In this series we tackle the thorniest questions facing business leaders today.
“My software company has been growing steadily for years — until recently, that is. Now that we’ve hit a plateau, we’re looking to expand to new markets. I know that mergers and acquisitions (M&A) can be an efficient and effective growth-acceleration strategy, but how can you tell when it’s the right time to buy? And given the shifting trade landscape, what should I keep in mind as I shop?”
— Impatient in Innisfil
Dear Impatient,
You’re absolutely right: M&A can be a smart strategic move, even in uncertain economic times. According to a 2024 Bain & Company report, companies that embrace this approach generate shareholder returns that are 130 per cent higher than firms that avoid acquisition. The first thing to keep in mind, says Dennis Ensing, a startup adviser at Mars Discovery District, is that there’s no specific moment when an M&A must take place. That decision is contingent on hitting several milestones: your company should be post-seed funding, with a reasonable amount of runway and support from investors. But the most important factor, Ensing says, is whether leadership is clear on strategic alignment.
“The right time is when you’ve identified what’s important to you,” he says. “So really you’re asking, ‘Why do I want to acquire another company?’ As long as that answer aligns with your business’s overall goals, you can pull the trigger.”
Identify in-house gaps
To begin, Ensing recommends conducting a self-assessment aimed at identifying key business areas that an acquisition would support. You’ve already zeroed in on one: expanding into new markets.
Talent is another common goal. Purchasing another company with the express purpose of gaining access to its staff, often referred to as an “acquihire,” can be a great way to bring on employees with a highly specialized skill set. This strategy is especially valuable in sectors where noncompete agreements are prevalent, which can further limit the pool of prospective talent. It can also be more efficient to hire an existing team instead of assembling one piecemeal, which is key if you’re looking to scale quickly.
Buying another company can also be a way to secure new product capabilities, allowing you to sidestep the expense and time required to develop new offerings with your existing team. Increasingly, companies are using M&A to accelerate digital transformation. They can also be a way to transform internal processes, integrate new tools or secure access to customer data.
“The AI revolution is a big part of this,” Ensing says. “A lot of companies are rushing to acquire AI-related businesses because they want to integrate the technology into their core product lines faster. They want to acquire a proprietary AI platform or secure access to digital assets.”
That was the case for Toronto-based Security Compass. The company’s flagship product, SD Elements, provides developers with tools to integrate security and regulatory compliance into software from the outset. They found that customers were increasingly looking for additional functionality in threat modelling, which involves analyzing systems to proactively spot security vulnerabilities. Rather than try to develop that product offering internally, CEO Rohit Sethi and his team looked to a startup called Devici, whose core offering is built around threat modelling.
“Obviously, every software company is thinking about how AI is going to change their products,” says Sethi. “We felt that what Devici had done was really complementary to what we do, and could also be a good foundation for more growth in terms of artificial intelligence capabilities.”
Seize opportunities in upheaval
The current tumultuous trade landscape can actually make M&A a more attractive option. For companies that focus on physical goods — manufacturing, agriculture and the like — acquiring a producer of necessary materials close to home can allow companies to pivot away from imports and reduce ballooning tariff-related operating costs.
And as Ensing notes, geopolitical uncertainty can also spark new business opportunities for Canadian software startups, especially those who are looking to expand into new territories.
“The U.S. market is still 50 per cent of the world, so most of the time, Canadian companies are not thinking about a European strategy, even if they take inbound sales from Europe,” he says, adding that broader trade issues could potentially open up earlier access to the European market.
That’s not to say there aren’t pitfalls. While Canada and the European Union have a free-trade agreement, the Comprehensive Economic and Trade Agreement (CETA), the regulations governing particular sectors can differ among countries, which means prospective buyers must be prepared to negotiate those parameters in addition to CETA policies. However, as the volatility of American economic policies makes the U.S. a less appealing trade partner, new opportunities in Europe and elsewhere can make those challenges well worth navigating.
Be intentional about integration
Company culture should be top of mind in any M&A deliberation. Perhaps your firm is process-driven and prioritizes collaborative decision-making, and you’re looking to acquire a company with more of a top-down structure. If those points of difference aren’t managed carefully through a comprehensive integration plan, it can lead to decreased productivity and increased employee dissatisfaction. Most acquisitions fail, Ensing says, because of a culture mismatch. A smooth integration process starts before any contracts are signed, he says.
Know when to hold and when to fold
During the discovery process, it may become clear that it’s not the right time to buy — which is not necessarily bad news. In fact, Ensing’s chief frustration in the M&A realm is when companies pursue a potential acquisition just because “some shiny object comes along.” Although it’s not unusual for founders to take this approach, it doesn’t tend to prioritize strategic alignment.
“It’s hard because we all love shopping, but what I really urge them to do at that moment is to say no,” he says.
Are you a business leader with a conundrum? Write to us at [email protected].
Stacy Lee Kong writes about technology for MaRS. Torstar, the parent company of the Toronto Star, has partnered with MaRS to highlight innovation in Canadian companies.
