पाठशाला Pathshala · संचालन Sanchālan, Operations · Lesson 26 · Scale

Acquiring a company: the small acquisition done right

A tuck-in acquisition is bought for one reason and lost for another. Write the reason down, price what you will actually keep, and integrate the people before the systems.

Pathshala, The Founder Library · 11 October 2026 · 7 min read

Hands fixing a wooden leg into the frame of a stool. — Photograph: Sóc Năng Động · Pexels

Most small acquisitions are not undone by the price. They are undone in the six months after closing, when the people who made the target worth buying decide that the company that bought them is not a place they want to work. The deal is won or lost on decisions that can be made before anyone signs.

This lesson is for a founder of a company with real revenue considering a first tuck-in: a team of five to fifty people, bought for cash, shares or both. It covers why to buy at all, how to evaluate a target, how to price what you will actually keep, the legal shape of the deal in India, the first hundred days and the review that tells you whether it worked. For the other side of the table, read [selling the company: the legal mechanics](/library/selling-the-company-legal-mechanics-indian-m-and-a).

One sentence before anything else

Clayton Christensen and his co-authors opened The New M&A Playbook in the Harvard Business Review of March 2011 with the observation that study after study puts the failure rate of mergers and acquisitions somewhere between 70 and 90 per cent. Their diagnosis was that acquirers misread what they were buying: a deal meant to improve the current business needs to be absorbed, while a deal meant to change the company’s direction needs to be protected from absorption. Most failures come from treating one as the other.

For a small acquisition the same idea becomes a discipline. Write one sentence that says what the target gives you, how much faster than building it, and how you will know. A team: eight engineers who have built payments infrastructure, a year faster than hiring them one by one. A product: a working module your customers have asked for, two years faster than building it. Customers: four hundred SME accounts in a region where your sales team has none. Each of these implies a different price, a different structure and a different integration. A deal that cannot be written in one sentence is usually a founder’s enthusiasm looking for a justification.

Evaluating the target

Diligence the thing you are buying before anything else, because if it is not there the rest does not matter. If it is the team: meet every person who matters, alone, and ask what they would do if the deal happened; find out what they are paid and what they were promised; check that the people you want are employees with clean contracts, not contractors who can walk. If it is the product: have your own engineers read the code, check that every contributor signed an [IP assignment](/library/ip-assignment-company-owns-what-you-built), and list the open-source licences. If it is the customers: take the customer list, the invoices and the bank statements for two years and rebuild revenue yourself; measure concentration, churn and how many customers are on contracts that can be assigned to a new owner.

Then the liabilities, which in a small Indian company tend to sit in the same places. GST returns and any open notices; TDS deducted and deposited; provident fund and ESI where thresholds were crossed; the statutory registers and filings with the MCA; pending disputes; promises made to employees about equity that were never written down. Use the same [data-room discipline](/library/due-diligence-data-room-that-closes-round) investors would apply to you. Each item found becomes either a price reduction, an indemnity or a reason to walk away.

Pricing what you will keep

Sellers price the target on what it is today. Buyers should price it on what it will be a year after closing, inside their company, after the customers who leave have left and the costs of integrating have been paid. Those are different numbers, and the gap between them is where most small acquisitions lose money. The figure puts them side by side.

At the defaults, ₹8 crore for a business billing ₹4 crore is a headline multiple of two. Keep seventy per cent of the revenue and spend ₹1 crore integrating, and the effective multiple on the revenue you kept is above three, with payback on gross profit just under five years. Raise retention to ninety per cent and payback drops below four. That single slider is why integration planning belongs in the pricing conversation, and why the most useful diligence question is how many of the target’s customers will still be paying in a year, and why.

The structure then moves risk back to the seller. Pay part of the price at closing and the rest later: deferred instalments, an escrow released when warranties expire, or an earn-out tied to milestones the buyer cannot manipulate, such as revenue from named accounts or the key people still employed. Where the seller is a non-resident, the Reserve Bank’s Master Direction on foreign investment (paragraph 7.9.1, updated to 15 June 2026) allows up to 25 per cent of the consideration to be deferred, held in escrow or covered by an indemnity for up to eighteen months. Keep part of the value for the team as a retention pool that vests over two to three years, separate from what the founders of the target are paid for their shares.

Price the company you will have a year after closing, not the one the seller shows you today.

Shares, a business transfer or a merger

There are three legal shapes, and the choice is driven by liabilities, contracts and tax rather than habit. Buying the shares keeps the target as a subsidiary with its contracts, licences, registrations and employees intact; it also keeps every liability the company has ever incurred, which is why the indemnities matter. Buying the business through a business transfer agreement moves the chosen assets, contracts and people into the buyer; liabilities left behind stay behind, but customer and vendor contracts may need consent to transfer and employees move on new terms. Merging the two companies combines them into one legal entity, usually after a share purchase has made the target a subsidiary.

For a merger between small companies there is a faster path. Section 233 of the Companies Act and rule 25 of the compromises and amalgamations rules allow a fast-track merger for classes that include two or more small companies, two or more start-ups, and a holding company with its wholly owned subsidiary: objections are invited from the Registrar and Official Liquidator within thirty days, and if the Central Government passes no order within sixty days of receiving the scheme it is deemed to have no objection. Competition law will rarely bite on a tuck-in; since the 2023 amendment, the deal value threshold for notifying the Competition Commission is ₹2,000 crore. Tax is where structure choices cost real money, including the treatment of the target’s accumulated losses after a change in ownership. Take tax advice on the structure before the term sheet, not after.

The first hundred days

Integrate the people before the systems. Day one: the founders of both companies tell the acquired team together, in person, what happened, why, who each person reports to and what will not change. Every key person gets a one-on-one that week with their new manager and a written offer that includes the retention terms. The first week: the target’s customers hear from someone they already know, with a single message on continuity of service, contacts and pricing. The first month: one integration owner on the buyer’s side, with a written plan of what merges when: payroll, policies, tools, the product roadmap and brand.

Thin curls of hardwood shavings on a workbench with a woodworker out of focus behind. — Joining two pieces of wood takes patient fitting before any glue goes on. Joining two teams is the same work, done in the first hundred days. Photograph: Ono Kosuki · Pexels

Protect what you bought. If the thesis was a team that ships fast, do not fold it into the buyer’s release process in week two. If the thesis was a customer base, do not raise their prices in the first quarter. The acquired team will read every early decision as evidence of what the buyer values, and [culture is what you tolerate](/library/culture-is-what-you-tolerate) in those weeks as much as any other.

The acquisition review

Hold the deal to its one sentence. At thirty days: are the key people still there, still engaged, and clear about their roles? Has every customer been contacted? At ninety days: compare revenue kept, people kept and integration spend with the numbers used in pricing, and name what is behind plan and why. At six months: decide what remains separate and what merges, and close the integration project. At 365 days: write a one-page review for the board: the sentence, what was paid, what was kept, payback on current numbers, and what the company would do differently. Keep it in the board record. The second acquisition will be better priced for it.

Law and regulation were checked on 11 October 2026 and change often. Nothing here is legal, tax or investment advice.