mergers and acquisitions Archives

Three Proven Strategies to FAIL in Your Business Acquisition

July 1, 2021 by bba12

Every business seeks ways to enhance market share and establish dominance in its niche. One proven strategy is to acquire other organizations that can contribute value and open new markets. However, history has shown that many acquisitions end in failure. In some cases, those failures could have been avoided. Here are three proven strategies to FAIL in your business acquisition. Are you making one of the mistakes?

1. Focusing on the Wrong Issues

In the majority of cases, acquisitions focus primarily on financials. Industry experts generally agree doing so rarely generates long-term value. While cutting costs does, indeed, help in the short term, it’s not a strategy you can repeat. In addition, cutting costs often results in reduced productivity or research and development, which hampers long-term growth.

Another common error is shopping for the cheapest acquisition rather than the one that is most likely to add value. If a company is priced too low, it generally suggests it is in distress, which can present a real opportunity or, conversely, lead to additional losses.

Of course, there are other possible issues that could impact the success (or failure) of an acquisition. For example, acquiring a company with a culture that’s totally different rarely ends well. While it’s possible to merge companies when cultural differences are present, it’s not easy.

One proven way to avoid making errors is working with advisors familiar with the acquisitions process. As a rule, acquisition experts in Texas will include a well-established broker, financial experts, and legal representatives. Those experts work closely with clients to determine which potential acquisitions are worth exploring in depth.

2. Not Having a Rationale for the Acquisition

According to industry experts, too many companies seeking acquisitions don’t have a well-defined reason for the acquisition. In some instances, a company lacks any real reason for a specific acquisition. It’s always vitally important to determine why you’re considering an acquisition. Going ahead with an acquisition simply because it looks good on paper is not in the best interests of your company or the company you’re acquiring. Understand what value the acquisition will add and make decisions based on what’s best for both organizations prior to finalizing any acquisition.

Remember that the initial acquisition is only the beginning, as integrating the two organizations will certainly present some issues. Your rationale for the acquisition should always consider how all steps in the process will impact your organization and the company being acquired. If your rationale doesn’t suggest the integration process will flow smoothly, it’s time to look elsewhere for an organization that will benefit your company.

3. Failing to Perform Due Diligence

It’s always important to understand what you’re getting into when considering any acquisition. Sellers understand they’re expected to provide details related to their organization, but not all will be forthcoming with details that might cause concern. When considering a possible acquisition, it’s attention to detail that often uncovers possible issues that must be addressed before finalizing the buying process. Here are a few of the elements to include in your due diligence.

Explore possible legal issues. This is where legal advisors are crucial. While it’s relatively difficult to hide tax liens and similar problems, it’s not hard to disguise other problems. For example, environmental issues can cause significant financial problems if they’re not discovered during the due diligence process. Your legal team, working with the Seller and the business broker, will provide advice when the potential for environmental problems is present.
Review the valuation process used. The Seller’s business broker may use one strategy to arrive at an asking price while your business valuation expert may recommend another approach. The numbers used to arrive at the asking price may be similar, but the analysis of that data may result in different final numbers. For example, the selling broker may rely on the market approach to valuation while your third-party business valuation may believe an income approach is more valuable. It’s a good idea to look at the results provided by different approaches, especially if the company being acquired is in an industry that’s outside your area of expertise. Remember, if your deal is done through a bank that is backed by the SBA, the SBA will require a third-party, arms-length valuation.
Consider multiple financing options. There are usually multiple options for financing an acquisition. Some favor buyers who wish to purchase the business with as little upfront cash as possible and are willing to pay higher interest rates to close the transactions. Other buyers have significant funds available to make a large down payment and want to keep their long-term costs to a minimum. How the company is structured will also be important here, as some financing options require specific forms of ownership. Your broker can assist with determining the best ways to approach financing acquisitions.
Know what you’re purchasing. A complete list of assets being acquired is an absolute must. Determine the ownership of all equipment included, as it’s common for companies to lease equipment. Of course, it’s also important to determine the condition of all assets, as having to deal with major building repairs or machinery replacements will create financial liabilities after the sale.

Acquisitions will always vary to some degree, so enlist the help of advisors throughout the process to ensure no due diligence matters are omitted. In addition, remember that some factors will be more important than others in certain settings and industries.

Is It Time to Move Forward?

It’s rarely easy to determine when (or when not to) move forward with an acquisition. The process will be time-consuming and, in many cases, expensive to complete. While risks are inevitable when acquiring a business, following recommended steps tends to minimize those risks. In this article, we discussed three proven strategies to FAIL in your business acquisition.

So, what’s the first step? Discussing your objectives with acquisition experts in Texas should always be your first step. Business brokers are well-versed in the local markets and understand the steps required to complete a transaction. At the same time, your broker will recommend strategies to ensure the acquisition is successful and generates the profits you expect.

If you’re unsure which types of acquisitions will meet your needs, now is the time to discuss the various options and determine which path will provide the desired results. To get started, and avoid strategies that lead to the three proven strategies to FAIL in your business acquisition, contact a local acquisitions expert today.

Best Practices for Each Phase of Mergers and Acquisitions

May 30, 2021 by bba12

It’s natural for company owners to explore ways to move their businesses forward. In this post, we’ll describe best practices for each phase of mergers and acquisitions. In many cases, growth means acquiring another company or merging with a similar organization to gain a competitive advantage in the marketplace. However, the process isn’t always easy, and numerous decisions must be made before a merger or acquisition can be completed.

To avoid making errors, it’s crucial to know and understand how to complete the process seamlessly. Business acquisition experts know there are specific steps to follow to avoid problems during any merger or acquisition. Here are just a few of the best practices to adhere to when it’s time to move your company forward.

Create a Strategy

It’s virtually impossible to move forward without first defining what you’re attempting to accomplish and what steps you’re willing to take to achieve those objectives. During this phase, working with a business broker will make it easier to set both short- and long-term goals and define the strategies necessary to reach those goals.

Develop a List of Targets

Once you’ve established your goals and clarified the requisite strategies, the next step is to establish a list of target companies to consider. In some instances, those targets may be on the market, but that’s not always the case. Brokers providing mergers and acquisitions services may also be aware of potential targets that are not currently on the market.

Your business broker will work with you to develop a list of candidate businesses that would be beneficial acquisitions. Depending on your goals, that might mean companies which enhance your strength in a specific niche or allow your organization to expand into other market segments. This might mean buying a business in your supply chain, also known as vertical integration.

Evaluate Potential Targets

Once the basic list is established, best practices require further analysis to determine which targets should be more carefully considered and which ones are less likely to provide the required benefits. In other words, not every potential target will be what it appears to be on the surface.

Some companies will be far too disorganized to make them attractive. Others may not be investing enough in research and development, depending instead on products that are currently successful but may not be in the near future. There are also times when a potential target doesn’t have a culture or customer base that would blend with your objectives.

Contact the Targets

Next, it’s time to contact the targets. When the target is already being marketed, that process is rather simple, and your business broker will certainly handle the initial contacts. In situations where the targeted company isn’t for sale, approaching the owner will require a little more finesse.

Based on the individual situation, the initial contact might be made by the business broker, but there are times when other options might be considered. To obtain the desired results, planning the approach may take time, so don’t be in a hurry. Follow the advice of your business broker and other trusted advisors.

Begin the Valuation Process

At this stage of the process, it’s time to get down to evaluating the nuts and bolts of target company. All companies know they’ll need to provide financial reports to prospective purchasers, but not all companies will be totally upfront with their disclosures. That’s not to say they will falsify documents, but they may choose to obfuscate some less-than-ideal aspects of their financial situation. Let the experts evaluate the financial reports and determine if requesting additional information is warranted.

Having the financial reports and tax returns are important, but it’s also important to identify what assets are being purchased and what those assets are worth. To establish that, various inspectors and appraisers may be used to establish their value.

Make an Offer

After the value of each asset is better established, it’s time to develop an offer, otherwise known as a Letter of Intent or LOI. Again, the business broker will work with you to write an LOI (offer) that defines the selling price and terms. As a best practice, it’s important to have your attorney and accountant review the offer before it’s presented to minimize the potential for errors.

It’s rare for an initial offer to be accepted. The Seller will likely present a counteroffer that you’ll need to consider. Remember, negotiation is an art, which means it’s once again time to look to your business broker and other advisors for advice. They can make it easier to determine if the counteroffer is workable or if additional changes will be necessary.

Conduct the Appropriate Due Diligence

Once a basic agreement is reached, it’s time to make sure all assets and clauses included in the agreement are carefully examined. All legal matters should be reviewed by an M&A attorney to make sure there are no surprises later.

Everything you or your representatives evaluated earlier will be reviewed again to uncover hidden issues or potential problems that could create any type of issue later. For example, errors in past tax returns could, and likely would, cause problems for the purchaser or bank. Performing due diligence takes a lot of time and attention to detail, but the process should never be glossed over.

Closing the Sale

Finally, it’s time to draw up the final contracts and associated paperwork. Again, all paperwork should be reviewed by your legal team and accountants to reduce the odds of any errors in the documentation.

Begin the Integration

This is the final phase of the sale. Here, it’s always crucial to ensure the integration proceeds as smoothly as possible. Remember, the integration should leave the new organization with the best aspects of both the original company and the acquired one. That’s not always easy to accomplish and often takes some time to accomplish. The Purchaser and the Seller may both be involved in the process, depending on the terms of the sales contracts. It’s natural for company owners to explore ways to move their businesses forward. We could write an entire separate post for best practices for each phase of mergers and acquisitions integration process.

Moving Forward Begins Now

Because so much rides on the success of a merger or acquisition, take whatever time is needed to start planning now. If you’re considering acquiring another company or merging, it’s important to contact a business broker for advice. Advance planning can make the difference between a highly successful acquisition and one that provides lackluster results. Keep these best practices for each phase of mergers and acquisitions in mind, when you want to acquire a business to grow your own.

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