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Successful M&A Strategies for Startups M&As can act as a massive growth engine, but deals must be carried out strategically to avoid the high failure rate.

By Tom Livne Edited by Russell Sicklick

Opinions expressed by Entrepreneur contributors are their own.

2021 saw approximately $5.2 trillion worth of mergers and acquisitions. What's more interesting is that this total previously never reached even $4 trillion a year. The technology sector continues to dominate in this realm. There was a 133 percent increase in global M&A to reach $888.2 billion USD of announced deals for the year, an all-time high.

M&As have been a massive growth engine, a true locomotive for growth of companies throughout the last century. Simply put, they do the job. M&As are accelerators for growth, but they entail substantial risk and challenges. Study after study shows that between 50 percent to 80 percent of M&A deals fail. Many acquisitions fall short because executives often incorrectly match targets to the deal's strategic purpose.

Strategic considerations from the start

M&As are designed to address different needs — to acquire talent, customers, product capabilities, to increase their total addressable market (TAM) and more. When entering into such a process, you need to start with a few key items:

  • Selecting the right targets for acquisitions: Will this target company help to fulfill your strategic needs and path? Are you looking for geographic expansion, offering expansion, competitor elimination or a combination? In Verbit's case, it was vertical expansion and penetration. We considered how AutomaticSync and VITAC would allow us to increase our footprints in the education and media verticals.
  • Deciding how you'll manage the integration process: How multiple companies become one is a combo of science and art. There are unification steps you must take, such as having a joint financial system. However, you need to understand if you want the new company fully integrated or to remain as a standalone. There's a significant difference in how you integrate new companies (this is the art), as there's no one size fits all. So you'll need to define organizational capabilities and strategies.

There's a paradox at play. Growth via M&A is essential to boost revenue and your presence. But, with the poor statistics on M&A success in mind, company leaders must understand what new possibilities this acquisition will open. They'll need to analyze the risks and identify exactly why they're doing the acquisition. Don't become another junkie for growth and lose sight of the execution. Ask yourself: What is the deal rationale? What is the deal structure? How will I/we achieve success in translating these needs into implementation?

Related: Mergers & Acquisitions: What You Need to Get Right

Key considerations to make

  • Sharing the same vision: Ensuring the company you'd like to acquire is talking the same language and shares the same vision is critical. Alignment of your mutual interests is the key. What are the goals you're both trying to achieve and how can you incentivize each other or help to reach those goals? This process of checks and balances must happen. Company leaders will never see eye to eye on everything. You need to create a mode of agreeing and ensure that you have a similar mission and path forward to achieve it together.
  • Getting the deal approved: How will you appeal to your board of directors? How can you best focus on the deal rationale and getting it approved? Having 1:1 meetings with each investor to explain why you're excited, as well as the value creation is key. What is the value for your shareholders and how can you showcase the classic 1+1 = 3 to them? Articulating the potential of the deal, how you'll source and screen it, what diligence you'll do and if you'll have a PMI (post-merger integration) team in place will all help you greatly.
  • Ownership: It all starts with a corporate development team. Someone must own and run a selection process and align it with your company strategy. The owner of this initial process will conduct research and investigation to uncover relevant companies and then cherry pick based on defined criteria. Then, once they've approached the company about an M&A, another process begins which will start to involve a different owner or set of owners — a PMI team. Establishing a PMI team can greatly help to ensure the integration is laid out clearly with identified KPIs (key performance indicators) to measure. The people managing the PMI should be the same people managing the due diligence. At Verbit, once we shifted from initial talks with the target companies and into due diligence, we engaged our PMI people then, not later. Then, when the deal is near to being closed, the PMI team is already looped in. They can begin communication for the announcement, as well as day one activities, month one activities and high-level PMI planning. Assigning ownership to establish teams, manage the process, make consolidation and synergy calls and streamline is essential for success.
  • Value creation and synergy realization: In addition to how you'll finance the deal, you'll need to translate the value creation for shareholders and what dictates it. The people helping you to execute the M&A must look into what synergies can be applied with the acquisition, and how you'll measure the success. Is it low employee turnover, price reduction or integration of products acquired with your current product line? Is it about capabilities that will change your product or scale it? How do you plan to integrate it into your current tech stack?
  • ID revenue synergies: How will the combined company or mutual relationship work? How will the combined company create additional revenue? Is it that Company A sells Company B's solution and vice versa?
  • ID creation of new offerings: How can the acquisition boost your existing solutions? The idea of combining Verbit's cloud technology with VITAC/SOVO's on premises solution created substantial value. It allows us to train people remotely, hire remotely and get work done remotely, which all translates into revenue. Bottom line, how can you sell more? Applying Verbit's sales and marketing machine and customer success strategy to AutomaticSync was tremendous in creating more opportunities. In turn, AutomaticSync has a GSA license (important to government agencies), which allows Verbit to expand and sell more to the government sector. Look to see how you can utilize resources and capabilities to simply sell more.
  • ID bottom line synergies: Focus on efficiency and come up with a combo to reduce costs and improve margins and profitability. How can you leverage existing platforms or make others redundant. You don't need to pay Salesforce or AWS for multiple company accounts when one unified platform can fulfill all needs. Look to consolidate systems to have one truth and one platform. It will translate to cost savings with decreased expenses and improved profitability.
  • Define operational and organizational effectiveness: Look for best practices to apply across the companies. Everyone wins when you take what you have already and use it to improve other companies you own. For example, Verbit implemented a learning management system to train transcribers and has a community management solution that creates dialogue among them. These tools make for professional, better transcribers who are highly productive and engaged and are being applied to our other brands.

Cultural clashes can be the make or break

Pay attention to the soft aspects. So you've closed the terms and conditions, decided how you intend to close from a strategic sales and marketing perspective and everything is on the right track. The problems start with the human aspect — the cultural aspects.

There can be differences in the national culture (for us it was the Israeli vs. American cultures). Paying attention to nuances and being more patient and tolerant of others' cultures is key. So, we hosted cultural workshops with our employees. Then, there's the corporate culture differences. Verbit as a startup with intentions to grow internationally was not the same as AutomaticSync, a company that works leanly. VITAC is an impressive 35 year-old company with legacy and experience and Verbit is a five year-old vibrant, jumpy and competitive company. There are bound to be clashes, so you need to pay attention. You may have the same vision as your target, but different modes of thinking. You need to ensure both corporate cultures are aligned in a productive way to grow into one company with a combined culture. Finally, there are personal and interpersonal cultural considerations. Collaboration and relationships must be based on professionalism, mutual trust and respect, but keep these cultural differences in mind.

Related: 4 Steps for Communicating a Merger to Employees

Defining a successful way forward

Look for ways to minimize the risks of reduced satisfaction and commitment of your employees, and even suppliers, to avoid churn and revenue loss. Acquisitions aren't easy for the people involved and can present huge change for people, which can lead to turnover.

Aim to be transparent with your employees, with acquired employees and with all customers on both sides whenever possible. Look to your HR team to focus on people-first initiatives. Find ways to unify everyone. Aim to minimize some changes being felt, but also lean into and showcase the positive changes. At the end of the day, be present and give all employees opportunities for their concerns to be heard. Conduct town halls and the like, which will keep them feeling more at ease and a true part of the exciting growing company you're building.

Lastly, an additional challenge to expect, and which may guide behaviors, includes earnout. Once individuals earn what was promised, they can tend to care less, which can hurt you. Getting the earnout structures correct and establishing a maturity process will also be massively helpful in addition to all of the elements above. Verbit is using an earnout mechanism, essentially a purchase price adjustment in the company acquisition contract. This allows for part of the purchase price due to the vendor to be paid out in the future. Enlisting this approach allows Verbit to secure continuity, secure revenues and ensure that the business replaces hands effectively and efficiently.

Related: Things That You Need to Know About Mergers and Acquisitions

Tom Livne

Entrepreneur Leadership Network® Contributor

CEO and Founder of Verbit

Tom Livne is the CEO and founder of Verbit, the world’s leading AI-based transcription and captioning platform. As an active investor in promising tech companies, he holds vast domain expertise in enterprise software, as well as tech-enabled and SaaS businesses.

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