Like with most great things in the WordPress community, it started with WebDev Studios. Two founders, writing code and sometimes writing books. And a friend of theirs, Lisa Sabin-Wilson, also writing some code and writing books. And then they merged.
If you were at Pressnomics this past year, you heard Lisa’s version of the story. And it was compelling. And I’m sure it made more than one small company think about its own position in the ecosystem.
Should they partner with someone else? Should they merge? But how do you go about doing this?
The questions were plentiful, I’m sure.
Then VeloMedia announced it had entered into formal talks to acquire Crowd Favorite, run until then by the famous Alex King. In the new company, to continue under the Crowd Favorite moniker, Karim would be the CEO and Alex would be the CTO.
Not more than a month or two later, iThemes announces it has purchased not only a security plugin, but also the developer behind it.
How big were these deals? How complicated were they? But they started a pattern of thinking that, while new in this ecosystem, is common in the tech world. Tuck-ins and roll-ups may be words not often spoken in our community, but I’m predicting we’ll all know them by the end of 2014.
The Tuck-in Acquisition Strategy
A tuck-in acquisition occurs when a company acquires another and plans to place the entire company into an existing division or business unit.
The idea is that a company may already have infrastructure in place (like a professional services group, or a product development team) and the new acquisition will drop directly into one of those divisions or teams.
Often, it’s an assimilation play. When I’ve been a part of those acquisitions, we’ve often done an asset purchase (where we pick what parts of the company we want—from people, to intellectual property, to clients/contracts), and then taken those assets and placed them inside an existing part of the company.
The changes, often in a quick integration, can feel stressful if not managed well, because often you see that the new products, or the new consultants, are now priced according to the existing rate card—which may be sharply different than before. So managing internal and external expectations is often a large part of the integration strategy.
The Roll-up Acquisition Strategy
A roll-up acquisition strategy can look very different from a tuck-in. Roll-ups consist of several acquisitions—and not always into existing infrastructure.
Sometimes you do a roll-up to increase your capacity or strength in areas where you were weak. Sometimes you do a roll-up to build a singular strong entity out of several smaller (and not as imposing) companies.
When markets are fragmented with tons of players in it, roll-ups are a way to build a market leader.
Will 2014 Be the Year of Roll-ups and Tuck-ins?
I’m not one to predict the future, but in this case, the future seems pretty predictable to me.
We’ve already seen companies like WebDev Studios and 10up growing via hiring. At some point, won’t it make sense to do an acquihire—an acquisition driven from the need to staff up? Won’t it be easier and cheaper to find small teams of people that already work well together and tuck them in?
So I’m putting it down on paper—I think they’ll each look at at least one or two tuck-ins this next year.
The new Crowd Favorite (disclosure: I’m on their Board) has already demonstrated a different strategy—having offices around the globe represent different centers of excellence. I won’t be surprised if they pursue some additional roll-ups this next year.
Another potential for a roll-up would be all the one and two-person shops doing WooCommerce extensions. Why wouldn’t WooThemes just scoop them all up in a big 2014 roll-up?
If You’re Looking for an Exit Strategy…
If you read this and think, hmm, I might want to sell my company—let me end by suggesting three things not to do, and three things to do.
- Don’t call a silicon valley friend to ask about your valuation. Their estimates are for a very different kind of company, within a very different kind of context.
- Don’t let your focus wander. The name of the game is execution. On every front. Focus on new names (new clientS). Focus on lowering attrition (clients leaving).
- Don’t expect huge up-front pay outs. I’m not saying there’s no money up front, but most of the value of a deal is often seen over time, or “on the back-end” of a deal.
By the way, we use terms like “exit” because in the investor community, it’s a way for early investors to get their money (and return) out. But if you’re part of the small shop you’ve built up, there may not be a way for you to “exit.” So be aware of that. Or plan for much lower valuations.
That said, in terms of exit strategies, here are three things to focus on.
- Recurring revenue. Regardless of whether you’re a product company or a service company, focus on getting that recurring revenue up.
- Diversified revenue. Don’t let one customer bring in the lion’s share of your revenue. That’s a red flag and risky to an acquirer.
- Happy staff. Make sure your critical staff aren’t looking at taking off. Regardless of whether you’re a product or service company, some of your strongest assets are your team.
So what’s your take? Do you think 2014 will be the year or tuck-ins or roll-ups?
Chris Lema is the VP of Software Engineering at Emphasys Software, where he manages high performers and oversees product development and innovation. He’s also a blogger, ebook author and runs a WordPress meetup in North County San Diego. His coaching focuses on helping WordPress businesses, or businesses wanting to leverage WordPress.