How to know when your startup is ready to acquire its first company

As the founder of a growing startup, one of the most common questions I get asked whenever the topic of competitors comes up is, “Can’t you just buy some of these companies out?”

From the very beginning of the dot-com boom, the idea of raising money, acquiring another company, or going public has always been sexy and exciting to people. It all seems very romantic when you’re looking from the outside in, but when you’re on the inside, the idea of acquiring another company is often incredibly daunting and stressful.

In most cases, there are a lot of conversations that have to happen, a lot of questions that need to be asked and answered, a lot of money that needs to change hands, and a lot of people that have to be involved. As a company, it’s a big step to take.

So, with that all in mind, the question is this: As a founder or CEO of a company, how do you determine if your startup is ready to acquire another company?

At When I Work, we recently went through the process of acquiring key assets from a competitor, and I walked away from the experience with some thoughts that might help you decide.

Here are the top six indicators to look for:

Indicator 1: You have the right people on your team

The first real indicator you should look for when deciding if you’re ready to acquire is whether or not you have a strong team in place. You need to have the right people to help you through the acquisition process, but you also need people who are ready and able to help you scale once the deal is done.

In our case, we made sure we had the following before we even considered any sort of acquisition opportunity:

• A handful of key advisors to help us navigate the acquisition process
• A director of finance to help manage and facilitate the deal
• A legal representative to help us prepare paperwork
• An expanded team of customer support specialists and account representatives, trained and prepared to handle the increase in requests and questions that would come in once the deal was finalized
• An expanded marketing team to help us launch a PR campaign once we had the go ahead to announce the news
• A team of developers to help ensure that our platform was ready for an increase in activity and engagement.

This list might not perfectly align with the needs of your company, but it should get you thinking more about the resources and talent you’ll need in order to make an acquisition both possible and successful. At the end of the day, you need to be prepared for more work. That might mean training and preparing your current team, or it might mean seeking out new talent.

Indicator 2: Your churn rate is decreasing and your Net Promoter Score is increasing

Another important indicator to look for involves zeroing in on your churn rate and your Net Promoter Score (NPS). If you’re in a situation where your churn rate is decreasing and your Net Promoter Score is increasing, it means that not only are your customers sticking with you, but they also love your products or services enough to recommend them to someone else.

That’s a good place to be. It means you’ve figured out what makes customers happy enough to continue paying you month after month. In these situations, doubling down is key. For some, that might mean fine-tuning the sales funnel and investing more resources in lead generation and nurturing, for others it might mean acquiring another company and the customers they serve. Again, it depends largely on your own situation, but it should get you thinking more about what your next step should be.

If you need help calculating your churn rate, read through this handy post.

For more information on the Net Promoter score, read this.

Indicator 3: You have more than enough cash in the bank

This one might be a bit more obvious than the rest, but it’s still worth spending some time on. If you’re thinking about acquiring another company, you should have more than enough cash in the bank to make a deal. Note the emphasis on more than.

As an entrepreneur and founder, I’ve always been careful about money. I pay attention to the dollar signs, but I try not to rely or depend solely on money when it comes to making judgement calls on important decisions. For example, in the early days of building my startup, I didn’t even entertain the idea of talking to investors until we were already profitable as a company and had money in the bank. Only when we got to that point did we ultimately decide to do a Series A round. Why did we do things this way? Because I wanted to prove we could build something that people wanted through sheer hustle and grit.

When it comes to acquiring another company, it’s important that money doesn’t cloud your judgement or prevent you from making the right moves in the future.

When we started talking about possibly acquiring key assets from one of our competitors, I only entertained the idea because I knew we had more than enough money in the bank. I knew we could afford to make the deal and that the money we spent wouldn’t hurt us in the short or long term.

If money is tight at your company, or if you’re worried that the money you’ll spend acquiring another company is going to prevent you from continuing to work on your other growth initiatives, you aren’t ready.

Indicator 4: You are exceeding goals month-over-month

Exceeding goals month-over-month is another indicator that can tell you you’re ready to acquire another company. That said, don’t set goals that are easy to meet, blow them out of the water, and think that means you’re ready. It’s important to set realistic goals that are challenging to meet each month. It’s the best way to push yourself, your team, and your company as a whole, and it’s the best sign that you’ll actually be able to benefit from acquiring a competitor.

In our case as a SaaS business, some of the monthly goals we set and track include:

• New customers
• New trials
• Churn
• Lifetime value of customers
• Conversion rate for web vs. mobile
• Monthly recurring revenue

We use a tool called Chart.io to track goals and progress throughout the month, but there are plenty of business intelligence tools out there to choose from.

Indicator 5: You’ve positioned your company as a market leader

If you’ve successfully been able to position your company as a market leader, the right time for acquisition might be just around the corner. This isn’t something that happens overnight. It can take years to build up your company’s reputation among other companies in your industry and among your customers. It took my company five years. Here’s how we did it:

1. We never obsessed over features — instead, we obsess over our customers and their experience with our product.
2. We focus on doing a few things really, really well (scheduling and attendance) — we’re not interested in trying to be the one-stop shop for every business owner looking for a comprehensive workforce management platform.
3. We value artistry. We make the back-end of our product as beautiful as the front-end.
4. We pay attention to, learn from, and make decisions based on data.
5. We actually listen to and care deeply about our customers.

When you’re the market leader, you have the reputation and trust needed to make an acquisition possible and successful for everyone involved.

Indicator 6: You have a clear reason for wanting to acquire

Having a clear reason and purpose is the final indicator that can tell you you’re ready to acquire.

As an entrepreneur or founder, you have to ask yourself why you want to acquire another company. What is your purpose? What are your goals? How will this change your business? Why now?

If you don’t have clear reasons or a clear purpose, you aren’t ready. Here are some common reasons you might want to acquire another company:

• To gain more customers
• To gain more team members and talent
• To take a bigger piece of the market
• To expand into new areas
• To gain technology or other assets
• To boost growth
• To boost your reputation

This list isn’t exclusive — it’s simply meant to get you thinking about your own company and the reasons why you think it’s time to acquire.

Final Thoughts

It’s important to recognize that these indicators are not exclusive — there are plenty of others that founders use to decide when and if to acquire another company. These are simply indicators that led me to believe we were ready at When I Work. Your situation will likely be different depending on a wide range of things like your team, your industry, your product, and your goals. Take time to review these and make a list of other indicators that might be important to you.

What other indicators do you think should be mentioned? Add them in the comments section below. Have questions for me? Reach out to me below or on Twitter.

Chad Halvorson is founder and CEO of When I Work, an employee scheduling app. He writes about business growth, management, startups, technology, and entrepreneurship and has built three multi-million dollar companies, all of which are still operating today.