In 2016, I purchased an E-commerce business that sold plugin’s for the Magento storefront platform. As a result, a lot of my capital was tied up in a low-margin, resource intense, and challenging business. After a year, I realized the business was my first failed acquisition.
As an investor, my goal is to operate my businesses with high margins and healthy cashflow. I achieved neither of those goals and sold the company after two years.
I knew I had to admit my mistake and prepare to sell when we were spending 70% of our attention on this underperforming business and neglecting the other companies that were growing and thriving.
Focusing on the least rewarding business is the opposite of how I operate today, a lesson learned from this failed acquisition. Today, all my efforts go into nurturing the horse that’s running the fastest with the most wide-open space ahead.
With years of time to reflect – and the pain from this failed acquisition fading into the past – I wanted to capture the lessons I learned so that others can learn from them too.
How Innocent Can A Failed Acquisition Look?
If an online business broker sent you the below executive summary, would you be able to spot a future failed acquisition in this broker description?
For Sale: A software business selling plugins for the second most popular E-commerce platform with over 250,000 companies actively using the platform worldwide. The platform recently released their newest and most expansive upgrade, thereby guaranteeing a healthy, long-term ecosystem for the business. The global popularity ensures a large developer pool that can help the new owner maintain current levels of growth.
Started by a top tier developer with deep ties to the industry, sales increased 100% in the past 12 months via his unique sales channel. Included in the sale are all of the tools, methods, SOP’s to replicate his success.
With thousands of current customers on annual licenses, a new owner is ensured an ongoing recurring revenue stream. The large user base ensures numerous opportunities for future up-sells and custom migration services.
The challenges are all listed in the executive summary, but I did not recognize them at the time.
Why Write About Failure?
When something goes right, we tend to give ourselves too much credit for our role in the positive result.
When things go wrong, we want to blame others, or the external environment, or anything other than ourselves.
Essentially, we believe that we are the reason for all of our success, yet we are not the cause of our failures.
I know all online company acquisitions aren’t successful. I know future ones that I make will also not be as successful as others. Some may even end up as a future failed acquisition example too.
Across the board, there are likely many more failures than successes. Yet, I don’t see a lot of failed acquisition examples discussed openly. It’s natural in business and in life to only point out the good events that happen to us and bury the bad things under the rug.
My goal here is to acknowledge where I was wrong in this acquisition and assign blame where it is due, with myself. Furthermore, if others can benefit from my experience, I would be selfish to withhold my education and thoughts from the community.
Due Diligence Against Myself
In this essay, I highlight my lack of self-awareness regarding the acquisition. I outline how I failed to educate myself about the company, the marketplace the products sold into, and my place in them both.
The issues below are just the technical reasons the acquisition failed. They are particular to that business and not applicable to many other acquisitions. However, my failed approach to the acquisition is relevant to all other acquisitions.
I was the wrong investor and owner for this company because I displayed hubris, ignorance, and the false belief that I could do anything with software if I put my mind to it. I went forward with an overestimation of my abilities and a blind ignorance of my weaknesses.
The lesson I learned from this acquisition was not “stay away from Magento” or “I’m not cut out for B2C or E-commerce”. I learned I needed to be a much more impartial judge of the strengths I bring to a business acquisition. Additionally, I needed to perform due diligence on myself to determine if the company would benefit from what I brought to the table.
I regret that it cost me so much time, money, and pride to learn these lessons. Yet, it has made me a much more cautious, methodical, and successful investor in the long term.
When all is said and done, this acquisition failure will likely be one of the best things that’s ever happened to me in my online business acquisition and operation career.
Five Lessons Learned from a Failed Acquisition
Framing the Business Incorrectly
I believed I bought a software company that sold products via an E-commerce platform. But in reality, I bought an E-Commerce company that sold software.
When I reviewed the business for purchase, I framed the business in my mind as a software business that made sales online instead of an E-Commerce business that sells software products. Even if you had told me at the time, I likely wouldn’t have realized how framing the business genre incorrectly would impact my long-term success.
E-Commerce was not an online industry I had spent much time studying or working in prior to the purchase. At the time, I was primarily a software investor. That doesn’t mean I can’t learn about E-commerce, or affiliate marketing, or lead-gen services. It’s just that my strengths lie in software first and other online genre’s second.
Therefore, from the start, I didn’t understand the company business model. Nor did I recognize that the B2C market for E-commerce was different than the B2B/B2C market for software.
Failing to frame my acquisition properly wasn’t something I realized until years after I sold the company. It was an unknown unknown because I didn’t know how badly I mischaracterized my own company.
Framing the Market Incorrectly
Magento v2 was released in late 2015, the same time I purchased the company. The platform – from a plug-in developer perspective – was incompatibly different. This was not an unknown issue at the time, it was just unknown to me.
A simple porting of our v1 extensions to v2 wasn’t easy, cheap, or even necessary. Many of the issues with v1 that my new business solved were unnecessary for new installations of Magento v2. Once customers upgraded to v2, many of them no longer needed our best-selling plugins.
I was a complete outsider to Magento. That caused me to overlook the fact that Magento was an overcomplicated and hard to use framework. I assumed, incorrectly, that v1 plugins would still be needed and could easily be upgraded to v2 plugins simply because the seller said so.
On top of that, Magento’s v2 change resulted in significant v1 to v2 migration expenses and beta-type functionality bugs. These changes rankled even their most satisfied and dedicated customers.
The prior switching cost headaches and expenses that kept companies on Magento even when they hated it disappeared when migrating to Magento 2 was just as painful and expensive as starting fresh on Shopify. Online stores started dumping Magento for more business-friendly solutions like Shopify. They could replace it with solutions that had lower complexity, more modern features, and a comprehensible path forward.
The overall trend for Magento usage and searches fell out of favor following 2016’s move to v2. In short, my most profitable customer pool was shrinking every day.
What’s my point here?
My point is, these trends were foreseeable and known within the Magento community. I was not one of those people. I neglected to either learn for myself or speak with people in the Magento ecosystem.
These facts were discoverable and likely the reason the seller wanted out of the company. I failed to do my research, failed to look critically at the business and the market it operated in, and failed to account for the fact that I was ignorant of the larger market forces that would dictate the success of the investment. And that left me with capital tied up in a failed acquisition instead working productively for me and my team.
Framing the Customer’s POV Incorrectly
Getting people to pay for a Magento plugin is difficult.
Magento is a free open source solution. The user is conditioned from the start that using Magento is not going to cost them a lot of money, in many ways like WordPress conditions users today.
The problem is that getting Magento to work can be very expensive in both time and money.
Incidentally, this is the one of the reasons some investors shy away from business offerings centered around WordPress. Most people using WordPress are conditioned to believe they can run their website without paying for anything other than hosting. It’s difficult to create WordPress plugins that do well financially, despite WordPress’ market share and success. (At the end of 2020, there were over 54,000 free WordPress plugins. The number of paying WordPress plugins is likely only a small fraction of that total.)
There is nothing wrong with users not expecting to pay. The problem was with me, not the users. I was not a Magento user, never built a store with the product, nor took the time to interview any Magento customers. Therefore, I didn’t know the resistance Magento customers had for paying for products.
Failing to frame my acquisition customers correctly resulted in our focus being completely wrong for their typical use cases and need for our services.
Framing the Prior Business Success Incorrectly
The original owner was a top tier Magento developer. He also excelled at a unique method of increasing sales via customer service interactions with customers. He shared all the tools, email sequences, SOP’s, and funnels to replicate his success. Sounds great, right?
Unique and Personable Sales and Customer Service =
Expensive Employees to Replace
The prior owner learned how to profitably exploit his customer service queue as his primary sales channel. Customers would write in with an issue and by the end of the ticket they would purchase additional products. This was due to his deep understanding of the technology, knowledge of the routine pain points of Magento, and his willingness to spend time reviewing his customers store-fronts and recommend the right plug-ins for their business.
To replace him, I had to find someone who was not only a top tier expert in Magento development, but also really strong in customer service and add-on B2C sales via email. How many unemployed engineers are out there waiting for me that are experts at those three skills? Very, very few.
What appeared like an obvious benefit (wow, what a unique sales channel!) as a buyer turned out to be a liability as an owner (wow, nobody else can do the same affordably!). The prior owner was not replaceable by one, or even three, people. I failed to understand during my due diligence that he was unique and I would never replace such a charismatic founder at a price that made the investment viable.
Be wary of businesses that do well because of the owner. If the owner is the reason for the success, not the business itself, that person will cost a lot to replace.
Highly Customized Solution =
Highly Priced Experts to Maintain
The prior owner also built a highly customized Magento storefront, which was a strong selling point. Not that I knew when I bought it, because I didn’t know the differences an out-of-the-box storefront and a highly customized version. The customization allowed the store to execute complex up-sells that significantly sold more products. Therefore, breaking any portion of that customization meant lost sales and high costs to fix.
The storefront was expensive to maintain because it required a lot of time to understand how to make even the simplest change. Whenever we fixed one issue, we broke another part of the storefront.
It required full-time maintenance and monitoring by an experienced engineer commanding high-level compensation. This was not the type of acquisition where one could hire a few outsourced engineers and be successful.
Paying for a talented engineer to do complex work is not an issue, but purchasing a site and not discounting the expense of replacing the founder was an issue.
Framing the Technical Support Ecosystem Incorrectly
If you had to guess, which ad would get the stronger and more qualified responses?
Ad #1: PHP developer familiar with Magento to design, prototype, build and launch new Magento Plugins.
Ad #2 PHP developer familiar with Magento needed to answer customer support questions, fix bugs, and push new sales with customers.
When developers spend 5-10 years learning how to write complex applications and refine their skills, customer service is not where they want to end up. They want to create, design, and implement. Not answer tickets, appease sometimes overbearing customers, and fix what others have broken.
The Magento ecosystem has a large supply of developers. Still, the pool is much smaller when you need strong language skills, the temperament to work in customer service, and the soft sales skills to artfully recommend products without sounding like you are reading from a pitch sheet.
Many developers have these skills, but most are like the seller, building out tools, services, and products themselves. They’re not waiting around for someone to hire them. Most likely, they already have a high-paying position or are working for themselves at Indie Hackers.
I wasn’t knowledgeable enough about the Magento talent pool to know how challenging it would be to replace a superior technical founder with the available talent on the market.
Ultimately, I didn’t understand the technical support ecosystem for Magento. I assumed a single developer could replace a single founder like many other software projects I worked on previously.
A Failed Acquisition – Was It The Business or Was It Me?
To go back to my earlier question, “Would you be able to spot a failed acquisition in this broker description” the answer isn’t really with the description of the business at all.
The problem was that I didn’t perform the proper due diligence against my skills, education, and talents. Had I done that honest self-assessment when I read that description, I would have realized that the business was a poor fit for my business background and skills early in my acquisition career.
I failed the business, not the business that failed me.