for inventiveness. With their common vision and with our mutual respect, these individuals have the power and resources to achieve and drive big goals.

Related: Make Your Own Luck and Get Acquired 

3. To build, buy or acquire: Know thyself.

Often, a team will start a company with a good business idea, the background to serve a particular industry and connections to make their dream a reality. Yet, very few entrepreneurs ask the right question early on: What is the real size and potential of this business?

While some may already have the mindset to become a big company or a true category leader, many others seek to be a category disruptor that will cause just enough irritation to get themselves acquired. A lot of entrepreneurs, in other words, build companies to sell them; but they do it too soon or too late. It is usually within the first couple of years that the relative return for the amount of effort invested in a company is at its highest.

Yet once some new business starts generating over $10 million in revenue, things start to get real. The higher the valuation, the more it will become subject to rational valuation tests, and the more likely it will be that the company is forced into a certain type of exit. Whereas, a bootstrap company that generates revenue and has a profit model that makes sense can quickly sell for single-digit millions. Which is at least enough reason for many entrepreneurs to move on to the next big idea.

There are obviously many factors to consider when an acquisition is in play: operations, financials, resources, , cultures, etc. Though it may seem like an oversimplification to say so, I offer the advice that you first consider the strengths of the people in your organization and whether you truly have the capabilities and skills to accomplish what you’ve set out to do.

Then, look at the more quantitative financial implications. Many times, companies do the inverse and make their decision solely a financial one. However, what you should be doing is looking at how to effectively advance your company’s aims, while evaluating whether other entities out there will do better if they are part of you -- or you are a part of them.

Related: How This Techstars Startup Got Acquired Before It Officially Started Up 

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