Growth by acquisition: Five common mistakes

In recent months, I have been called upon by clients to assist where significant growth plans through acquisitions have struggled. This has been due to various reasons, such as poor detailed planning, particularly cash flow projections and scenario planning. I thought it would be helpful to compile an article detailing the five most common mistakes with growth by acquisition.

• Inflexible approach to due diligence

When looking at growth by acquisition, due diligence is an integral part of the process, which needs to be adapted for different sectors and companies. As many clients have found, there is no one-size-fits-all approach with due diligence and any shortcuts, whether due to financial or time constraints, can prove expensive. 

As well as you might know your business, industry and even the management of the company you are looking to acquire, take legal advice. Far too many acquisitions have been tied up in legal disagreements further down the line. The emergence of surprises and shocks can prove costly in more ways than one - additional charges and diverting your focus from the everyday running of your business.

With a growth by acquisition strategy, due diligence is the foundation for your final decision. Don't get it wrong!

Statistic: Harvard Business Review research shows that between 70% and 90% of acquisitions are pulled before completion.

• Overpaying for an acquisition

As you would likely be looking to acquire a company which is growing or has potential for long-term growth, there is a temptation to pay tomorrow's potential value today. As a seller, you would be looking to integrate an element of growth potential into the sale price, but it's very different as a buyer. The potential acquisition should be benchmarked against peers in the same sector, industry, and country. If you are comparing apples and pears, this is when the problems start, you could end up overpaying.

While goodwill reflects the company's reputation and standing in the marketplace, you must lock down key employees to protect this. It's dangerous to automatically assume they will move over to a new owner, a potentially new culture and a degree of uncertainty if your communication with them has been limited.

Remember, you aren't just buying the business; you're also buying into the workforce, their skills and their contacts - make them feel wanted.

• Cultural clashes

When looking to acquire a business, generally in the same industry or perhaps extending your business to a complementary area of commerce, we tend to assume organisational cultures are the same. Big mistake!

It's essential to develop a "cultural integration outline", a timetable to accommodate integrating two wholly or slightly different business cultures. This ensures that all parties know of any potential problems, solutions and the timescale. Historically, many acquisitions have failed to appreciate other cultures, often leading to unhelpful confrontations. 

When buying a business, you aren't just paying for the reputation and the profits; you are also (hopefully) buying into a finely tuned business-focused culture. Could their way of working be more efficient than your current system? Might you both be able to learn from each other?

Statistic: Leading lights like Cisco boast 87% employee retention with mergers and acquisitions because they understand different business cultures.

• Underestimating financial resources

I have encountered many entrepreneurs looking at growth by acquisition who have underestimated the required financial resources. While the acquisition price is something you can negotiate and control to a degree, underestimating or, in some cases, ignoring the required cashflow can be business suicide. 

Integrating the cashflow projections of your existing operations and the soon-to-be acquired business can be challenging. If anything, you should be erring on the side of caution, making additional funds available if required rather than expecting immediate cashflow improvements. 

On a positive note, bringing a new business into a more extensive operation could create opportunities to extend trade terms with suppliers and reduce payment terms with customers. However, in the early days, this could be difficult; therefore, it is crucial to ensure sufficient financial resources are available.

• Claw-backs and earn-outs

In theory, a clean break acquisition, cash up front, business transferred, and everyone going their separate way sounds interesting. But what happens if you encounter unexpected difficulties three months, six months or even a year down the line? There may even be challenges with the initial integration into your existing group. How can you protect yourself?

Part of your agreement must involve a handover period, a time when both parties will work together to calm employee nerves and smooth the transfer of customers. You should also look at claw-backs and earn-outs to protect you if things don't work out as expected. Holding back a final payment will incentivise the previous owners to help you. Writing claw-backs into the arrangement will undoubtedly focus their minds and should help you achieve your targets. If not, there would be a reduction in the overall acquisition price.

Statistic: A typical earn-out will be between 10% and 25% of the value of the business

This is where we can help

While growth by acquisition strategies can be lucrative, they must be structured correctly and appreciate the individuality of both the target business, current owners and, in many cases, the culture. Then there is the acquisition price, cash flow, claw-backs, and earn-outs to protect your company and incentivise previous owners. It's also essential you have the confidence to walk away if a deal doesn't work for you.

Acquisition strategy and implementation is an area in which we are particularly strong and an area that can make or break your business. If you would like to discuss the benefits of an in-depth structured approach to growth by acquisition, get in touch, and we can discuss your plans and situation in more detail.

Internal resources:-

https://www.cloudficient.com/blog/unmasking-the-truth-how-many-mergers-and-acquisitions-fail

https://www.channele2e.com/post/10-mistakes-avoid-buying-company

https://www.beankinney.com/article/10-common-mistakes-that-can-doom-an-acquisition-buyers-prospective/

https://morganandwestfield.com/ask/should-i-consider-an-earn-out-when-selling-my-business/