How Can You Manage Mergers and Acquisitions Risk?

Acquisitions are one of the fastest ways to grow, but they do come with their own set of risks. Industry numbers show that about 70% of acquisitions fail, so executives are highly motivated to mitigate their risks when purchasing a company. This can be done in a number of ways.

Usually we think about hiring lawyers or advisors during due diligence who will uncover any skeletons in the target’s closet. If the target passes through due diligence without any red flags, we tend to think we’re in the clear in terms of risk.

In reality, if you wait until the formal due diligence stage to evaluate your risks beginning at due diligence, you are starting too late. By this stage you’ve already invested resources, both time and money, pursuing one deal. So it can be really hard to say “no” when red flags do appear.

In my experience, one of the best ways to mitigate M&A risk and increase your chances of success is by following a detailed and proven process. While this might sound simple, many firms embark on M&A without any written plan at all.

Let me use an example to illustrate my point.

Most companies have detailed HR manuals for hiring new employees that cover things like the job description, key performance indicators, salary and compensation, the interview process and onboarding once the employee joins the team. On the other hand, very few have an equivalent discipline when it comes to buying another company. The typical approach is more of a “we’ll know it when we see it.” Businesses just look for companies they might buy and then jump to evaluating their financials.

Companies typically pay far less for the people they hire, expect immediate results from them and can more easily dismiss them if they find it’s not the right fit. However, acquisitions cost millions or even hundreds of millions of dollars, take a long time to integrate and are very difficult to spin off if a mistake is made. If you think about it, it really makes no sense to pursue M&A without a detailed written system.

At Capstone, we’ve developed just such a process, the Roadmap to Acquisitions. It lays out each step, from developing the initial strategy all the way through to closing and integration. Our experience over the past 20 years has shown this process to be a key foundation to M&A success. Some risk is inevitable in every business initiative. The Roadmap is a sure-fire way to dramatically your acquisition risks to a minimum.

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