Your business can double in 10 years, but how about doubling now 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, more than 50 percent 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.
What to do? Here are suggestions to improve the odds of achieving business bliss.
WHAT ACQUISITIONS APPEAL TO YOU?
Do you want complementary 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 – merging companies in the same market – can be successful, but combinations without marketing synergy or the ability to hold customers have a tough time succeeding.
Customers 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 were adversaries. Would you or the acquired be willing to change practices to build a better organization?
A tremendous number of acquisitions fail because of clashes of culture in which key employees or managers never buy in.
To reduce these cultural risks, owners and key employees often are retained for at least a reasonable period to assure skeptical customers and achieve a cooperative atmosphere.
Sometimes an earnout 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 CUSTOMERS?
Customers ultimately control your fate. Customers expect to see 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.
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 distinct value, most struggling businesses can be rehabbed into profitability.
Even a good brand can struggle with too many competitors or a declining need. Often, acquisitions in these marginal situations are driven by cost reduction potential, but revenue often deteriorates faster than costs can be cut.
So, do your diligence, look at the finances, maybe talk to customers (without disclosing your interests) and observe the operation.
Be objective in assessing your ability to correct problems and expect to uncover unanticipated challenges.
USE PROFESSIONALS
Professionals can help to analyze financial statements before an acquisition and avoid legal and tax problems. Don’t avoid them just to save a few dollars.
Make sure contracts for leases, clients, patents, trademarks, licensing and branding are transferrable. Personnel arrangements with owners and employees also 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 ensure they have the 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 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 backward 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 the value of your business and how it compares to the competition and your targets.
Hugh Kelly has held a variety of senior executive positions for publicly held and privately owned companies in financial services, direct marketing and the not-for-profit consulting fields. Formerly a Certified Public Accountant, he is a certified mentor for Lehigh Valley SCORE and can be reached at [email protected] For more information or free help in business valuation and benchmarking, contact Lehigh Valley SCORE (www.lehighvalley.score.org).
