How To Acquire Competitors – Eliminating Threats To Accelerate Growth

Learning how to acquire competitors is crucial for entrepreneurs looking for tactical approaches to scale their companies. Buying out a strong competitor can not only eliminate a contender for your market share, but also bring other advantages.

Thanks to one less seller, you’ll expand your customer base and integrate technology and IP to gain that elusive edge. Higher sales ultimately translate into increased revenues and profitability, thus accelerating growth for your brand.

Although acquisitions are an excellent growth strategy, you’ll execute this move carefully, preferably with the advice of an expert consultant. You’ll plan each move, from identifying the right candidates for acquisition to completing the transaction and ensuring a successful integration.

Keep in mind that acquisitions drive value and allow you to grow vertically and horizontally. However, a failed deal can be expensive in terms of costs and loss of reputation and credibility. You’ll consider several factors before diving into this approach.

A notable example of a failed M&A transaction is that of AOL and Time Warner, which was worth $350B. Had it been successful, the new company would have quickly become a powerful media and internet company. However, several challenges led to the failure of the acquisition.

Significant cultural differences and strategic conflicts impacted the merged company’s financial performance. The dot-com bust also contributed to the problems. Eventually, Time Warner and AOL had to dissolve the partnership. The lost merger resulted in losses worth $99B in 2002.

This deal is known as the most considerable corporate loss in history. So, how to acquire competitors and ensure successful integration that will allow you to extract maximum value? Read ahead for an overview of the crucial aspects to consider when planning an acquisition.

Evaluate the Proposed Acquisition Carefully

This is clearly the most critical step in the process–evaluating your acquisition candidates carefully. You’ll analyze the business to identify potential synergies that will add value, along with the areas that need work. Also, explore the cultures and operational frameworks in both companies.

The ultimate objective of the acquisition is long-term success, so you’ll ensure that it aligns with your business strategy. Asking the right questions will help you uncover information that indicates whether the two companies are a good organic fit. Here’s what you need to ask:

How will the acquisition contribute to expanding the product portfolio?

Does the target have some USP that makes sense to purchase? Focus on its core strengths and the reasons that prompted a purchase consideration. It could be unique product features, disruptive intellectual property (IP), or exceptional customer service.

Isolate the USP that threatens to overtake your brand and how you can integrate it with your own. You’ll also work out the potential revenue increase once the integration is completed successfully.

At the same time, don’t forget to run an estimate of the runway you’ll need to incorporate more products into your portfolio. If required, you’ll set aside adequate funds to invest in tools and upgrade the facility to expand production capabilities.

What is the anticipated increase in market reach and customer base?

Does the target sell to a dedicated customer segment? If it commands robust brand loyalty, it could split the customer base, making it challenging to gain an upper hand. By creating a unified brand, you could consolidate the fragmented market and perhaps even expand it.

Work out an estimate of how to streamline operations and integrate the customer base with your own. Running a quick survey could help you understand how customers will likely view the merger. Check if the combined brand will increase their confidence in its ability to deliver what they need.

You’ll also analyze the potential for future acquisitions, horizontal or vertical, to grab a bigger market share. That’s part of your strategy when determining how to acquire competitors.

Does the target have unique technical expertise in terms of talent and skill sets?

Are they capable of developing new technology and product features that can overtake your brand? What does their core team look like? Research the people working in the target company for data about their success track record. You’ll also examine its R&D capabilities and manufacturing facility.

Don’t lose sight of the objective behind the acquisition, which is to eliminate a threat. Accordingly, you’ll examine the areas where the target has a clear advantage. And how purchasing it will transfer that advantage to your brand.

At the same time, you’ll ensure that customers will likely be receptive to the newly formed brand. You’ll need aggressive marketing and convincing messaging to communicate that it includes the best of both participants in the merger.

How long will it take to capitalize on the synergies?

What is the expected timeline before synergies are realized and the merged company starts to generate higher revenues? Integration can take anywhere from three to six months, but this duration can be longer. Several factors contribute to delays, such as the size and complexity of the companies.

The scope of their operations, cultures, product portfolio, and human resources management are only a few of the moving parts. Aligning each aspect and getting it up and running is a time-consuming process. Particularly when you want to maintain continuity in operations to serve customers.

Although careful planning before the acquisition can speed things along, be prepared for delays before revenues start to pick up.

What is the overlap?

When two companies operate within the same vertical and are competitors, they likely serve a similar customer base. They could also manufacture similar products or share distribution channels. But M&A transactions are typically about taking advantage of synergies.

Synergies occur when you can leverage the acquisition’s assets and advantages to grow your brand. However, you may have to let go of some of the overlapping assets during the integration. Your team will analyze the areas with duplicates and eliminate the less efficient ones.

These areas may include human resources, machinery, tools, equipment, and premises. Although you’ll liquidate the unwanted assets, too many overlaps can lead to a waste of resources.

For instance, when firing redundant employees, you may have to offer severance packages and compensation for option pools. You may also have to break leases for premises and equipment, which can cost more. Make sure the costs make sense when measured against the gains.

What do the target’s financials look like?

When following the steps for how to acquire competitors, you’ll likely assign a due diligence team to examine their financials. The initial focus is always on the target’s profit and loss statements, balance sheet, and revenues. But you also need to analyze its costs and expenses carefully.

These liabilities will transfer to the acquiring company. Accordingly, you’ll examine the accounts payable, debts, and inventory, paying special attention to insurance payments. If the target pays more than the usual premium, that could indicate hidden liabilities you should explore.

When analyzing the accounts payable, check if they are adequate enough to offset the target’s debts. If they aren’t, you might want to rethink the acquisition.

Get an Accurate Valuation of the Target

The typical techniques for valuing a company are similar to when you’re ready to raise funding. Your accountants and lawyers will likely use one of the four primary methods, such as:

• Market Multiples
• Discounted Cash Flow
• Adjusted Book Value
• Economic Value Added

Each method has its pros and cons, so you should select the one that most closely aligns with your vertical. Also, remember that, unlike in fundraising, a company targeted for an acquisition cannot be evaluated solely based on its cash flows.

Conventional valuation techniques may not be able to demonstrate or quantify the target’s inherent values comprehensively and accurately. You must consider several other factors, such as the current market conditions and similar competitors in the sphere.

Don’t overlook the target’s potential for growth if it had not come up for an acquisition. That being said, let’s talk about the next step–exploring the seller’s exit strategy.

Keep in mind that storytelling is everything in fundraising, mergers, and acquisitions. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that founders worldwide are using to raise millions below.

Delving into the Seller’s Exit Strategy

When understanding how to acquire competitors, it’s crucial to delve into the seller’s reasons for exiting the company. A seller will likely upsell their company by talking about its core assets, such as top-notch talent and impressive valuation.

Their negotiation will center around IP, an excellent customer base, and market reach. But you must get behind the scenes to understand if the company is underperforming. Is the target facing issues like financial difficulties, high employee turnover, difficulty in customer retention, or cybersecurity?

Sellers often choose to sell their company when they’re ready to retire or as an alternative to raising venture capital. Others think the company is not ready for an IPO but needs strategic partners to assist with growth. Understanding the seller’s motivation will help you negotiate for a fair deal.

You’ll also be in a better position to identify and avoid potential pitfalls. Monitor market conditions closely and the possibility of the target’s products or IP becoming redundant soon. Ask yourself–if this is the opportune time for the seller to exit the company, is it a good time to purchase it?

Explore the possibility of the founder/seller staying on as a consultant with the newly formed company after the deal. You could benefit from their expertise in scaling the company. Maintaining a great relationship is crucial, as are open lines of communication.

Focus on building trust and communicating your commitment to the new company’s long-term success. Understand the seller’s priorities, perspectives, and vision. Strategies like these will ensure the transaction and transition progress seamlessly.

Conduct Due Diligence Thoroughly

The importance of this step cannot be stressed enough. You’ll put together a team with consultants who are experts in their respective fields. These professionals will examine and analyze every aspect of the target company to identify the risks.

Remember not to rush through the process and give your team enough time to do their jobs. They will unearth some of the typical red flags that can potentially kill acquisitions. Once this step is complete, you can use the results to negotiate the terms and conditions of the M&A deal.

Iron out details like the purchase price, payment framework, warranties and representations, transfer of IP ownership, and more. Also discuss future relationships with employees, investors, ongoing contracts with existing clients, and other stakeholders.

Resolving issues at this stage ensures that the acquisition proceeds smoothly and you minimize potential risks.

Whether you’re raising funding or acquiring a company, you should know how to navigate the due diligence process. Check out this video in which I have explained in detail how it’s done.

How to Acquire Competitors – Work Out the Financials

When acquiring a company, you’ll undoubtedly focus on its financials and look for any discrepancies and issues. Interestingly, the buying entity should also have a robust balance sheet and financial statements. Further, both participants in the M&A deal should have the same NAICS code.

Understand that the NAICS (North American Industry Classification System) is a standardized system used to classify business establishments based on their primary economic activity in North America. Countries that must comply with the code include the United States, Canada, and Mexico.

Acquirers must ensure their company is strong and stable enough to bear the financial burden of an acquisition. If they need to raise funding from third-party investors, their financials will be subject to thorough scrutiny. Bringing in investors means giving up equity and/or board seats. Tread carefully.

Work with your acquisitions attorney, accountant, and CFO to assist you with the financial aspects. You’ll need to determine how to pay for the acquisition without risking liquidity. This money is crucial to keep the new company operational.

The Deal is Closed!

The real work begins now that the deal is closed and you’ve taken control of the target company. The road to integrating the two companies can be streamlined with detailed planning. You’ll start the process by appointing a team when considering the acquisition.

Knowing how to acquire competitors is the easy part. The real test comes when extracting synergies from the deal and deriving value from the transaction. With carefully strategized approaches, you can ensure the integration is successful and your company is poised to take on other competitors.

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