How to Grow Your Startup by Acquiring a Business

Most startups focus their growth efforts by finding a way to grow their business organically. They use innovative marketing tactics, often called growth hacks, to gain customers quickly. While organic growth is usually the best way to grow a startup, you can also grow your business by acquiring competitors.

Buying your competitors can be an effective way to grow your business, and often overnight. It allows you to buy the clients and the resources of the company you are acquiring. However, acquisitions are a double-edge sword. The wrong acquisition could easily put you into insolvency and out of business.

5 areas to examine before considering an acquisition:

  1. Are their products and client base a fit?

Consider buying only those competitors whose products and client base fit well with yours. Examine their product matrix and compare it to yours. Do their products complement or compete with yours? You must ensure that you can create a cohesive product offering that matches what your intended clients need.

Then, look at their client base. Will your new offering be a good fit for them? Will you be able to cross-sell any products? In most cases, the main “assets” you are acquiring are clients, product and skill-set. Be sure that you make the right choice.

  1. Are their employees a fit?

Most acquisitions come with employees. Are those employees a good fit for your company culture, skills requirements and compensation structures? Will you be able to manage the new teams and get their support?

Identify key employees from the company you are buying and craft a strategy to retain them. Integrating both employee bases can be very difficult. Animosity in these cases is not unusual and can prove lethal.

  1. Is their location compatible?

The importance of location varies by industry, and many startups allow remote employees. That arrangement may seem to make location less important. However, the location of certain teams with respect to your headquarters is critical. Disparate locations may make consolidating operations in the future challenging, especially if you choose to close an office.

Early in my career, I was involved in the acquisition of a small company that complemented ours. We worked in a small industry and were lucky because the acquisition target was only an hour and a half drive from our headquarters. While it was not a short drive, it allowed key executives to work in both offices regularly. This proximity made company integration much easier.

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  1. Are their financials acceptable?

The next step is to review the acquisition target’s financial situation. Examine their books to see if the company is profitable or not. If it is not profitable, determine why and decide if the acquisition will bring enough synergies to turn the situation around.

Assess their debt structure and determine if your company can support it. Also, find out if the debt can be assumed and if it’s guaranteed by the current owners. It is best to bring in a financial specialist to help you with these matters. Your CPA should be a good resource. 

  1. Do you have the financial resources to buy them?

Lastly, determine if you have the financial wherewithal to buy them. The most common way to finance a small business acquisition is through an SBA-backed acquisition loan. While easier to get than conventional loans, these loans often have complex requirements. One important detail to keep in mind is that business acquisition loans require that you contribute at least 10 percent of the purchase price. Establish how you will pay this amount (it cannot be financed) before you begin looking to acquire a company.

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