How to make the right add-on acquisition, with the right people, at the right time.
Organic growth is vital for B2B SaaS companies, but there are some growth goals that can be achieved faster via add-on acquisitions of other businesses… if done right.
At Monterro, we help our portfolio companies grow both organically and through add-on acquisitions. Speaking from experience, those who see acquisitions as an easy route, should think again.
For this eBook, we have condensed that knowledge into the ‘need-to-knows’, so you can make your add-on acquisition a success.
Anna Murray“We’ve all helped facilitate a significant number of add-on acquisitions – and wow, there have been some big lessons learned on the way.”
01 The four goals of add-on acquisitions
03 Three things your M&A strategy need 04 Two big risks and how to avoid them
This is a valuable 12-minute read but if you only have two minutes, you can jump to the key takeaways.
Let’s meet the brains behind this eBook’s insights:
— Transactions Director, Monterro
David lives and breathes deal making. Having spent 13 years in the corporate finance and private equity industry, David now sources new investments and assists our amazing portfolio companies with add-on acquisitions. At Monterro, David has successfully completed in excess of 30 transactions.
— Head of Inorganic Growth, Monterro
Anna is a mergers and acquisitions maestro. Working with the incredible Grant Thornton International, Anna has amassed over 10 years experience working in corporate finance and M&A. At Monterro, Anna now assists our portfolio companies with add-on acquisitions.
— CEO, Matilda FoodTech
Erik has extensive experience on both sides of the acquisition table. As CEO of Matilda FoodTech, he’s masterminded multiple acquisitions which have helped further Matilda’s mission to digitise the food service industry. And as a Monterro portfolio company, Erik also has first-hand experience of leading a business whilst it gets acquired. This has given him a full appreciation of the importance of acquiring a business with a good cultural fit.
Ready? Let’s do this.
There are four main reasons to make an add-on acquisition:
1. Build a stronger market position and increase company size
By taking on the expertise, product, and customer base of another business, it can make your organisation more stable and strengthen your market position. It also reduces your dependence on individual staff members or customers.
There may be another market, outside the one you operate in, that’s a good fit. Acquisitions can speed up your journey there.
If a company has a customer base that’s a great fit for your product, an acquisition can open the door for you.
4. To strengthen your own product offer (the most exciting)
Is there a product or feature that you know your customers want? Developing it yourself will burn a lot of time and resources. But acquiring a business that’s already developed, then incorporating it into your product portfolio can be much more efficient.
Add-on acquisitions are great for product improvement.
Want to broaden your product offering, add a new product to your portfolio, or add features to your existing offering that will add value for your customers? Find a well performing business that offers it, and benefit from their learnings.
But it’s vital that there’s a strong market demand for the product or feature, not just an internal desire for it.
Businesses with niche offerings (as per Matilda’s example) can make great add-on acquisitions.
Having such a narrow focus, allows such businesses to put a lot of energy into product development – this makes their offering very strong.
And since buying from a single supplier (rather than a series of smaller ones) is more time efficient for customers, such acquisitions are a win-win. The acquired business gets increased product reach and the acquiring business strengthens their product or product portfolio.
Erik Bergseth“At Matilda FoodTech, we spoke to customers and identified a strong market demand for digitising the manual recording of food temperatures. We found a company with a great solution but minimal market penetration. The add-on acquisition worked out really well for both parties.”
Being proactive with add-on acquisitions is a must but don’t rush ahead before you’ve done your homework. An undercooked acquisition plan is a recipe for disaster. With that in mind, here are the three questions you need to ask before you get going:
1. Are we ready for an add-on acquisition?
Acquisitions need time, care, and resources. Organisations with less than 20 people or a turnover of €2.5m-€3m, often struggle to make add-on acquisitions a success. If that sounds like you, it might be time for more organic growth first.
2. Do we know what our goal is?
Which of the four add-on goals listed in chapter one, is driving your M&A activity? If your goal is geographical expansion, it’ll inform the kind of acquisition opportunities you should be looking for.
Erik Bergseth“Work long and hard on defining what your goal is and how that shapes what makes a good acquisition opportunity for you. The focus will make it easier to find the right opportunities, and then identify which opportunity holds the most value to your business.”
David Kuritzén“There’s a hefty but vital due diligence process which requires at least five people from the acquiring company to do it correctly. If your business is just 10 people, and half of them are working on the acquisition, your product will suffer. But commit less people to the acquisition, and the deal will suffer.”
Where do you want to be in five years? You’ve set your goal, now how will you get there? And what resources will be needed?
Define which parts of the strategy will be accomplished organically and which would be better served with add-on acquisitions.
Anna Murray“Take internationalisation as an example. Organic expansion can work really well in regions you’ve already got a network in, or strong connections with – because you’ve done some of the groundwork. But in regions that are new to you, add-on acquisitions are much more efficient. Just make sure you do your research first.”
When actually drawing up your strategy, there are some key considerations that will turn it from one that works, to one that delivers.
Your strategy should include details of how you’ll resource your acquisition from a financial and a staffing perspective. Rigorously assess what you can afford as this will impact the size of business you are capable of acquiring.
There are a lot of potential businesses to choose from, so your strategy should include a list of attributes a business needs to have in order to qualify as a great acquisition opportunity. These could include: businesses operating in a target geographic market, a threshold for minimum turnover or income, or the presence of a culture similar to yours.
Whilst not something in your strategy, it’s a vital thing your strategy needs. Discuss the strategy at length with your leadership team and iterate until you get something that everyone agrees on and believes in. This will stop cracks appearing later down the road.
Using your criteria as a filter, proactively get to know the market by meeting people.
To identify acquisition opportunities, use everything from trade shows to Google. But talk internally about them too. Who in your organisation knows the market and who are their connections? Do your internal teams have information on tricky rivals?
Don’t forget your sales team is closest to your customers so will have some of the sharpest insight into their wants and needs.
As we mentioned at the outset, add-on acquisitions are great for accelerating growth but are not an easy route. Here are two big risks to avoid:
The problem: Acquisitions require the two companies to work closely and spend a lot of time together. If there’s a major culture clash, the acquisition won’t work.
The solution: Define your values and culture so you can clearly communicate them to another business.
Spend a lot of time explaining your company culture and getting to know theirs. This isn’t just a business transaction, it’s a relationship.
The problem: Acquisitions don’t happen overnight – there are many ups and downs on the road. If you haven’t clearly mapped out the journey, or done so in enough detail, it can cause big problems.
The solution: Be transparent about the goal and get buy-in from everyone. Then, clearly map out the journey. Do they want to join or not?
Acquisitions also involve a lot of emotions, so remove as many potential shocks as possible. There’s a reason a business is often referred to as someone’s “baby” – and why they get protective about it.
Spend time decoding all the factors that influence the deal amount and timeline. Allow time for the acquired business to get used to the idea of selling, and for a ‘grieving process’ afterwards.
Ensure integration is fully baked into this journey. How you’ll integrate the two businesses is fundamental to the acquisition plan – it can’t be tacked on afterwards.
Buying a competitor can work for some businesses, but such acquisitions need particular care and attention.
For starters, you’ll have two products offering the same thing. So which one will you focus on? This process is tricky and can get very heated. Especially because there can be some residual rivalry between the companies that leads to clashes.
If you’re planning on acquiring a competitor, make sure you’ve factored in a lot of time for integration, and prioritise looking for a business that’s a great culture match with yours.
David Kuritzén“With acquisitions, our goal is for the founder and leadership team to feel we’re entering a new context where we can speed towards a shared goal – together. It’s not destructive, it’s positive and collaborative.”
And that’s it. Here are our key takeaways…
Know what you want to achieve with your M&A activity and plan accordingly.
Assess if you’re ready for an acquisition and define your goals and leads clearly. Then draw up a strategy which includes financial plans, and prioritisation. And make sure you get buy-in on the plan.
Culture-fit can make or break your acquisition. Respect it and take time to find a good match.
Make sure both parties are on the same page, be sensitive but not sentimental, and make sure your integration plan is rigorous and transparent.
We’re Monterro, an investment firm (of the get-your-hands-dirty with strategy and operational support variety) that helps Nordic software companies hit their biggest growth goals.
