With the economy growing substantially as well as the low cost of capital, many business owners are considering making an acquisition as part of their growth strategies. In the past few months, I have been asked by many business owners about the risks inherent in making an acquisition.
I tell them that most accomplished acquirers admit that they have learned more from their mistakes than from their successes. Current market conditions suggest it is a seller’s market with frothy multiples. Therefore, a comprehensive assessment of the acquisition “target” is a must. In my experience, there are 10 major mistakes to avoid.
1. Not doing a thorough operational due diligence: Although standard checklists can be used for due diligence, they are not sufficient. Buyers should examine everything they need to know about the target’s business. A thorough examination requires that a unique due-diligence plan be developed for each deal and each target. Shortcuts at this stage can be extremely expensive down the road.
2. Not doing a SWOT (strengths, weaknesses, opportunities, threats) analysis: There are many concerns when making an acquisition (management bench strength, operating structure and systems, industry conditions, competitive barriers, and organizational capacity). Customer concentration is the biggest concern and threat to success. The SWOT analysis will help you match your company’s SWOT to the target’s SWOT – helping you in determine where there are alignments.
3. Not benchmarking the target acquisition against industry peer performance: Numerous databases – like Sageworks, First Research and Business Valuation Resources (BVR) – are available to help you to determine how well the business is being managed. Comparing sales growth, profit margins and various components of the balance sheet can determine if the target is in the top or bottom 20 percentile of its peer group.
4. Not accurately examining synergies: One of the most appealing parts of an acquisition is the inorganic growth and synergies it can offer. But be careful – cross selling is not a given. Sales synergies are much more difficult to achieve than duplicated cost savings. Remember, cost savings are not free. There is usually some kind of investment required for all cost savings. Know what the net contribution is after calculating the required investments.
5. Not identifying the organizations’ cultural issues: The “we don’t do it that way” attitude will kill the implementation of a promising acquisition. I recommend that a “culture integration outline” be developed between the buyer and seller before signing the definitive agreement. Understanding the differences between the companies’ policies, processes, practices and procedures will help smooth the integration processes.
6. Not asking the target’s top customers the right questions: Acquisitions become much less valuable if the target company loses its largest customers. Asking the customers the right questions indicates whether the customers are loyal to the target and if they will commit to the new organization after the deal closes. Interviewing the top 10 to 15 percent of the customers is not unreasonable.
7. Not having integration and communication plans ready: According to Global PMI Partners, 70 percent of all strategic acquisitions fail due to poor implementation of integration and communication plans with employees and customers. Without these plans, the acquisition is left dangling and can easily start the integration process off on the wrong foot.
8. Not having all the key employees tied down to employment contracts: There is always a hidden trap door for someone critical to the business. Find it and nail it shut. It is critical for the seller to deliver the senior team and key people to the buyer upon closing. If key management and employees are unwilling to sign non-compete/non- solicitation agreements, you may be headed for trouble.
9. Paying too much for the target: Offers need to be benchmarked against the market. If the combined businesses – in the worst case scenario – don’t generate an ROI on the purchase price (without earn-outs) greater than the buyer’s cost of capital, you’re paying too much. If you can’t work out a fair price with the seller, don’t walk away, run.
10. Not getting professional help: All too often, owners think that they can save money by “going it alone” without professional advisers. The latest research clearly indicates that business owners who use professional M&A advisers have a far greater chance of success when buying or selling a business than those who don’t.
Avoid these 10 common mistakes and you will be well on your way to growing both your top and bottom lines.