When we assist companies with their business strategies, acquisitions are often a topic of discussion. After all, the headlines are filled with companies buying, selling, or merging.
While a well-developed acquisition strategy can be a very important element of your company’s strategy, we don’t think it should be your whole strategy. We often caution our clients about how much emphasis they place on acquisitions versus other growth strategies.
The reason for our caution is twofold. First, large companies that pursue acquisitions typically have a department whose sole function is to source targets and get transactions completed. Second, large companies have access to cheap capital at a relatively low cost, which means that if they mess up a transaction, it won’t jeopardize the entire company (unless it is a gigantic transaction).
Compare this to a private company that may have little or no capacity to take on the work to do an acquisition properly, no experience with acquisitions, and limited access to capital. The cost of messing up can be devastating.
We find that most people generally underestimate the difficulty of getting an acquisition completed. If you have never undertaken an acquisition, or if you need a refresher, here are six tips to improve your chances of success:
- Get your clear on your strategy first. Take the time to really understand your potential targets and how they fit within your broader strategy. Be strategic about characteristics like company size, industry, and geography at the outset so you can weed out prospects that don’t fit.
- Start small. For your first acquisition, don’t take a chance that could cost you your whole business if you are wrong. You will make mistakes, so don’t do anything that bets the farm.
- Don’t forget your existing business. There is a significant filtering process that goes on during acquisitions. For every 20 targets you research, you may only be interested in pursuing further discussions with a select few. The process takes a lot of management’s time and can affect the operating results of your existing business if you give too much attention to the acquisition. Keep your eye on your core business and be careful not to jeopardize it for the sake of the acquisition.
- Hire good advisors. While most M&A firms focus on the sell-side, there are a few that do buy-side work. A good M&A advisor can help you locate targets and will walk you through the process all the way to the completion of the transaction. You should also get competent help on the valuation, accounting, tax, and legal fronts. There are many moving parts to these deals and you will need good advice, especially if you have never done a transaction.
- Stay disciplined. While most private companies do not undertake a lot of acquisitions, those that do are incredibly disciplined about the target company’s fit with their strategy and the price they are willing to pay. If the target isn’t the right fit or the right price, they have the discipline to walk away – and so should you. This is often difficult, though, because of the effort, cost, and time it takes to get far down the road with a target. All too often, companies lose their discipline because they become too invested in the process and fall in love with the deal. Be willing to walk away if the deal does not fit.
- Don’t underestimate the difficulty of post-deal integration. The process of integrating a new company can be just as difficult as finding one in the first place. The only difference is that now you have money on the table! Successful integration requires a lot of thoughtful planning and coordination. Mistakes are often made because management is too focused on the numbers and getting the deal done and not what comes after.