Acquisition Success: Taking On Amazon
By Cort Ouzts, POS Nation
In 2017, POS Nation was exploring selling point of sale systems in the Amazon realm. It was territory that we had little to no experience in, but we knew that developing a presence on Amazon was a natural fit for our online sales strategy. Selling on Amazon seems simple. But just because you list your products on the marketplace, that doesn’t necessarily mean they’re easy for customers to find.
Similar to Google, success on Amazon is heavily dependent on your search rankings — and new product listings don’t jump to the first page overnight. So, we were left with a decision to build or buy. Should we invest in the platform and spend months, or even years, slowly inching up the search results? Or should we purchase a company that already had authority on Amazon? Build or buy is a significant factor in most acquisitions — and if you’ve ever dealt with expanding into new territories, industries, or product lines, you’ve likely faced this same dilemma.
The Decision-Making Process
Given our targeted sales trajectory, we decided that moving to Amazon faster made more sense for us. We started our search for the right target by mimicking our customers and looking up POS systems to see which companies ranked highest. We kept running into one vendor, The Perfect POS. They sold products similar to ours, and just as importantly, appeared to be close to our company size. The Perfect POS maintained significant Amazon authority and had multiple high-ranked listings on a variety of searches. They appeared to be exactly what we were looking for, so we reached out to their owner and outlined our strategy.
On paper, there were numerous synergies between the two companies. It didn’t take long for both management teams to realize the acquisition had the potential to be a really good fit. After talking high-level numbers, we submitted an indication of interest to The Perfect POS which outlined a valuation range and post-acquisition operational plans. The range was acceptable to The Perfect POS, so we conducted more thorough diligence by sharing financials, bank statements, Amazon reports, and more confidential business information. This information allowed us to fine-tune our offer. After a few months, we submitted a letter of intent outlining the specifics of the transaction including valuation, payment structure, and post-acquisition roles and responsibilities. After some back-and-forth, both parties came to an agreement and the letter of intent was signed. The last step was finalizing all open due diligence items and negotiating the legal terms of the purchase agreement. Because we already had a signed letter of intent in place, however, we were working within a tight framework and we were able to finalize the deal within a couple of months.
On the closing date, we flew down to Fort Lauderdale, Florida, to sign documents and close the deal. But when we arrived, The Perfect POS’ management team had terrible news for us: just an hour earlier, they received an email from Amazon informing them their account was to be suspended. Our side immediately huddled, and despite the months of work, we decided to walk. Without even unpacking our bags, the team flew back home.
Fortunately, The Perfect POS was able to restore their Amazon account health within a few months, and once they reestablished their online presence, we closed on the deal with terms close to the original agreement.
Acquisition Pitfalls And Advice
First off, for every acquisition announcement you see, what you don’t see are the hundreds of acquisition seeds that were planted that never amounted to anything. Our management team is constantly soliciting potential acquisition targets and letting business owners know that, when they’re ready to sell their business, we’re willing to take a look. Our advice is to assume you have to make 100 calls before you get a single seller that’s willing to entertain a serious conversation. Then, assume you’ll need to have 100 serious conversations before you’ll close a deal.
Next, most small companies like ourselves never even think of an acquisition in the first place. They look at it as a corporative move — but we’re here to advise you not to be scared of starting the conversation. As long as the risk-reward profile is in balance, it might be worth your time to at least explore the M&A world.
When it comes to negotiating, acquisitions are not a zero-sum game. This is not the car dealership where every dollar you save is a dollar that the salesman loses. In the vast majority of acquisitions, the acquirer will continue to work with the target’s management team and employees — and it’s critical to form good working relationships. A common misconception is M&A negotiations are all about the valuation, but in reality, the valuation is just one of the dozens of critical points that go into the final agreement. Be creative and find solutions that leave both parties satisfied, yet still a little uncomfortable. That’s the sure sign of a good deal for both sides. And don’t get caught up on every penny of the transaction. Of course, you want to pay as little as possible to get the deal done, but three years from now, the last 10 percent of the purchase price you were negotiating will be irrelevant to the acquisition’s ultimate success or failure.
Our next piece of advice is to be patient and disciplined. From start to finish, the M&A process can easily take six to 12 months. It’s long and fatiguing, but you must stay focused. While our summary of The Perfect POS acquisition might sound relatively painless, it was nine months of intense work. The majority of the process is spent in the due diligence phase, and while not glamorous, you’ll find yourself reviewing line item after line item on bank statements from the past three years. Be skeptical of everything and verify the story the target is telling you. We often call this peeling back the layers of the onion, and it’s your job to find the skeletons in the closet so you know what you’re getting yourself into. Acquirers suffering from deal fatigue often find themselves emotionally attached to a deal, but just like our experience with The Perfect POS, you have to be disciplined enough to pull the plug at any phase if you uncover information that distorts your investment thesis or throws your risk-reward equation off balance.
Once the deal is closed, the real work begins. Merging two organizations and combining cultures is challenging. Operations and processes require work, but culture is the element that’s often overlooked. In our case, POS Nation was able to start selling on Amazon the day of the closing. Our fulfillment department immediately started processing orders and our customer care team was ready to support Amazon customers. Getting the two management teams in sync, however, took months. If your gut tells you that your target’s company culture is just too different, walk. No matter how good the acquisition looks, if the two organizations fail to merge into a unified team operating under one common goal, then the acquisition will forever be more of a distraction than a success.
When merging operations, it’s imperative to understand where you can compromise and, conversely, where there’s simply no room for discussion. For us, there was never an option when it came to which company’s systems we were going to use going forward. The Perfect POS was forced to adopt everything from our CRM to our online scheduling app. Our recommendation when faced with decisions like this is to communicate early and often. From day one, we communicated our intentions to use our systems. Therefore, when the changeover occurred, there was no surprise or animosity — but there were growing pains, of course.
Our final piece of advice centers around people. Acquisitions can be scary for employees. First, there’s the uncertainty of job security immediately following an acquisition. Outsiders often associate M&A with headcount reductions and layoffs, but this isn’t always the case. When it comes to the employees you intend to keep, overcommunicate and reassure them that they are part of the ongoing strategy. Offer retention bonuses to key management members if you think there’s a risk of them leaving. When we purchased The Perfect POS, many of our employees thought we were crazy. However, we communicated the strategy and vision to everyone and laid out the step-by-step plan for the integration. We didn’t ask everyone to agree with our decision, but once the decision was made, we did ask everyone to support the plan. Employees rarely blindly get behind major disruptions to their daily workflow, so consistent communication was necessary to turn the skeptics into believers.
It’s been 18 months since our acquisition of The Perfect POS, and to date, the transaction has been extremely successful. It’s been a ton of work and has resulted in numerous side projects, but we were ultimately able to gain a significant presence on Amazon much faster than we could have organically. (Not to mention, we also eliminated a competitor.) Is an acquisition strategy right for your business? Don’t underestimate the work involved and don’t be intimidated by taking a chance.