The strategy of growing a business through acquisitions is becoming increasingly popular as more private companies come on the market. The benefits of this strategy can be significant, including more favourable pricing and deal structuring, easier access to capital, the ability to attract top talent, and potential for synergies. However, there are also many risks involved in growing through acquisitions, and private companies are especially vulnerable due to their limited resources.
The biggest mistakes made by private companies in this process include:
1. Neglecting their core business while chasing deals
2. Becoming too invested in a deal and ignoring due diligence results
3. Paying too much cash upfront and taking on too much debt
4. Not properly evaluating the impact on people and culture
5. Failing to have an integration plan and ignoring the importance of the first 100 days post-acquisition.
It is important to be mindful of these pitfalls and to carefully consider the benefits and risks before embarking on a growth through acquisition strategy.
The benefits of growth through acquisitions are numerous. Access to capital becomes easier, and a company may be approached by retiring entrepreneurs seeking liquidity. Attracting top talent also becomes easier, and synergies from cross-selling and cost savings can boost profits. The increasing number of private companies coming up for sale and favourable pricing and deal structuring can also be advantageous to the buyer.
1. Integration Risks
Even if the deal is structured well and the due diligence is thorough, there are still risks that come with integrating a new business into your existing operations. These risks include cultural differences, conflicting management styles, and integration of systems and processes. All of these can lead to lower productivity and reduced profits, even if the acquisition was initially a good deal.
Acquiring a company can be expensive and overpaying for a target can seriously harm your financials. This can be due to an over-optimistic view of the target's future growth potential, insufficient due diligence, or paying a premium for strategic reasons.
“Some of the best investment decisions I’ve ever made were ones where I walked away from the deal”.
3. Mismatch of expectations
A common problem in acquisitions is a mismatch of expectations between the buyer and the seller. This can arise from a misalignment of goals, culture, or simply a lack of communication. This can lead to disappointment and potentially harm the acquisition in the long run.
4. Legal and regulatory risks
Acquisitions involve a significant amount of legal and regulatory paperwork, which can be time-consuming and costly. There can also be unforeseen legal and regulatory risks, such as antitrust issues or disputes with labour unions. These risks can lead to delays in closing the deal or even termination of the agreement.
5. Deal Fever
Deal fever is a phenomenon where the excitement and emotional investment in a potential acquisition clouds the judgement of the buyer, leading them to ignore negative results from due diligence and proceed with the deal regardless. This can lead to regret and negative consequences for the business in the long term. It is important for buyers to maintain a clear, objective perspective and not let their emotions drive the decision-making process. In some cases, walking away from a deal may be the best investment decision.
Integrating a newly acquired company into your own can be challenging, and it's important to have a plan in place to ensure that the integration is successful. Common integration issues include differences in culture, processes, systems, and personnel. Failing to address these differences can result in a loss of key employees, decreased productivity, and lower profitability. It's also important to have a clear plan for how the acquired company will be integrated into your existing operations and to communicate that plan effectively to all relevant stakeholders.
7. Costs and time involved
Integrating two companies can be a complex and time-consuming process, requiring significant resources and attention. It's important to have a solid integration plan in place and to allocate enough resources to make sure the integration is done properly.
Underestimating the cost and time involved can lead to delays and added expenses, which can negatively impact the return on investment. In some cases, a poor integration can even lead to the failure of the acquisition.
It's important to understand that the success of an acquisition depends not only on the terms of the deal, but also on the ability to effectively integrate the two companies.
8. Decision making
Not taking tough decisions during an acquisition can lead to long-term consequences and affect the overall success of the integration. When employees within the acquired company or even within your own company cannot make the jump to the next level, it's important to take action and make changes, rather than waiting and hoping for things to improve. Taking decisive action, even if it's not 100% clear, can help improve the situation and set the foundation for a successful integration.
Acquisitions often require a shift in management style, from an entrepreneur to a manager. If an entrepreneur has difficulty delegating key roles, they may struggle to grow their business through acquisitions. In such cases, it may be better to focus on other growth strategies, or work on developing a more managerial mindset. If an entrepreneur is determined to go down the acquisition path, they should make sure that their debt load is manageable in case of any unforeseen bumps in the road.
10. Having the right skills
Failing to upgrade your talent pool can lead to risks associated with rapid growth going unmonitored, thereby putting the entire acquisition effort in jeopardy. It is crucial for growing businesses to have a more skilled workforce than stagnant companies. However, many owners prioritize paying down acquisition debt over bringing in new talent, which is a mistake. Upgrading the talent pool should be seen as an internal acquisition, and investing in it can lead to a successful integration.
A disciplined, patient and methodical acquisition strategy is your ticket to success.
If you have an acquisition in mind or currently somewhere in the middle of one and need assistance - contact us!
We help Business Owners successfully conclude transactions.