Updated August 18, 2020: 

In the business world, companies merge all the time. Today startups are doing the same to expand and change the way they do business. An acquisition involves buying a company and changing it to fit the way you do business. The goal is to create a new company made of the best parts of your business and the proven parts of another.

A startup would buy another business for various reasons. These reasons include access to new technology and access to new markets. Buying a company can mean being able to make new products and having access to new resources or fresh management talent. However, if you handle an acquisition poorly, your business could take on the mistakes of a broken organization and heavy losses.

Here is a step-by-step guide of how a startup acquires another company.

1. Make a Plan

Look at the reasons to buy a company:

  • Finding new markets

  • Industry roll-up strategy

  • Getting advanced technology

  • Market window strategy

  • Product supplementation strategy

  • Getting new personnel

  • Synergy strategy

  • Geographic growth strategy

  • Increasing market share

  • Diversification strategy

  • Vertical integration strategy

  • Increase supply chain pricing power

  • Adjacent industry strategy

  • Eliminate competition

Consider which of these resources you need. Find out why the business is worth buying. Develop an acquisition plan that gets the most out of the enterprise while spending the least. Focus on the aspect of the company that is most valuable to you and shape your offer around that benefit.

2. Build an Acquisition Team

Build a team that fills the following roles:

  • An executive manages the team to ensure the success of the acquisition. This person also reports progress to the board of directors. Your CEO is the best candidate for this position.

  • An investment banker handles your finances and looks into the stability of the company you are acquiring.

  • An acquisitions lawyer understands the rules of transferring ownership.

  • A human resources expert organizes the staff from the new company.

  • An IT specialist merges your technical infrastructure with that of the new company.

  • A public relations officer promotes the merger to the public. This person informs your business partners and customers about the new merger.

These people will work to provide useful information on the company. They will determine what can become a part of your business and what should not.

3. Do Your Research and Due Diligence

This process has two phases:

First Phase

Check the public information about the company. Check job listings, Web pages, blog entries, conference proceedings, news stories, SEC filings and any other data that you can use when drafting the contract. Look to see if the company fits your plans and for any issues that may devalue the company. This research will be useful during negotiations.

Second Phase

After contacting the company, tour its corporate facilities. Meet the management and check the essential elements of the company. Use this information to answer questions like these:

  • What are the actual numbers?

  • How successful and sound are the company's products?

  • What is the staff like and how can they improve your company?

  • Does the corporate culture match your company's culture?

Common documents needed

  • Summary of business owner requirements

  • Three-five years of financial data (P&L and balance sheet)

  • Annual review of owner's benefits

  • Summary of top customers

Prepare documents

  • Non-Disclosure Agreement

This document makes sure all information considered confidential will be treated carefully and not shared. It also means the information has to be returned upon request.

  • Letter of Intent

This document states that you intend on buying the company after signing the NDA and after considering the business is worth.

  • Confidential information memorandum

This document provides the prospective buyer with information for the initial offer. It is commonly referred to as the "book" and will typically include: a summary of business operations, summary of industry and market opportuntiies, financial information, and summary of auction process.

  • Indication of Interest

With this you express an interest in making a deal in vague but formal written offer.

  • Purchase Agreement

You and the seller formalize the agreement in a binding legal contract.

4. Make Your First Offer

If you like what you have found, make an offer. Make a good first impression with clear positive negotiations by offering a fair price. Because you are attempting to buy this company, you need to make the first offer. Remember that the merger working is your responsibility. Also, keep in mind that you are buying more than a company. You are buying the brand, the company's goodwill, and its people. Be flexible and make an offer between 75 and 90 percent of the company’s worth.

5. Negotiate the Terms

Reach an agreement that ends in the happy merger of two companies. Be firm but don't undermine your success by being too harsh. Try not to overpay and work toward an agreement that benefits both parties.

If things go well, you will settle on a price, but this process is about more than money. This is about understanding why the owners are making their counteroffer.

Find out why the company is incentivizing the sale. See if there might be something wrong with the company. This will give you a clearer idea of what you are buying.

After you have settled on a price, work over the soft issues. Figure out who stays with the company and who you will have to let go. This part can be emotional, so be sensitive and try to keep as much of the talent in the company as possible.

6. Write Up (and Then Sign) a Contract

Contracts are not the end of a negotiation. They are where things get complicated. The deals don't end when you go to contract. Having a lawyer recording the negotiation makes things easier. A contract lawyer will find anything you need to talk about.

If you need a lawyer to help you with an acquisition, post a job through UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.