Your business can double in 10 years, but how about doubling now and then doubling that business with a smart acquisition? How’s that for happiness?
But, most business plans, even those rare few with a clear “exit” strategy for the owner, exclude one critical area, acquisitions. And acquisitions can determine the longevity and ultimate success of an enterprise.
Unfortunately, over 50% of business combinations fail. Why? Owners often enter into acquisitions in emergencies or in a flush of excitement, rashly destroying their business’ value by emphasizing cost savings over customer needs, misjudging the compatibility of the companies or paying too much.
So what to do? Here a few suggestions we’ve developed at SCORE to improve the odds of achieving business bliss.
- What acquisitions appeal to you? Do you want complimentary businesses to cross-sell and smooth your revenue flow or competitors to expand your market share?
Some acquisitions are driven primarily by the desire to save money. “Roll ups” can be successful, but combinations without marketing synergy or the ability to hold customers have a tough time succeeding. Customers too may have expectations that with your increased scale or cost reductions come reduced prices, eliminating your initial value.
- What kind of acquirer would you be? It’s risky to align with competitors who for years may have been adversaries. Would you or the acquired be willing to change practices to build a better organization? To paraphrase Bill Watterson, the creator of the “Calvin and Hobbes” comic strip, “Selling out is really buying in”. A tremendous number of acquisitions fail due to clashes of “culture” in which key employees or managers never “buy in”.
To reduce the risks arising from cultural adjustments, often owners and key employees are retained for at least reasonable period to assure skeptical customers and achieve a cooperative atmosphere. Sometimes an “earn out” or bonus based upon results accrues to former owners and a “covenant not to compete” is incorporated into the purchase. Swallowing your pride once in a while as a buyer can also create favorable returns on your investment.
- What’s in it for the customers? Customers ultimately control your fate. Customers expect to see some improvement in value or at minimum maintenance of, convenience, service, price or product.
Competitors may try to use your new scale against you in the market so make sure there is a clear value proposition that can be demonstrated to a skeptical or prospective customer.
- What are you paying for? Most acquisitions will be “fixer uppers” so try to minimize the challenges you’ll face even if the price looks “right”. There will likely be more problems than you anticipated.
Be very careful buying a company with a poor reputation unless you have a very strong brand. Even then, you must be careful not to damage your hard won reputation with an inferior competitor or inflated customer expectations of improvement. With a loyal customer base or unique value, most struggling businesses can be rehabbed into profitability.
Even a good brand can struggle with too many competitors or a declining need so pay careful attention to the market climate. Often acquisitions in these marginal situations are driven by cost reduction potential, but revenue can often deteriorate faster than costs can be cut.
So, do your diligence, look at their finances, maybe even talk to their customers (without disclosing your interests) and observe their operation. Like any home remodeling job be objective in assessing your ability to correct the problems and expect to uncover some unanticipated challenges.
- Use professionals. Maybe an obvious suggestion, but professionals can help to avoid legal and tax problems and analyze financial statements prior to an acquisition. Don’t avoid using their expertise to save a few dollars. Make sure contracts for leases, client contracts, patents, trademarks, licensing and branding are transferrable. Personnel arrangements with owners and employees too must be negotiated to assist in a smooth transition.
Most professionals will provide some informal free direction prior to an acquisition, assuming you may pursue the matter further, and to make sure they have the requisite expertise.
- Value your business at least annually. A sense of enterprise value is critical to providing direction to any company as well as developing a sense for what other companies are worth. Set specific value targets and dates as part of your business planning just as you might set up interim goals to train for a marathon.
Public companies and private equity investors often budget starting with their target market valuations and work backwards to identify the conditions needed to achieve them rather than budgeting based upon last year’s results.
Talk to your banker, accountant, attorney or even business brokers about their assessments of the value of your business and how it compares to the competition and your targets. Some professionals who work with SCORE use business benchmarking services to give you accurate, unbiased assessments at low, or no, cost and can further dissect the areas your business needs to address.
For more information or free help in constructing and reviewing your business strategy, the Lehigh Valley SCORE Organization of experienced business mentors, a partner of the SBA, is available at https://lehighvalley.score.org. The website includes templates for constructing budgets cash flows and other elements of a business plan as well as contact data for your local chapter.
Author: Hugh Kelly