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.