Numerous studies and surveys over the last 10 years have reported that over half of mergers and acquisitions fail. Sounds like marriage, doesn’t it? Just as pre-marital counseling has been shown to decrease the likelihood of divorce by 30%, focused preparation and the right counsel can help a business merger succeed for all parties.
Think Real Estate
“The process of buying or selling a business is analogous to that of buying or selling a house,” says Matt Janchar, Managing Director of Capital Markets for Berkshire Partners. You put your house on the market, people come to see it, and someone makes an offer. Right?
“But then you discover that there’s an entire world of people who know the ins and outs of how to do it,” he continues, “including brokers, bankers, insurance companies and more. You’re just this tiny player in a complex web of people who make a living in this field.”
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It’s the same with business mergers and acquisitions. Whether you’re a founder looking to sell, a mid-size company being acquired by a larger one or the buyer itself, there will be pitfalls to anticipate, careful preparation and advice from the right people needed.
According to a new report by KPMG, mergers and acquisitions have been on the rise in recent years as the US economy recovers from the recession. Twenty-five percent of the M&A professionals surveyed expect to broker 3-5 such deals in 2015. While many business owners might see dollar signs reading about Google’s acquisitions - the company has assimilated over 170 other businesses into its Borg since 2001 - it is important to determine if the market for your industry is primed for a great deal.
“You need to be completely honest with yourself and your board about why you are selling” or buying a company, Janchar shares. “Is it because you are threatened by the competition?” Or has someone made you an offer you can’t refuse? Be wary of the siren song of greed. “In the same way that you might ignore downsides of your ‘dream house,’ the desire for a big payout can lead to bad decisions.” The other land mine to consider is fear. Hesitation because of the risks involved might hold you back. A thorough review will reveal hidden opportunities you may have overlooked.
A Trusted Team
As with a real estate transaction, your broker (a business broker or lawyer for a smaller business, or an M&A firm for a larger one) will be your right hand. Don’t just hire the guy who helped your brother-in-law sell his business. Interview at least three professionals. Investigate their background, and make sure you have a good rapport. Once a deal is in the works, the right banker, lawyer, and insurance agents will be necessary, too. “Vetting the experts is an important step in a business sale,” says Janchar. In addition, it helps to seek the counsel of someone who has gone through the process before you, but doesn’t have a financial interest in your deal.
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With an eye on the future, Melissa Lanz, founder of meal-planning service The Fresh 20, spent a year focusing on policies and procedures. “Since I have a content-related service company, I made sure that the way we create our content is heavily documented,” she said. “I want our process to be repeatable on a larger scale, so that the core value of the company doesn’t have to be compromised in order for it to be profitable.”
“Small business owners are too often caught up in short term goals of running their business and making sure they have cash flow,” says Lanz. If you are considering being acquired or merging, focus on long term strategy versus monthly cash flow. Get your paperwork in order. Make sure you know your company’s true value. Nobody wants to fall into the trap of buying too high or selling too low - just like in the real estate market.
What happens after the sale? If you’re the small business owner, and you decide to stay on, you’ll have more control over the success of the deal. If not, you’re likely to be asked to sign a non-compete clause that restricts you from operating a competitive business in the same market for a set amount of time. If you’re the buyer, how are you going to handle the logistics of the new customers, employees, products, procedures, or services for which you are now responsible? In the KPMG survey, a “well-integrated execution plan” was cited as the most crucial element that determines a merger’s future success.
In short, take the time to prepare your business for a sale or an acquisition. There’s a lot of work to do before you’re in your new home, putting your feet up on the coffee table and enjoying a nice cocktail.