Startups
5 Ways For Startups To Succeed Making Acquisitions
After catching up with Marcus Lim of Oneflare it has become very apparent that startups need to take a leaf out of their book and become bolder. To demonstrate that boldness, Oneflare has just completed its second acquisition of an Australian company called WOMO, after acquiring Renovate Forum last year. WOMO is Australia’s largest online review website and has over 422,000 reviews. Given that both Oneflare and WOMO target the local services market, this is a great match. To see a startup making these bold moves is very impressive and shows that they understand the power of cash flow and scaling quickly.
Australia is very lucky as we have been the market leader for these types of marketplace businesses and have had success stories such as Carsales, Envato / ThemeForest, Seek and 99 designs.
Oneflare is another startup to join the online marketplace niche, and they connect customers and service providers together that span across over 250 categories. They then send that request out to all the businesses that are relevant to that category. A customer can then hire a person to complete that service based on price and reputation. Their vision is to be the most trusted source for local services, and they do this by checking details about their service providers such as ABN, insurances and licensing. In order to be successful at local services online, Oneflare realised that trust was much more important to their clients than the price – WOMO really helps complete this circle of trust nicely.
Their vision is to be the most trusted source for local services, and they do this by checking details about their service providers such as ABN, insurances and licensing. In order to be successful at local services online, Oneflare realised that trust was much more important to their clients than the price – WOMO really helps complete this circle of trust nicely.
Their revenue model for an online marketplace is unique and rather than charging for a successful job, they charge based on a monthly subscription that gives the service provider a specified number of leads. Charging by the job can be tricky because people can go outside of the platform to avoid paying service fee’s.
A lot of startups overlook acquisitions because they don’t have the capital, and it’s an area of unknown to them because they have never acquired a business before.
Marcus is going to share with us 5 ways for startups to succeed with acquisitions.
1. Find your target
Once you have decided that you want to look at an acquisition Marcus says that the best thing to do is pick up the phone to some founders of potential businesses that you’re interested in and see where they stand. A lot of success with this comes down to whether the founders of these prospective companies are motivated to sell.
When you’re looking for targeted companies to acquire, consider things like market fit, a big user base, strong traction, immediate income accretion with a positive EBITDA (the business makes a profit), unique content and a strong business model that’s been around for a few years.
Also, look at what opportunities might exist if you acquire your target. Is there something that the target company you are looking at doesn’t do so well, where you can add value? In Marcus’s case, when they acquired Renovate Forum, the previous owner was not that tech savvy, so they had an instant opportunity to use their expertise in page optimisation, to adjust the position of the ads on the page, so that good content was not being deprioritised over ads. Googles algorithms picked up this change, and they began to see an increase of 30% in traffic.
The other tip to remember when you are talking with a target company for acquisition is that founders are typically emotionally attached to their company; it’s like their baby. In order for them to be comfortable to sell it to you, you need to show them that their business will have a good home with you, you will help grow their baby, take care of their baby and both businesses will be a perfect match.
Finally, make sure the target company aligns with the vision of your startup and don’t give up too quickly when looking for the ideal acquisition. Marcus had looked at 3 or 4 before he decided which one to go for.
2. Think about how you are going to fund your acquisitions
Oneflare have raised $1.5 million to date and have a strong cash flow position because they bill monthly and annually in advance. This excess cash has allowed them to save up and look for strategic acquisitions. The beauty of a strong cash flow is that they haven’t had to raise a lot of cash and thus been able to retain more equity amongst the founders.
Trying to raise money from private equity and venture capital to fund acquisitions is really difficult to do. The reason for this is because it’s very hard to know how much the acquisition is going to cost.
3. Scale is important
In order to scale quickly, Marcus said that acquisitions were the quickest way for them to do that. There were incumbents coming into their space, and the local service marketplace was very hot. By being able to make two acquisitions, they could build traction and users a lot quicker. With your startup, think about what your plan is and whether just building users in your niche is enough or whether and acquisition into a similar niche could be of value to you.
4. Understand whether you are going to acquire assets of a business or the business itself
In Oneflares case, they had made an acquisition last year of the Renovate Forum, and they brought the user base, the site and the traction, not the actual business itself. When you’re making these types of decisions, you need to look at whether the talent of the company is something that you’re interested in. One thing that is popular in the USA right now is acqui-hiring, which is the process of acquiring a company for its talent rather than assets or user base. If you were keen on the talent of a company, then you would probably be more likely to buy the whole company, not just the assets. If you have an acquisition in mind where the product is specialised, then you would want to try and keep the founders on as employees for as long as you can.
If you have an acquisition in mind where the product is specialised, then you would want to try and keep the founders on as employees for as long as you can.
“When you buy an asset you are not exposed to any outstanding liabilities of the old business, and you are also not responsible for the staff and their employment contracts”
5. Understand the process of negotiation and get good at it
When a company is for sale, the first thing you do is read through the information memorandum (investment summary, financials) and decide how much the business is worth to you. From here it’s time to get the boxing gloves on and go round for round in negotiating the final price. Ideally at this stage you hope there is no competitive tension (the opposite of Let’s Pop’s sale story) and that you’re the only bidder.
It’s always best to start at a price that is a value buy for you, and then the seller will usually come back with a higher price, and eventually you will probably meet in the middle. If the founders of the business are throwing out crazy numbers, then you need to come equipped with examples of similar types of acquisitions that have already been publicised. Your ability to present similar cases, in a simple form, will help you get the price you want. Oneflare used examples like when Yelp brought Qype and when Zomato brought Urbanspoon as Qype and Urbanspoon are both online review directories that are competitors to WOMO
Your ability to present similar cases, in a simple form, will help you get the price you want. Oneflare used examples like when Yelp brought Qype and when Zomato brought Urbanspoon as Qype and Urbanspoon are both online review directories that are competitors to WOMO
Once you reach the agreed price, you then sign a term sheet (a non-binding, indicative offer) where you need to work out payment terms. The payment terms Oneflare agreed on were two payments (industry standard), one payment up front and a second payment in 6 months from the acquisition. Out of these two payments, the first payment would usually be a lot larger than the second one
For Marcus, the due diligence took 4 weeks and they were really clever and used a checklist from when they were raising funds and had due diligence done on their company, as well as adding a few extra things.
After completing due diligence, it’s time to sign a SPA (Sales Purchase Agreement) which outlines the earn-out period, the payment terms and the final purchase price. As part of the SPA, there’s a warranty section that says that all the information they have given to you is correct, and they don’t have any outstanding liabilities. If later on something wasn’t disclosed then part or all of the second payment could be used to cover that liability. The only time this gets dangerous is if the loss from the liability is greater than the second payment you owe the founders. Once the SPA is signed, then it’s time to transfer the money for the sale.
If your startup has not made acquisitions before then, you need someone who has done this process. For Marcus, he hired a Commercial Director (Howard Leibman) who had a lot of experience, so he could guide them through the different stages.
Some books that helped Marcus with his startup journey were “How Google Works,” and “Good to Great”.