An acquisition is a business term that involves a larger business or company acquiring a smaller business or startup. In an acquisition, the acquiring company purchases the target company’s shares or assets, which gives it the power to determine how to use the assets without seeking the target company’s shareholders’ approval.
Statistics showed the share of startups worldwide in 2018; about 37 percent of startups were five to ten years old when they were acquired globally.
Also, Acquisitions make up a larger percentage of exits worldwide, followed closely by liquidation and merger.
Types Of Startup Acquisition
Startup acquisition refers to the process of one company buying another startup, either for its technology, product, team, or strategic advantage. there are three main types of startup acquisitions: team buy, product buy, and strategic buy.
Team Buy
This type of acquisition involves acquiring a startup primarily for its talented team. The acquiring company may want to bring on board-specific individuals who have valuable skills, experience, or expertise. This type of acquisition is common in the tech industry, where companies often seek talented engineers, designers, or other specialists.
Product Buy
In a product buy acquisition, the acquiring company is primarily interested in the startup’s product or technology. The product or technology may complement the acquiring company’s existing offerings or fill a gap in its product portfolio. This type of acquisition can help the acquiring company to enter new markets or strengthen its position in existing ones.
Strategic Buy
A strategic buy acquisition is when the acquiring company is primarily interested in the strategic benefits of acquiring the startup. This may include gaining access to new customers, markets, or intellectual property. A strategic buy can help the acquiring company to expand its reach or capabilities, or to gain a competitive advantage over rivals.
In addition to these three types, the statement also mentions a fourth type of acquisition known as a “synergistic” acquisition. A synergistic acquisition is when the acquiring company is looking to achieve synergies or cost savings by merging with or acquiring a similar company. This type of acquisition is common in industries that are experiencing consolidation or where there is significant overlap between companies’ offerings.
The 10 key phases of a merger and acquisition
- Target identification
- Valuation analysis
- Negotiations
- Due diligence
- Deal closure
- Financing and restructuring
- Integration and back-office planning.
Strategy Development: In this phase, the acquiring company develops its strategy for growth and expansion through M&A deals. The company may decide to enter new markets, diversify its product offerings, or strengthen its existing operations.
Target Identification: The acquiring company identifies potential targets that fit its strategic goals. The targets may be identified through industry contacts, market research, or recommendations from investment bankers and other advisors.
Valuation Analysis: The acquiring company conducts a thorough analysis of the target company’s financials, including its revenue, profits, assets, and liabilities. This helps to determine the target’s value and to develop a negotiation strategy.
Negotiations: The acquiring company negotiates with the target company’s management and shareholders to agree on the terms of the deal, including the purchase price, payment structure, and any other conditions.
Due Diligence: After the initial negotiations, the acquiring company conducts a detailed due diligence review of the target company’s operations, finances, legal status, and other key aspects. This helps to identify any potential risks or issues that may affect the deal.
Deal Closure: Once the due diligence is complete and any issues have been addressed, the parties finalize the deal and sign the necessary agreements, including a purchase agreement, legal documents, and regulatory filings.
Financing and Restructuring: The acquiring company secures financing for the deal and may need to restructure its operations or finances to accommodate the new acquisition. This may involve selling off non-core assets, laying off employees, or restructuring debt.
Integration: After the deal is closed, the acquiring company begins the process of integrating the target company into its operations. This may involve merging departments, systems, and processes, and rebranding the target company.
Back-Office Planning: The acquiring company plans for the integration of the target company’s back-office functions, including finance, IT, HR, and legal. This helps to ensure a smooth transition and to minimize disruption to the acquired company’s operations.
Post-Merger Review: After the integration is complete, the acquiring company conducts a post-merger review to evaluate the success of the deal and to identify any areas for improvement. This helps to ensure that the acquisition has achieved its intended goals and that the company is positioned for future growth and success.
2 Major Reasons Why Startups Get Acquired
Here below are the two primary reasons why most startups and small businesses get acquired at the outset, even before they fully mature.
Business development
Business development acquisitions are a form of acquisition that usually happen when an established company or business wants to move into a related industry or market. In this case, the already established company takes an eye on other well-performing startups and businesses in the field it wants to venture into to see if there is any potential to make it big there.
However, if there is potential, the bigger company or business acquires the small startup even before any other business or competitor sees it.
One good example of business development acquisition is Google. Google does this extremely well; they often aim at investing in startups or acquiring them at the outset to develop the company before anyone else sees the potential.
Acquire talents or patent
One sure thing is that most startups and striving businesses often have valuable patents or assets that other bigger businesses and companies may find attractive. In such cases, they waste no time acquiring the startup and taking over its talents for their benefit and advantages.
And mind you, it may be cheaper for a buyer to acquire the startup than to develop its competing product or to risk a lawsuit for patent infringement.
Hence, that is one of the famous reasons why most bigger companies acquire small startups and businesses.
Pros and Cons Of a Startup Acquisition
Here are some pros and cons of a startup exit:
Pros:
Financial gain: An exit can provide a substantial financial gain for the startup’s founders, employees, and investors. This can help them to pursue other business ventures or personal goals. With a successful exit, founders and investors can reap significant returns on their investments, allowing them to reinvest their profits into other opportunities. For employees, a successful exit can mean stock options and bonuses, which can boost their earnings and incentivize them to stay with the company.
Liquidity: An exit provides liquidity to the shareholders of the startup, enabling them to convert their equity into cash. This can be particularly beneficial for early investors who have been holding onto their equity for several years, as they may be ready to cash out and move on to other ventures. Additionally, liquidity can help reduce the financial risk for the startup’s shareholders, as they are no longer tied to a single asset and can diversify their portfolio.
Increased exposure: An exit can increase the visibility and exposure of the startup, which can attract new customers, partners, and investors. A successful exit can serve as a testament to the startup’s value and potential, which can attract interest from other investors and companies looking to acquire similar businesses. Additionally, the increased exposure can help to solidify the startup’s brand and reputation in the market, potentially leading to new opportunities and partnerships.
Reduced risk: Exiting a startup can reduce the risk of future failure or loss, allowing the founders and investors to exit with a profit. Startups are inherently risky ventures, with many failing to achieve profitability or sired market position. Exiting at the right time can help to mitigate this risk, allowing the founders and investors to reap the rewards of their hard work without the uncertainty of future challenges and obstacles.
Cons:
Loss of control: An exit can result in a loss of control for the founders of the startup, as they may no longer have the same level of decision-making power.
Disruption to employees: An exit can lead to a disruption of the startup’s operations, which can impact the employees negatively.
Time-consuming process: The process of an exit, whether through a sale or IPO, can be time-consuming and require a significant amount of effort from the founders and their team.
Potential for a lower valuation: An exit may result in a lower valuation than expected, which can impact the financial gain of the founders and investors.
Overall, an exit can provide a significant financial gain and increased exposure for a startup, but it can also result in a loss of control and disruption to the company’s operations. It’s important for founders and investors to carefully consider their options and weigh the pros and cons before deciding to pursue an exit.
Conclusion
Overall, startup acquisition is a complex process, and it’s essential to understand the basics before jumping into it.
Hopefully, this guide provided a good starting point to help you know what the acquisition process is all about, including some reasons why startups are acquired during their first few years in business.