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When M&A Means Missteps and Affliction

After nearly five years of struggling to turn a profit, the man who had engineered the ill-fated deal sat down with the 25 people he had personally promised to keep in his employ, and fired them. What should have been a terrific business opportunity had tormented him since nearly the day after he had purchased his direct competitor. He could describe in detail every problem they had encountered. If only he had been able to predict the pitfalls he would have avoided an expensive — and painful — mistake.

The national business press is filled with M&A (merger & acquisition) stories, mostly concerned with how Fortune 500 companies regularly buy and sell their various divisions. But small and mid-sized business owners are frequently in the M&A seat. In the world of business acquisition, where experience in buying and selling businesses counts more than any other skill, small and mid-sized business owners are at a disadvantage.

Though there are many reasons for a failed acquisition, the most common reasons can be spotted and mitigated at the outset. The following four M&A missteps can doom a business owner to the scenario at the beginning of this article:

  1. Focus on revenue growth related to synergies without commensurate focus on potential cost savings.
  2. Emotional involvement, leading to a belief that the deal has to be done. 
  3. Failure to set firm price limits based on careful financial analysis of the most conservative possible outcome of the deal.
  4. Failure to analyze the cultural ramifications of blending two different organizations.

It is easy to get excited about synergies when considering an acquisition, and it’s tempting to focus most of the attention on the revenue growth that will occur. Be your own wet blanket. Analyze the advantages of the deal if revenue growth did not occur and the only benefit of synergy was cost savings. Is it still worth it?

The more you invest in a deal, the more it seems to matter. Seems to, because a deal never matters more or less based on how much energy you have put into it. Yet emotional involvement based on how much time, energy, or money has already been invested is one of the most common reasons business owners proceed against their better judgment. Would you rather spend $10,000 + $1.5 million on a bad investment, or $10,000 and not a penny more?

Another reason for emotional involvement is competition. Whether the target company is a direct competitor or whether there are other companies competing with you for the acquisition, never let adrenaline and testosterone get in the way of clear thinking. It’s only a good deal if it’s a good deal.

If you are not emotionally involved, and your financial analysis has been carefully conducted, you should know what the company you are attempting to purchase is worth to you. To you, because it may be worth an entirely different sum to another company with different operations and customers. Set a firm price limit, and do not get pushed any higher, unless information is revealed during the negotiation process that clearly demonstrates how much greater your cost savings and revenue growth will be (hint: this is fairly unlikely).

Finally, combining two companies is always more difficult than business owners anticipate. However much attention is paid to the financials, operations, and marketing, conflicting cultures are often at the heart of failed mergers. Careful assessment of the cultural challenges will prevent a lot of anxiety later.

If you have already made an acquisition that is giving you heartburn, and you recognize yourself in these four missteps, don’t despair. Turnarounds are possible with the right expertise and a lot of hard work. But if you are just starting down this path you would be wise to seek the advice of an expert. In the world of acquisitions and mergers, expertise counts.

(c) 2008. Andrea M. Hill

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