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8 Steps to Successfully Buying a Small Company

Ben T. Smith IV, co-founder of Merchantcircle.com & Spoke.com (btsiv.com), talks about buying a small business. These eight tips will really help during your company acquisition.

  1. Determine exactly what you aim to purchase
  2. Respect the existing product & the customer relationships
  3. Decide immediately who should stay (typically 15%)
  4. Don't focus on inconsequential issues
  5. Put a short-term material retention program into place
  6. Implement a long-term incentive program for the employees
  7. Intermingle the employees on a specific basis
  8. Dedicate a full-time position to specific people issues

Having bought a number of small companies, and then frankly having sold my company to bigger companies a couple of times, buying a small company is different. There are lots of books out there. There’s 50 books that I probably learn on how to do big merges and acquisitions integration work. But in a small company, there’s a few things that are different. I’m going to walk you through eight steps or eight things to consider in buying a small company.

The first thing is, if you’re buying a big company, you pretty much want the business. You’re not going to buy you know, a $100 million year revenue stream and not care about the $100 million revenue stream. That certainly happen to the world but it’s pretty rare.

When you’re buying a small company, you may be buying the business or you maybe buying the talent or the intellectual property to apply to your business. Lots of these kinds of deals happen all the time. Facebook buys companies like this all the time. LinkedIn has bought a few companies like this or you really trying to not to buy the business, you’re trying to buy the talent. You need to make a decision early on whether you’re buying the business or you’re buying the talent.

If you’re buying the business, you need to keep that business separate at least for 18 months and let them develop on their own with the minor points of integration and have their own success with their own GM, et cetera.

If you’re buying the talent, you need to as quickly as possible move that team off the existing product and inject them into your business as to what you’re trying to do.

So, you’re trying to improve you know, your search on your ended site and you bought a search team, you need to move them off building their search product and enter your search product as quickly as possible.

Even if you do that though, whether you are keeping the existing business or you’re moving into town and do your operation, you got to respect what that team built in terms of product and customer relationships. This is what they sold their soul for for two or three years. And if you piss their customers off or you dismiss your products and don’t show respect, you’re going to end up with a lot of very frustrated engineers especially, and people were very unhappy, and you’re going to end up destroying the value. Even though you’re only one of the team in some cases, the team is going to leave because they’re embarrassed about what you did with their product. And I’ve seen this happen where people will open source the product after they buy it as a way of making sure the product survives and people can be you know, that sort of what they built can survive. I’ve seen it where you focus on keeping their customers happy, maybe even add a little bit of a lost for a period of time. So, it’s not – you don’t end up a lot of negative ill will against the team ‘cause the team will leave if they feel that ill will.

The next thing you have to really do when you think about this is you have to make an immediate decision who’s going to stay. You know, in my experience, if you’re buying a company in the growth space, in the internet space, in the technology space, and you intend for more than 15% of their people leave, you’re probably doing a bad deal. But you probably are going to have 15% leave. You should know who those 15% are before you do the deal. You and the seller should know who those people are. You should decide, you know, day one, who they’re going to be and sent them for stay here for a short period of time as you want. And then, get them out so that you can move on to building your leadership team. If you don’t want these certain set numbers to senior leadership, then make that decision early on, treat them with respect while making the decision early on. And then, the rest of the team, the 85%, don’t lose any of them. Every person you lose, you do look at it as a failure because remember, in a small company, everybody plays a critical role, both in what they do everyday as well as part of the DNA of the company. So, take the 15% out, and then don’t lose a single other person.

And on the next point, it really ties that certainly don’t loose people over things that don’t matter. Things like benefits or other small things in the company that really aren’t going to change the financial outcome of the company. Don’t meddle with those things. In fact, if you’re going to do anything, make it better. When (Tarpilus) was sold to Disney, Disney could have taken a lot of opportunities to make their lives more difficult. It actually made the benefits better for the team. Make it easier for them to want to be there. Don’t meddle with things that don’t matter whether it’s one hour of the team comes in in a pouring or one you know, what bug checking system that you use, anything that doesn’t matter that doesn’t really drive them to success because remember, this is a growth asset, it’s not an efficiency tribune acquisition in most part, don’t meddle with things that don’t matter.

Next point to really get people through which is going to be though period because even if you don’t do anything intentionally to meddle with the business of make their lives difficult, you’re still going to change things because anytime you have an acquisition, there’s just change. It could be a change that matters as small as where they go to lunch. But there’s going to be a change. And you have to get people beyond that because remember they just lost their hope of change in the world a little bit, so you got to get them through that and get them have a period where they a buy into you. And it’s really important that you put a short term in the center program or a retention program in place to make that happen.

That retention program needs to be material. It needs to be you know, at least as big as their expected bonus and maybe two or three times as big as their expected bonus so they’ll really feel like they’ve got to bear through this and understand the difference between the two companies as they go through it. You don’t want people taking the phone calls that will happen the day after the acquisition occurs from head hunters.

Once you got the short term, you need to put a long term instead of in program placed that really appeals to the hope they had before. If someone, when they sold their company as an engineer who made $2 million and your long term incentive program for them is $50,000, you don’t have a long term incentive program. It may have felt like – you may think that $50,000 is a lot of money. But remember, you just gave them $2 million as part of the acquisition to join the company.

And the less you don’t think they’re important to creating that future value which is often 80% of the value in an acquisition, then you need to figure out, unless you don’t think they’re important, you need to figure out how to put an equal incentive for them going forward. So, that means you have to change the deal price to make that happen and change the deal price because you can put all the money up front for your high price in the deal, all you’re doing is really making it worst for the long term.

Next thing I found to be really effective in terms of building that cultural bridge is taking one, two, three, four employees and switching them around in a targeted basis. This is not meshing the teams of integrating the teams. You’re still keeping them separate. But you take your CFO and making the acquire CFO. You take your legal person and make him your GC. You take your HR person and put your HR person on the side of their team. You take your QA lead from the acquiring company and put them on the team who you just bought. Three, four, five, six, seven people who switch roles within the two companies as a way of starting the integration that you will eventually do 18 months from now without pushing everything together in terms of common policies you know, common development, environments, et cetera. A few people move back and forth.

And then finally, the most important point I have to say is of course, in any deal, the CEO’s job is to make the deal successful. But it’s hard to spend all your time doing that. And since most deals fail over people issues, I believe the most important thing to do is to identify one person in your company from the acquiring acquire. And so, your only job is to make the people at the acquired company happy and successful and have a big impact.

It is not to deliver just financial benefits. It’s not to just deliver you know, an economic term. But just to make sure those people are happy. And taking one person saying, “That’s your job.” is to make those people happy in measuring them on turnover – measuring them on the innovation that comes from the team, measuring them on the cultural fit, all that stuff really will drive you to at least think about those issues everyday because you have a full time person who’s bringing it up to you.

In the end, small companies are difficult to buy. They can have tremendous benefits to acquire over the long term. And that has been proven over and over again in Silicon Valley. But they rarely work out at their optimistic because if they’re optimistic, you’re not going to take the time to follow these steps because it’s just – you’re just thinking you’re getting the good deal. It’s rarely you get a good deal just because you think you’re getting the good deal. Most deals that change companies you feel like you’re overpaid for, and you feel like you put way too much effort into these eight steps, but that in the end is why they work.