10 Things to Consider Before Your Startup Acquires a Competitor

Guest author Scott Gerber is founder of the Young Entrepreneur Council.

Let’s face it: acquisitions are stressful. From audits and fine print to non-competes and company culture, there are many details to navigate before either making an acquisition or being acquired. Add your competitor into the mix, and things can get complicated.

To make sure you’re making the right decision when you acquire a competitor, I asked 10 entrepreneurs from the Young Entrepreneur Council (YEC) what one piece of advice they would give an entrepreneur in this situation.

Have A Narrowly Defined Non-Compete Provision

We have helped with dozens of acquisitions, and one of the biggest issues is whether the seller will be prohibited from participating in competing ventures. If you are looking to acquire a competitor, pay particular attention not only to the duration and geographic scope of the non-compete restrictions, but also the definition of a “competing venture.”

The very last thing you want to do is to provide the jet fuel for your competitor’s next venture, particularly if that new venture will hurt the business you just acquired.

Doug Bend, Bend Law Group

Don’t Be Afraid To Listen

I have only acquired one competitor in the past. When I approached the subject with them, we sat down at a table. I asked him if he’d be interested in selling and just listened. I literally asked 2-3 questions in 2-3 hours. I just listened and he told me everything I needed to know to be able to get the best price possible.

Being able to sit and listen is hard. Ask a question and wait for their answer. Don’t be afraid of silence. After I asked that question, he took almost 2 minutes to answer (silence). I learned some things that I would have never known had I been asking tons of questions.

Peter Daisyme, Host

Do Your Due Diligence

Assuming that you’re already in tentative agreement, make sure that you have a very good understanding of the competitor’s financial position (accounting records should be prepared in accordance with GAAP), tangible and intangible assets, corporate governance, contracts covering business partnerships, legal records and founder agreements, plus HR documentation.

David Ehrenberg, Early Growth Financial Services

Do A Technology Audit

Before acquiring a competitor, or any company for that matter, make sure to do a comprehensive technology audit to make sure that the technical know-how and assets will indeed be transferrable and easy to integrate with your existing technology. This audit usually comes as part of a due diligence process after you sign preliminary paperwork, so make sure to really dive into the details and ask all the technical questions upfront so there is no ambiguity over the value it will bring after the acquisition is complete.

Doreen Bloch, Poshly

Ask Yourself, “Will It Help My User Base?”

Your revenue comes from your users, period. Does acquiring the competitor whose business you’re considering buying actually help them? Does it deliver value to them? The last thing you want to do is alienate or confuse your existing client base.

In a related vein, ask yourself if the competitor’s users will be loyal to your company, or if you’ll lose them as well. You can always build up the flow of business again, but an acquisition that makes you lose months or years of accumulated goodwill from your existing and new customer base might have a much higher cost than just the money you pay for the other company.

Dave Nevogt, Hubstaff.com

Consider All Of The Details

You need to evaluate the pros and cons of the acquisition. You also need to assess how many acquisitions in your space have been successful and added real value to the company’s bottom line.

There are several factors to consider: corporate cultures, technology platforms, integration process and timeline. Why am I considering this specific acquisition and is this something that I can do cheaper and easier in-house?

You also need to consider employee attrition (both physical and mental). Even if acquired employees are subject to lock-up agreements and contracts, this does not preclude them from mentally checking out.

Joseph DiTomaso, AllTheRooms

Trust Your Advisors

Acquiring a competitor is sexy. You immediately become the big fish. Because it’s such an exciting time, the details of the deal often are ignored. Getting the opinions of outsiders and looking at the facts can help temper your emotions. Trust your advisors, and do twice the due diligence you think is necessary.

Matthew Moisan, Moisan Legal

Look At The Motives

Determine the real reason the company is for sale. That might be that the founder made so much money that he wants to retire and spend time with his family, but often that is not the case. People sugarcoat the facts, and it’s often not until too late that you discover a fatal flaw. A customer list alone is not reason enough to acquire, whereas trade secrets, IP and exceptional talent are.

Gideon Kimbrell, InList

Stick to the Cold Hard Facts

Entrepreneurs are very sensitive about their business. They may not necessarily lie, but they will always tell the best version of the truth. Do not listen to stories or relationships, and stick to the cold hard facts. 

Make sure to have a third-party independent auditor go through the books. Meet with employees to get a good feel for the operation. Do not have confirmation bias and believe what you are told without the facts to verify.

Adam Stillman, SparkReel

Look For A Good Culture Fit

Make sure there is a culture fit and that everyone is on the same page. Even if you acquire the company for its product or its customers, the success of the acquisition will ultimately come down to how well the two teams merge together. Before making any final agreements, talk about what the future will look like, get both executive teams on board with the vision and make sure this attitude trickles down to all employees.

Ben Rubenstein, Yodle

Photo by Daniel Oines

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