You may have missed the headlines about the latest deal involving Q2 Holdings. There’s a reason for that: there weren’t many.
Big-money agglomerations involving brand-name companies like AB InBev (and its $104-billion acquisition of SABMiller) and GE (and its on-and-off $3.3 billion deal with Electrolux) get most of the attention. But for a people-intensive company like Austin-based Q2, which provides a platform of electronic services to regional and community banks and to credit unions, acquiring another business and bringing its employees into the fold requires careful planning.
“Sometimes smaller acquisitions are the most difficult,” says Jennifer Harris, who has served as CFO of Q2 since 2013, a year ahead of its public offering. “You have entrepreneurial folks that are very passionate about what they’ve built, so there are feelings involved, and there’s nobody to smooth the path.” Q2, which had revenues of about $80 million in 2014, spent $10.6 million in cash to acquire Social Money, a maker of financial services software. The Des Moines-based business, explains Harris, has a product that “will allow our customers to reach millennials and the underbanked. Those two groups represent a very big target we need to figure out how to serve.”
First, however, Q2 needed to get the deal done. Here, from Harris, are some tips as to how they did it:
Mission over money. Given the emotional attachment an entrepreneur is likely to have to his or her business, simply attaching a dollar sign to it may seem insensitive. “There are feelings involved,” notes Harris. Q2 may be an 11-year-old company, but it regards itself as very entrepreneurial, especially given that its founder still serves as chairman. Where it also shares common ground with smaller companies is in its focus: “The bottom line isn’t always first,” says Harris. “It’s important that we meet the goals and the guidance that we put out there, but it’s not driving every decision that’s made.” In discussions with the acquisition target, Q2 emphasized its broader mission of strengthening communities by strengthening local financial institutions.
People then profits. Small acquisitions—Q2 made a $20 million acquisition last summer—is “as much about the people and the skills we are acquiring as it is about the company,” says Harris. In each of the deals, Q2 brought the management team to its headquarters to meet with a cross-section of management team members as well as some individuals. Q2 would likely scrap a deal, Harris says, “If we found a small organization that had a completely different culture that we thought would not mesh with ours.”
Deftness in Deal-making. Reaching terms with a smaller company can be tricky, especially given the fact that they tend not to be audited by any Big Four accounting firm. There may be conflicting signals, for instance, as to whether all back taxes have been paid—leaving the acquirer exposed to the risk of later taking on an unwanted liability. The smaller company will insist, however, that it has always operated that way. To prevent a stalemate, “You have to understand what the problem it and to address it in a different way,” says Harris. In that case it may involve putting money in escrow as part of the deal so that the acquirer has more time to investigate the situation. “In some cases, we are willing to take the risk because the liability is minimal,” says Harris. “In any case, the smaller company understands that we need to know their business as well as they do.”
–Josh Hyatt
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