Acquiring another company, especially a promising startup, has become a bit of a competitive sport. Big enterprises are eager to capture larger and larger shares of a particular market, and a lot of companies want to expand their offerings by purchasing startups with an unrelated but highly lucrative focus. However, in the rush to snatch up the next big thing for the sake of a dollar, some important matters may be overlooked. No matter how exciting a prospective acquisition is, financially-motivated haste should never become the catalyst for a deal's downfall. There is a reason that successful businesses tout the principle that a slow and steady approach ultimately wins the race. Here are 5 common startup acquisition mistakes:
Lack of Mutual Understanding
It does not matter how lucrative the acquisition of a startup may seem, if the acquiring company and the startup do not understand each other, have incompatible visions, and/or fundamental differences regarding valuation and other key financial metrics, there is no way the deal will close. There has to be mutual understanding and respect to ensure smooth negotiations and realistic deal terms. It may be tricky finding common ground if the acquiring company is engaged in a different type of business, but the approach and mindset of the people involved are far more important. A successful acquisition is usually a collaborative process rather than an adversarial one.
Inappropriate Intellectual Property (IP) Protection
One of the things that makes a startup attract the interest of purchasers is its involvement in a niche market. In many cases, but especially in the tech sector, this often means that there is valuable IP at play. However, if startups have not taken the appropriate measures to protect the IP, it won't be surprising if this kills the deal before it even gets off of the ground. A deal dying because of this oversight obviously isn't a mistake on the acquiring company's part, so startup leaders whose company has IP must ensure that it protects it correctly, for example by filing for patent protection, keeping trade secrets in a vault-like virtual data room, and limiting dissemination of company information. By taking these precautions early on, lucrative deals won't be lost and there won't be messy litigation if the acquiring company fails to realize there were inadequate safeguards before sealing the deal.
Inadequate Document Retention and Sharing
Document management is definitely not the fun and sexy side of running a business. But, it is absolutely critical to countless business transactions and especially an acquisition. It can be a huge hassle for both the acquiring company and the targeted startup if there hasn't been a strong and secure record keeping strategy. Although disorganized records may not be a complete deal killer, it will certainly stall any momentum. To avoid this potential pitfall, one party should initiate the creation of a virtual data room. Ideally, the startup founders will create this when the business is still in its early stages to ensure meticulous accounting of all corporate and financial records.
Failure to Designate Roles
There are usually a lot of players involved in an acquisition, but it isn't always clear who is responsible for what. To avoid confusion, redundancy, or important items being forgotten, the parties must designate roles and assign responsibilities as early as possible. It would be a shame for things to linger on or fall apart altogether because no one realized what needed to be done or who should have done it.
Inexistent Transition Plan
People become so embroiled in closing the acquisition itself that they often neglect all of the things that will have to happen subsequent to the official closing. This can have disastrous consequences and is the worst way to embark on a new venture. As a result, everyone must be on the same page with respect to how the transition will unfold, including who will oversee what facets, the timeframe in which certain things must be accomplished, and how it can be achieved to ensure an effective integration.