By Maurie Cashman
Buying a business is something a business or individual will rarely do and even more rarely do well. The success rate for acquisitions is not great. Large companies as well as small get it wrong. So how can you improve your odds?
â€œThe argument is made that there are just too many question marks about the near future; wouldnâ€™t it be better to wait until things clear up a bit? You know the prose: Maintain buying reserves until current uncertainties are resolved, etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long term values.â€– Warren E. Buffett â€“ Forbes, August 6, 1979
My friend Hank asked me to meet with him last week to discuss the question of improving his odds of reducing this uncertainty. His company is doing well and would like to grow via acquisition. We sat down and discussed some thoughts for how to improve the odds. Here are some points we discussed that you might benefit from:
Watch Out for Un-represented Sellers. Hankâ€™s business had been approached by a business owner who was interested in selling his business. This had set off alarm bells with Hank. As we discussed this we talked about a discussion I had had with an attorney. Our conclusion was that a seller (or buyer) who approaches a company wanting to sell was risky to engage. Why? Because that seller is trying to shortcut the sale process by not engaging proper representation. He does not respect his business enough to protect his identity when trying to sell. A properly represented business will not reveal information until the time is right. If this seller will approach you wanting to sell, how many others has he approached? That lack of confidentiality could affect this business going forward, affecting you if you buy.
Further, his is not likely to engage strong advisors for other necessary parts of the transaction. We had a seller last week that wanted a clause in his confidentiality agreement stating that he would not guaranty the accuracy of the information he was providing to us, the buyer. He claimed that this was on the advice of his legal counsel. Now, you can probably guess that we exited that discussion rather quickly. Part of the reasoning was that it we were going to experience this lack of understanding or the selling process early on, it would not be worth our time to attempt to conduct due diligence and negotiation in this environment.
Is the Acquisition a Fit? Why are you interested in this acquisition? Does it fit with your current business? Does it launch you in directions that you cannot go on your own or to move faster than you could without the acquisition? These are key questions you should ask before entering an acquisition discussion.
Likely the biggest reason acquisitions fail is that these questions have not been answered properly. It is very interested to get excited about acquisitions. People find it glamorous and fool themselves intothinking they will be good at it. I have known many corporate VPâ€™s of something like Business Development, in charge of acquisitions, and most donâ€™t know what they are doing. They are sometimes in a difficult position as they may be paid partially on the number of acquisitions get done. Seriously. So they will often rationalize their way to why a deal should be done.
Often acquisitions are rationalized to get a deal done. The landscape is littered with acquisitions that were rationalized via â€œcost synergiesâ€ that are never realized. The pressure to get a deal done is so great that intelligent people will act completely irrational in evaluating the true value of the business in relation to their own.
This also happens when evaluating cultural fit. Many businesses may be attractive on their own, but when the cultures of the acquirer and the acquired are completed out of sync. It is nearly impossible to achieve the goals of the acquisition if the cultures clash. There will be fighting, hard feelings, and possibly a guerilla campaign to sabotage the deal during due diligence and after the deal is done.
Do You Have a Plan? Letâ€™s say you find a good company that is a fit for your objectives. Wonderful. Do you realize that you can destroy all of the value you sought to create in the first ninety days following the closing?
Companies and individuals often get so caught up in the acquisition process that they forget that theyare going to have to successfully transition the new business into their own model once the closing is done. The employees you are acquiring as part of the deal are excited about the new opportunity and also a little apprehensive. So are your new customers and suppliers. You have a one-time opportunity to get this right.
So what happens? You are exhausted from the acquisition process and decide to take a two-week vacation to decompress. Or worse, you come in and impose your new management style in place of the style that the existing company has been using for years. You throw away everything that made the acquisition attractive in the name of imposing your will on what you have purchased.
A better way to handle this is to have a ninety-day plan for what you are going to do to get theacquisition off to a strong start. Your odds increase dramatically if you can get the first quarter completed without inflicting any damage. Your goodwill with stakeholders will increase and the likelihood that they will support later changes will increase dramatically. If you blow the initial push, you are unlikely to ever get another chance.
Buying a business is a very effective strategy for increasing the value of your business. An objective outside advisor is critical to insuring that the right acquisition is being done for the right reason. Managing these three factors effectively will increase your chances for success.
Â© 2016 Aspen Grove Investments, Inc.