Horizontal Integration: How To Acquire Other Companies As a New Startup Founder

“A-a-acquiring… isn’t that only reserved for huge law firms, and like, Microsoft?”, you might think, visibly confused.

But no, there are actually many ways small businesses and startup founders can merge with, acquire, or simply work with other small businesses to scale their own.

Under a more fancy and nerdy name, this process is called “Horizontal Integration”.

Basically, I’ll show you how YOU can also eat up other companies. It’s not just a thing for tech giants. *gulp*

I’ll also reveal how *I* use horizontal integration for my own business. If you’re a little weird and voyeuristic, you’ll definitely find it interesting.

I Can Barely Pay Rent, How Exactly Do You Propose I Buy Another Company?

Well… I’m not.

As you already said, you don’t have a lot of money to play around with (hey, your words, not mine)…

… which is why you can merge with other companies.

Merging with a has a ton of potential benefits. Let me give you an example to illustrate them.

Let’s say a local bakery acquires another bakery across town.

Before integration, each bakery has its own accounting software, delivery service, and marketing team. All of that costs them money.

After merging, they consolidate operations – one accounting system, one delivery service, and a smaller marketing team.

They lower their expenses.

At the same time, they sell more of their products, since no one really sits down for a croissant without ordering an overpriced coffee.

And if that wasn’t enough, they automatically get an edge over any café that doesn’t sell pastries… and over any bakery that doesn’t sell coffee.

I understand you might want to guard your business like it’s your baby. Maybe you never even thought of merging or partnering with someone, but it might actually be worth it.

(and no, I don’t sell a merging service. I’ll sell you other products 😉).

For now, you can partner with my 8D Framework For Creating and Scaling Your Startup Business. It’s going to help you turn your vision into reality and will assist you at every step of the way.

How Horizontal Integration Cuts Your Costs And Helps You Profit More $$$

Horizontally integrating with other business owners (ooh la la 😏️) lowers your expenses by lowering your overhead rate.

To understand it, let’s first bang out a couple of simple definitions.

Overhead costs are expenses a business must pay to operate but do not directly contribute to making a specific product or service. For example, rent, utilities, insurance, supplies…

On the other hand, direct costs are expenses that vary based on production or service volume (like materials, wages, etc.)

The overhead rate is simply a percentage that helps a business figure out how much overhead costs (like rent, utilities, and office supplies) are compared to direct costs (like materials and labor for a product or service). Here’s how to calculate the predetermined overhead rate:

Super complex formula: Overhead Rate = (Total Overhead Costs/Total Direct Costs) x 100

We’ll use the café example to make this clear. If a café has $5k in overhead costs (rent, utilities, etc.), and $10k in direct costs (coffee beans, barista wages, etc.), then it has an overhead rate of 50%.

Here’s why the café wants to calculate this:

• The café calculates that the overhead rate is 50%.
• The café knows a latte costs $2 in direct costs.
• The café then understands they should price the latte above $3 ($2 + 50% overhead + profit margin).

Horizontal integration helps you cut costs because it can decrease your overhead rate.

When you split your rent and utilities, of course, you’ll end up saving money! Then, you can either profit more, or charge less and be more competitive that way.

I just want to warn you about a common mistake in calculating the overhead rate.

People sometimes fail to account for seasonal variations in production costs! For example, a manufacturing company might have higher overhead costs during peak production seasons because their machines need more maintenance (cuz they’re working more).

So when you calculate your prices by taking into account the overhead rate, adjust it based on seasonal changes! If you’re in a dry period, the rate might be small, and you might (wrongly) charge way more than you should.

Practical Part: How To Go About Merging Or Collaborating With A Similar Business

Theory without a practical guide is useless.

Sure, collaborating, or even merging with another sounds good, but who do you choose and how do you go about it?

First, as always, you need to do a bunch of market research. Shift your focus from an internal perspective to an external, market-oriented one.

You’re trying to see what your target audience wants and needs, not just what you think would complement your products or services well.

Quick example: Say you have a blog.

What you can do is purchase ANOTHER blog that writes about similar topics… and then incorporate their articles into your blog.

That shouldn’t break the bank and should help you with your SEO rankings. That’s what I did.

Or let’s say you’re a graphic designer.

At a certain point, you might realize that clients are constantly asking you if you can also create animations for them.

However, while you can make certain characters look fabulous and pretty, you lack the animation skills to bring them alive.

And so, you leave plenty of money on the table, since you can’t fulfill the demand.

Angry and depressed, you find a fellow graphic designer to partner with – and all of a sudden, you’re able to fulfill the demand.

They lived happily ever after 🙂

If you don’t want to partner with another business, you can always engage in some friendly referrals with people from another part of the value change.

For example, a client asks you to design and code their website.

You’d say “sorry, I can’t code your website, but my buddy Anthony can, he’s a great web developer.”

To return the favor, Anthony might send some clients your way when someone asks him to design something. Win-win!

Conclusion: Think of your audience and see if there’s a way you can fulfill the needs that are not necessarily part of your expertise.

Horizontal Integration Challenges: It’s Not All Sunshine and Rainbows 🙁

Horizontal integration doesn’t just mean making more cash and having less costs. It also involves merging different company cultures, processes, and technologies.

Yep, it’s going to take some compromise… but there are ways to make your life easier.

Always remember to prioritize me-ti-co-lous documentation throughout the integration process.

By that, I mean documenting existing workflows, systems, and critical knowledge held by individuals in each company. It’s going to help you have a much smoother integration process.

Also, it ALWAYS makes sense to document your processes. If you want to replace an employee or if they decide to leave by themselves, such documentation is going to save your ass.

Instead of spending countless hours training someone new, you can make it easier for everyone by showing them the document you created. But that goes over the scope of this article.

Don’t think that integration is a less important part of the process. McKinsey’s 2024 reports that 67% of failed integrations in 2023 were actually attributed to cultural misalignments. Not financial or operational issues.

They also found out that companies spending over 30% of their integration budget on cultural alignment programs showed 2.5x higher success rates. That’s a whole ONE THIRD. That’s how seriously it should be taken.

Takeaways

Merging/collaborating with other businesses has plenty of potential upsides for founders, and no, you don’t have to be Mr. Bezos to acquire something. Here’s a summary of how to go about it without spending $64.8B (obviously pocket change for a guy like me):

• You don’t have to buy companies, you can also merge with them. Doing so helps you cut costs and increase revenue. Basically profitability 101
• Instead of paying for 100% of a given system (like accounting or marketing), you split the costs.
• By horizontally integrating, your overhead rate decreases. Then, you can either have more profit and call it a day, or you can lower your prices to be more competitive. In some cases, you can even increase your prices!
• Don’t make the mistake of not accounting for seasonality when calculating your prices based on your overhead rate.
• As a startup founder, you can be on the lookout for other founders who offer complementary services. If you’re a graphic designer, you can partner with, for example, web developers.
• If you don’t want to have partners, you can refer your clients to people who offer complementary services. That way, you might get some clients in return. Worst case scenario, you get a new friend.
• If you do end up merging with another company, please be mindful of cultural integration.
• 67% of failed integrations in 2023 were attributed to cultural misalignments, not financial or operational issues.
• Document existing workflows, systems, and critical knowledge held by individuals in each company. It’s going to help you have a much smoother integration process.