ACG National Capitalby David Braun, CEO of Capstone Strategic, and author of the book, Successful Acquisitions.
About 77% of company acquisitions fail. Don’t let that number scare you off from an acquisition. Based on my observations as an M&A consultant, I’ve found most acquisitions fail due to widespread misunderstanding of the process.
If you know what you’re doing, there is no reason you cannot execute an acquisition that delivers the exact outcomes you plan for. Below, I’ve listed some of the most common mistakes made during the acquisition process and how you can avoid them.
Mistake # 1: Killing Two Birds with One Stone.
If you try to fulfill multiple needs with a single acquisition, you embark on a dangerous path that blurs your decision-making. You make it too easy to say “yes” to almost any potential purchase. This can lead to bad acquisitions and problematic integration. Although it may seem that killing two birds with one stone is cost effective, it is likely to prove far more expensive in the long run. If you try to address several needs through one acquisition, you risk addressing none of them.
Solution # 1: Have ONE reason for acquisition.
Singularity gives focus, and focus generates results. Identify a single need and adopt a focused acquisition strategy. Think of how you go about hiring new employees. If you have simultaneous needs in sales, accounting, and operations, you are not going to hire one person to fill all three spots. The qualifications for each position are unique and you look for three different individuals to fill those roles. This same concept applies to making an acquisition. Having a single, clear purpose for an acquisition keeps you focused on which markets to look at and which companies to consider.
Mistake # 2: Rushing the deal.
Are you focused on getting the deal done as quickly as possible? This philosophy does not lend itself to a systematic acquisition process and threatens to produce a poor outcome for the long term. There are people who have a significant number of acquisitions on their resume, but have learned surprisingly little about what makes an acquisition successful. If you rush the deal you risk losing the interest of the seller or worse, purchasing the wrong company.
Solution # 2: Be patient!
Every company is for sale – for the right equation. If you want to acquire the right company, you will need to invest the time and effort to proactively go after companies that are not actively searching for buyers. As a buyer, you must be patient to discover what will prompt the owner to sell.
Mistake # 3: Failure to Communicate.
There are bound to be rough spots on the road to any acquisition agreement. Both you and the seller may have anxiety, doubt, and frustration that you are unable to express to each other without damaging your relationship. You may worry that the seller is concealing critical information. The seller may suspect that you are trying to take advantage of his vulnerabilities. The danger is that you allow a barrier to grow between the parties that makes open communication difficult.
Solution # 3: Find a Listening Ear.
An expert third party can act as a lightning rod for any negative energy. Although the adviser is beholden to you, he can provide a trusted ear for both sides. The seller needs an avenue to express frustrations or doubts, but may be uncomfortable talking to someone who could be his future boss or partner. The third-party adviser can play the role of intermediary, keeping communication flowing and minimizing any potential damage to the relationship between buyer and seller.
Mistake # 4: Putting all of your eggs in one basket.
Are you deeply invested in one acquisition prospect? Only looking at one target means there are no backups when things go wrong with your initial preference – which is almost inevitable. What if the seller gets cold feet and backs out at the last minute? Without any other prospects, you risk wasting your time, resources, and energy, only to come out empty-handed. You will be left to start the entire acquisition process over again.
Solution # 4: Fill the pipeline.
I recommend you develop a pipeline of several prospect companies. Don’t just have a Plan B. Have a Plan C, a Plan D, and so on. Create a funnel and fill it with likely prospects. This way, if there is a breakdown with your first choice prospect, your acquisition process can continue unhindered.
Mistake # 5: Getting Emotional.
Acquisitions can be derailed by too much enthusiasm, or by too much caution. Emotionally charged decision making is the enemy of a good acquisition process. This is not to say that that your acquisition should be conducted without any excitement, but there is a danger to making decisions based on emotions rather than facts.
Solution # 5: Develop a System.
Systems are the antidote to emotions. Conduct your search using a structured process and objective tools, and return to those tools at the key decision points. Follow a clearly defined roadmap from the beginning of the process to the end. Having a third party advisor can help you make level-headed decisions based on systematic and rigorous research. Your advisor has no emotional attachments and can remain objective through the acquisition process.
The mistakes I’ve listed are some of the most common I’ve seen executives make when conducting an acquisition. Of course, there may be other challenges you face along the path to acquisition, but the underlying principle is to remain strategic throughout the entire process. Hopefully these tips will help you navigate through one of the most exciting ways to grow your company.
This post is adapted from David Braun’s book, “Successful Acquisitions,” now available at Amazon.com