Over the course of 14 months, we evaluated 50 different companies, personally visited 30 of them, narrowed the list down to five, and then narrowed it to two, before finally acquiring digital proofing leader ProofHQ as a Workfront company. From letter of intent to closing and funding took a total of 60 days.
How did we do it? First, we had a long courtship. Before we ever thought about popping the question, we navigated a successful reseller partnership for nearly three years. And even then, we kept eight essential questions in mind throughout the process.
If you're considering an acquisition-- for more than just a roll-up strategy --then these eight questions will help ensure the smoothest, most successful experience possible.
1. Does it Fit Your Long-Term Strategy?
Ask yourself what your organization looks like after the papers are signed. Do the companies make sense together? Can you still tell a coherent investor story? Will you be able to clearly communicate what you do without resorting to fractions? ("Two-thirds of our company is about SaaS financial software, and we also have an online magazine for horse enthusiasts.") If a deal doesn't align with your long-term roadmap, take a pass, no matter how attractive the company appears on paper.
2. Who Will You Put in Charge of the Deal?
The CEO is there to paint the vision, but another party is needed to assess and evaluate options, execute on that strategy, lead the project, pull teams together, perform initial due diligence, build the business case, get executive committee and/or board approval, and work out funding details. It's no small job. I assigned our vice president of corporate development to the ProofHQ deal full-time. If a dedicated internal employee isn't an option for you, hire a boutique investment bank or a good consulting firm instead.
3. Is there Audience Alignment?
Are you buying a customer base that is likely to be interested in what you currently sell? Will your current customer base be interested in the business you're buying? Will the new company add some stickiness to your customer retention rate? Look for crossover sales potential that can make your acquisition additive, so 1+1=3. If you have a $5-million business, and you're buying a $2-million business, the goal is to end up with more than a $7-million business.
We sought out a digital proofing company precisely because it's a natural extension of what Workfront already does--and it has a shorter on-ramp, which makes their customers a perfect lead source for our full enterprise work management solution. Plus, we had already seen audience alignment at work during our long-term partnership with ProofHQ, during which time we had already developed 300 joint customers.
4. Is there a Culture Match?
You have to get to know the company you want to acquire. And there's no better way than spending some time in their space, getting to know who's on the team, how they work together, how they approach clients, and whether the company values fit in with yours. Also look at how they're organized. If they have two people creating and building their product, and 100 people selling it, but your company is weighted in the opposite direction, it could be a bit of a force fit. Trying a shorter-term partnership before attempting a full acquisition is a great way to test the waters.
5. Are You Falling for Shiny Object Syndrome?
It's easy to become enamored with a company that's growing fast, making a lot of money--and that you have an in with because your sister-in-law is on the executive team. If you just dive in without stepping back and looking at it objectively, you could overlook key parts of the deal that may put it at risk. (Like, for example, the fact that it's in a completely unfamiliar market.)
Beware of falling in love with the idea of the acquisition before any due diligence has been done. If you've already planned your new joint residence and mentally assigned everyone a new title, you could blind yourself to potential red flags.
6. Did You Play the Field First?
Always start by looking at all of the possibilities, even if you're well acquainted with a company that's in the field you're targeting. Make sure you're not missing out on an even better partnership. Again, even though we had established a relationship with one digital proofing solution, we evaluated 49 of their competitors and visited 30 of them before narrowing down our final list and extending an offer. The benefit of this process was that we could proceed with absolute certainty that this company was the right fit for us. Plus, after such extensive research, the board approval of the deal was much easier.
7. Did You Define Your Deal Breakers?
Make sure you have a clear list of criteria before you start shopping for a company to acquire. We created a list of requirements related to product, technology, people, and financial performance, and we weighted each item. Every time we met with a vendor, we scored them in each area, so we could compare all of our options objectively.
Without such pre-defined criteria, you run the risk of getting distracted by bells and whistles that are immaterial to your goals--and perhaps ignoring the fact that the company hasn't been profitable in five years, or that they experience 50% employee turnover every 18 months.
8. Did You Look Under the Hood?
Due diligence is essential. Think of all the lessons you learn in Shark Tank: How unique is the business? How strong is it? How up-to-date? How easy is it for a competitor to replicate? If you're buying a food business, you must know how strong (and proprietary) the recipes are. If you're in apparel, look at how unique the designs are and the strength of the manufacturer relationships. If you're in tech, you have to evaluate the code base. To formally manage the due diligence process, we used a third-party SaaS solution that housed hundreds of tasks and requests, tracked activity, provided visibility and status updates to all stakeholders, and allowed us to check items off one by one.
Only Fools Rush In
In business as in dating, it's far better to stay single than to rush into an unhappy union. Keep your long-term goals in mind. Take things slow. Stay objective. Define your deal-breakers. Look under the hood. Always play the field. While those last two may not work for romantic relationships, they will help you make sure a potential acquisition is the right fit for your business, before you sign on the dotted line.