The process of acquiring a business is one of the biggest decisions you can make as a business owner or manager.
But the vast majority of mergers and acquisitions (M&A) – around 80 per cent, according to a recent Harvard Business Review report – fail. Why?Here, we talk to people who’ve been closely involved in buying a company so you can learn from those who went before.
Identify the company to acquire
The first thing to consider is what company to acquire. Bryan Shaw, senior associate at UK law firm TLT, says there are a few common indicators of a positive target.These are:
‘This is a strong indicator of a good target, evidenced by regular board meetings, appointing non-executive directors and keeping books and records in order,’ Shaw says. ‘It also enables any negative issues to be identified early and rectified promptly.’
A passionate and talented management team
‘This can also make a world of difference as they will be driven to succeed and prompt and responsive to all due diligence enquiries.’
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Good quality investors
‘It’s worth consulting the target’s cap table as institutional investor shareholders or other well-known professional investors are usually a sign of a solid business or one with strong potential,’ Shaw concludes.
A clash of culturesOther cultures can cause issues, according to a report by Baker & McKenzie. Consider Japanese buyers, who were less satisfied than their US/UK counterparts when it came to acquiring companies.
The Japanese tend to develop blueprints for the entire project and were less likely to change their minds after the project was launched as it could be seen as a sign of incompetence, the report finds.It also reveals that the US/Euro style of running a business generally embodies a spirit of ‘launch first, find solutions later’ that allows them to act swiftly.Issues with contracts and a lack of transparency from the target’s management team are also potential stumbling blocks. ‘If the due diligence process identifies unfavourable or unreasonable contract terms, or if the target has no contracts, this could be cause for concern, depending on the sector,’ Shaw says.
An acquisition that’s part of a wider growth strategy
Put simply, it’s not advisable to acquire a business if it isn’t a logical part of a wider growth strategy. For example, a low-cost airline must make business decisions that contribute it to being a low-cost airline. Using a higher quality food supplier for food on flights would probably increase customer satisfaction initially, but in reality, it would almost certainly drive up costs in the long-term which would ultimately put the airline’s low-cost reputation at risk.
Peter Linas, executive vice president of corporate development and international at Bullhorn says, ‘[Acquiring a company] should add value to your company, which will lead to better outcomes for your customers and, ultimately, allow you to better serve your industry on the whole.
’Bullhorn, which recently bought recruitment firm Invenias for an undisclosed amount, says the practice of ‘acqui-hiring’ – a term coined by Rex Hammock – which means acquiring a business in order to acquire its people is sometimes overlooked as an option. It is favoured by tech firms including Twitter and Dropbox.
Timing is important
Linas says, ‘A lot of planning needs to go into making sure the acquisition goes smoothly, so be careful not to start the process during a particularly busy period, at the risk of disrupting customer service levels. He adds, ‘One of the most important initiatives to be planned involves raising awareness about the acquisition amongst your staff, their staff, your customers, their customers, and the wider market, through a very carefully considered communications programme.’Your budget must also be put into ensuring a strong integration of systems, processes, and technology as well as an integration of working cultures. ‘Ultimately, the sooner you can get back to business as usual, the better,’ concludes Linas.
Acquiring a distressed business
Andy Scott, founder and chairman of REL Capital, which turns around struggling UK SMEs, says hiring a good CEO is the first, and possibly the easiest step to making the firm successful again.“Stabilise the company, get them to a cashflow neutral position at least, so there is no cash drain. And then grow from there”
He says there is no one-size-fits-all secret but uses the so-called four B’s for a strategy for success.