There are many books that discuss big mergers and acquisition integration work, but acquiring a small business requires a different strategy. Small companies are difficult to buy, but they can have tremendous benefits to the acquirer over the long term, which has been proven over and over again in Silicon Valley.
That said, they rarely work out if they are done opportunistically. If you are buying a company solely because you are being opportunistic, you most likely won't take the time to follow the steps below because the focus is only on "getting a good deal." It's rare you are actually getting a good deal, just because you think you found a good deal.
Having bought a number of small companies and frankly having sold my companies to bigger companies a number of times, I have found the following eight steps to be essential in this process. For most acquisitions that work, the buyer feels like they overpaid, and that they put way too much effort into these steps. It's a higher price to pay during the process, but those are the deals that actually end up working in the long run.
1. Determine exactly what you aim to purchase
When you're buying a small company, you may be buying the business either for its talent or the intellectual property to apply to your business. If you're buying the business, you need to keep that business separate at least for 18 months and let their team develop on their own with minor points of integration. Let them have their own success with their own leadership team. If you're buying the talent, quickly move that team off the existing product and inject them into your business.
2. Respect the existing products and the customer relationships
Whether or not you plan to keep the existing business, or are moving the talent into your own operation, you must respect what that team built in terms of product and customer relationships. This is what they sold their soul to for two or maybe three years. If you upset their customers or dismiss their product through a lack of respect, you are going to end up with a lot of very frustrated engineers on your hands. Even if you only wanted the team, there is a chance they will want to leave because they are embarrassed about what was done to their product.
3. Decide who will stay and who will be let go
In my experience, if you are buying a high-growth company in the Internet space, typically 15 percent of that team will leave. Ensure you retain the other 85 percent.
You and the selling company should know immediately who you will want to stay and who you don't mind losing. If you do not want certain members of senior leadership, then make the decision early on. Treat them with respect but make the decision early. Any person beyond the 15 percent that you lose should be seen as a failure because everyone plays a critical role in the DNA of a small company. So take the 15 percent loss and work to not lose anyone else.
4. Don't focus on inconsequential issues
This ties to above -- keep as many team members as possible, and never lose people over inconsequential issues. Do not change processes such as benefits, or other small things that really aren't going to change the financial outcome of the company. Remember this is a growth asset and is not an efficiency-driven acquisition for the most part. Do not mettle with things that don't really matter.
5. Put a short-term material retention program into place
It will indeed be a tough period for current employees. There will be change. To help quell employee fears, put into place a short-term material retention program. Remember they just lost their hope of changing the world a little bit so it is critical to get them through that period and to a point where they buy into you as their new leader. Putting a short-term incentive program or retention program in place helps ease that transition. It is important to remember that the retention program needs to be material, and at least be as big, or double, as their expected bonus. This will help the transition period, and help retain your new talent.
6. Implement a long-term incentive program for the employees
Once you have the short-term in place, you need to put a long-term incentive program together that appeals to the hope employees had before. You are investing for the future value of the acquired company, so be sure not to undervalue top talent with low long-term incentives. This is important, even if it changes the final deal price.
7. Intermingle the employees on a specific basis
To build that cultural bridge, take a handful of employees and strategically switch them between the two teams. This doesn't necessarily mean integrating the teams; still keep them separate, but take your CFO and make them your acquirer CFO. Or take their HR person and put them on your team. This intermingling of teams at a strategic level begins the overall integration that you'll eventually do 18 months down the road without pushing the boundaries of messing too much with common policies, common development environments, etc.
8. Dedicate a full-time position to specific people issues
Finally, the most important point in any deal is that it's the CEO's job is to make sure the deal is successful. In my opinion, most deals fail over people issues. I believe one of the most important things to do is to identify one person in your company and make their only job to gauge the temperament of the overall acquisition. Is the buyer team happy? The acquired team? Take one person and have them measure the success of the acquisition by focusing on turnover, measuring the innovation now taking place, gauging the new cultural fit -- having someone report directly to the CEO will make them think about those issues everyday, and understand what is truly going on within both companies.
Ben T. Smith, IV is CEO of Wanderful Media, a startup reimagining the digital circular with >Find&Save. He is also a Venture Partner at Accelerator Ventures and co-founder of MerchantCircle.com and Spoke.com. Ben blogs at btsiv.com, and you can follow him on Twitter at @bentsmithfour.
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