This article originally appeared in Alan’s weekly Forbes column.
Most owners engage in the buying process without knowing or measuring the inherent risks. Somehow the thrill of the deal overshadows their clear thinking and the results are a disaster for all parties. Generally, entrepreneurs and managers don’t follow time-tested and proven guidelines on the topic. To improve outcomes for those contemplating growth through a smart acquisition, please consider my thoughts and those of Bruce R. Evans, managing partner of Summit Partners.
1. Remember your strategy
Stick to your core competency and what you do best. Don’t fall in love with and acquire a company that looks attractive and available at a good price, but is not specifically aligned with what you do.
Moreover, be very careful of subtle differences between your organization and the targeted firm, even if it’s in your industry. Consider, for example, the purchase of Chrysler by Daimler-Benz and why it failed. On the surface both made great cars, but there was a huge difference between each company’s markets, products and customers. In the end, management was unable to bridge the gulf between two enormous companies. Your take-away lesson on remembering strategy is this: Before you purchase a targeted company, make darn sure it is a perfect fit on your terms. If it’s not, say no and move on.
2. Know the culture
Most acquisitions fail based upon incompatible cultures. I define culture within a business on how people treat one another, their customers, suppliers, investors, partners and even competitors. Even more, it’s about a company’s values and beliefs that are guiding and defining principles of conduct.
Now let’s say an acquirer finds and buys a suitable company with a terrific growth strategy but the cultures are from different planets. Sadly it fails. The owner overlooks the differences in behaviors and proceeds to make the purchase because the combined financial statements are irresistibly glorious. Then the foolish acquirer learns of a war between his people and the new crew. In fact, the guerilla fighting is so intense that no one is cooperating and the business has declined. “Let’s work together, people,” he proclaims. “Let’s move past our differences.” It won’t happen in a million years! Why? It’s like a marriage ending in divorce with irreconcilable differences. Your take-away lesson: It’s best to find and acquire a company with a culture that is just like your own.
3. Due diligence
Transactions can also fail because problems or trends were not uncovered — were misjudged during the due diligence process. There are many ways to make mistakes in this regard.
Consider, for example, the entrance of a new and previously unknown competitor or newly released changes in the regulatory environment. How about the effects of an unanticipated lawsuit or a patent that won’t be issued? What if the financial books have been cooked and company value is a lie? What if valued employees flee or a disruptive and innovative technology replaces an existing product line? Any of these or a host of other difficulties may arise that could be catastrophic to a successful acquisition.
Most failed purchases are the result of poor due diligence and the negative effects of forces beyond anyone’s control.
Your take away lesson on due diligence is this: First and foremost, engage only those individuals with years of experience, who are highly professional and very thorough, to perform due-diligence tasks. And lastly, know in advance there will be issues that will arise that will negatively impact the success of the transaction. To minimize such unexpected events, I recommend being prepared with a “what if” list of problems and potential solutions.
4. Manage the process
Take your time and do it well. Don’t rush into a deal. Be patient. Be thoughtful. If it really is a great opportunity, move with caution. Time is on your side.
Remember that tackling an acquisition is not a minor or casual event. Ask yourself if you have the time to engage in a highly intensive and time-consuming process without harming your current business activities. You have only so much time in your day. Perhaps you have employees that you trust and can manage the task. The take away on managing the process: Remember that at the end of the day, any transaction will require your knowledge and approval. Transactions fail when the owner or his or her acquisition team are ignorant, inexperienced, sloppy and harm their own business in the process of the hunt.Comment on this story
I often find after the transaction is completed that management forgets to properly and carefully integrate the new team into its operations. If poorly done, the rate of failure accelerates. If well done, it only takes a few months for the combined companies to achieve their ultimate objective.
As always, you can contact me at @AskAlanEHall or via my personal website, www.AlanEHall.com.
Alan E. Hall is a co-founding managing director of Mercato Partners, a regionally focused growth capital investment firm. He founded Grow Utah Ventures, is the founder of MarketStar Corp. and is chairman of the Utah Technology Council.