How to Acquire a Small Business (and Keep Employees Happy)

By Ben T. Smith,
Image credit: ShutterstThere are many books that discuss the inner workings of big M&A deals but there are few that delve into the purchase of a small business -- a move that requires a different strategy. Small companies are difficult to buy, but they can have tremendous benefits to the acquirer over the long term -- an argument that has been proven over and over again in Silicon Valley.

That said, they rarely work out if they are done opportunistically, meaning the buyer is just looking for a "good deal."

Having bought a number of small companies and frankly having sold my companies to bigger companies a number of times, I have found the following eight steps to be essential to making the process a success -- on both ends.

1. Determine exactly what you aim to purchase. When you’re buying a small company, you may be buying the business either for its talent or the intellectual property to apply to your business.

Related: Selling Your Business? Serial 'Trep Gurbaksh Chahal Says Be Bought, Not Sold (Video)

If you’re buying the business as a whole, you need to keep that business separate for at least 18 months and let the team develop on their own with minor points of integration. Let them have their own success with their own leadership team.

If you’re buying the talent, quickly move that team off the existing product and inject them into your business.

2. Respect the existing products and the customer relationships. Whether or not you plan to keep the existing business or are moving the talent into your own operation, you must respect what that team built in terms of product and customer relationships. This is what they sold their soul to for two or maybe three years. If you upset their customers or dismiss their product through a lack of respect, you are going to end up with a lot of very frustrated engineers on your hands. Even if you only wanted the team, there is a chance they will want to leave because they are embarrassed about what was done to their product.

3. Decide who will stay and who will be let go. In my experience, if you are buying a high-growth company in the internet space, typically 15 percent of that team will leave. Ensure you retain the other 85 percent.

You and the selling company should know immediately who you will want to stay and who you don’t mind losing. If you do not want certain members of senior leadership, then make the decision early on. Treat them with respect but make the decision quickly. Any person beyond the 15 percent that you lose should be seen as a failure, because everyone plays a critical role in the DNA of a small company. So take the 15 percent loss and work to not lose anyone else.

4. Don’t focus on inconsequential issues. This ties into the above statement. Keep as many team members as possible and never lose people over inconsequential issues. Do not change processes such as benefits or other small things that aren’t going to change the financial outcome of the company. Remember this is a growth asset and is not an efficiency-driven acquisition for the most part. Do not mettle with things that don’t really matter.

5. Put a short-term material retention program into place. It will indeed be a tough period for current employees, as there will be change. Remember these employees just lost hope of changing the world a little bit, so it is critical to get them through that period and to convince them of the new leadership.

To help quell employee fears, put into place a short-term material retention program.It is important to remember the retention program needs to be material and at least be as big, or double, as their expected bonus. This will help the transition period and help retain your new talent.

6. Implement a long-term incentive program for the employees. Once you have the short-term process in place, you need to put a long-term incentive program together that appeals to the hope employees had before. You are investing for the future value of the acquired company, so be sure not to undervalue top talent with low long-term incentives. This is important, even if it changes the final deal price.

7. Intermingle the employees on a specific basis. To build that cultural bridge, take a handful of employees and strategically switch them between the two teams. This doesn’t necessarily mean integrating the teams -- still keep them separate. But you can do swaps like taking your CFO and making them your acquirer CFO. Or take their HR person and put them on your team. This intermingling of teams at a strategic level begins the overall integration that you’ll eventually do 18 months down the road without pushing the boundaries.

8. Dedicate a full-time position to specific people issues. The most important point in any deal is that it’s the CEO’s job to make sure the deal is successful.

In my opinion, most deals fail over people issues. I believe one of the most important things to do is to identify one person in your company and make his or her only job to gauge the temperament of the overall acquisition. Is the buyer team happy? The acquired team? Also have the employee measure the success of the acquisition by focusing on turnover, measuring the innovation now taking place and gauging the new cultural fit. Have this person report directly to the CEO, as will understand what is truly going on within both companies and force him to think about issues every day.  r