When you acquire a company, the biggest risk you face in the unknown. You put a potentially large sum of money down for results that are not guaranteed. Whether you are acquiring a company for a new technological capability, to expand your geographic footprint, or for its complementary product line – there’s always the possibility that the transaction won’t yield the desired results or that it will cause problems and even hurt your company.

In the news we hear about bad acquisitions and there is an entire book, Deals from Hell, that recounts exactly what went wrong in many of these high profile transactions. Acquisitions are inherently more risky than hiring a new employee that you could fire if you find it is not working out. Once you acquire a company, it is yours, and you’re not going to be able to “fire” it.

If Acquisitions Are Risky, Why Acquire?

If acquisitions are so risky, then why do companies do them? If done right, acquisitions can bring about great rewards and next level growth to your company. M&A is inherently a high risk, high reward tactic, but you can take steps to reduce your level of risk by using a proven M&A process. A proven process will help you identify the right acquisition so you can maximize your opportunity for success.

The Roadmap to Acquisitions

Think back to the example of hiring a new employee. Your HR department probably has a manual with a process for job posting, interviewing, and onboarding employees in order to ensure they are a good fit at your company. As we mentioned earlier, although you expect results from your new employee, if you find it’s not working out, you can always let them go. Why wouldn’t you have a process for acquisitions as well?

The process we use is the Roadmap to Acquisitions, which we developed from over 20 years’ experience helping clients grow through acquisition. The Roadmap takes a holistic perspective on the acquisition process, beginning and initial strategy all the way through deal execution and integration planning. I highly suggest using an M&A process or having a strategic plan before you begin pursuing acquisitions. This will help your reap the rewards of M&A while reducing your exposure to risk.

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In my over 20 years of pursing strategic, not-for-sale acquisitions for clients, the most important piece of advice I have is: be prepared. It may sound simple, but I cannot stress enough how critical preparation is to M&A success. This applies to every stage of the Roadmap to Acquisitions, our M&A process, from initial strategy to research, to due diligence and integration.

Capstone Roadmap to Acquisitions

The Roadmap to Acquisitions in a strategic, proven process for pursuing M&A, based on over 20 years’ experience.

Develop a Plan

In the early stages of the M&A process, you must develop a carefully planned strategy to guide your search for the right acquisition. This means that before running off to pursue companies to buy, you take the time to really examine your business and your vision for the future. Think about your overall strategy, how M&A can help you achieve it and what steps you will be taking to execute. The point of pursuing acquisitions is not for the sake of buying another company – rather, executing an acquisition should be a tool for reaching your strategic goals.

This foundational step will determine the success or failure or your program. Acquisitions are inherently risky and those who come to the table armed with a plan increase their chances of success.

Do Your Homework

As you move along the acquisition process into conducting market and company research, preparation remains important, especially when it comes to primary research. When calling key contacts in the marketplace or owners of companies, it’s important to be knowledgeable about the industry so that the caller takes you seriously. We call this “doing your homework.” This means, that before you even pick up the phone to conduct primary market research, you have already conducted secondary research by accessing articles, websites, reports, and databases. And before making contact with an owner, you have already analyzed the market, researched the owner and studied the company.

Without preparing for these conversations, it’s difficult to maximize the value of your discussion and ask the right questions. You may miss out on an opportunity to gain new insights, the caller may refuse to speak with you or you may even damage a relationship with a potential acquisition prospect.

On the other hand, if you have prepared well, you may gain new insights about the market or the industry, and begin to develop a relationship with an owner that may turn into an acquisition.

Move Swiftly

When it finally comes to executing the deal, a lot of your hard work and preparation pays off. Ideally you have identified the best candidates for acquisition in the most effective way by following your strategic acquisition program and by thoroughly researching markets and companies.

It’s also helpful to have all your documents and financing ready in order to maintain momentum. Nothing kills a deal like stalling and you do not want to be scrambling at the last minute to put together a financing package or paperwork for the deal.

Being prepared is important even after the deal closes. Integration issues remain a top reason for acquisition failure. Slow integration can interfere with the effectiveness of a deal, and in some cases it can even lead to acquisition failure. After the deal closes, you only have about 100 days to implement changes, or employees become resistant. And there are a number of mission critical items that must be addressed on Day 1. One way to mitigate, or even avoid integration issues, is by developing an integration plan long before the deal even closes. This way, you’ve had the time to anticipate integration challenges and develop solutions and your integration plan is ready to be deployed on Day 1.

No Short Cut, Just Hard Work

There is no short cut to preparation. It takes good old-fashioned work, strategic thinking and attention to detail. While it does take time and effort, it’s the most effective way to increase your chances of acquisition success.

Sometimes an acquisition that looked promising turns out to be less than ideal as you get closer to finalizing the deal. The question becomes: Should we proceed or should we back out?

Join me for our new M&A Express videocast, “When to Walk Away,” on May 13th. M&A Express is new, complimentary resource for middle market executives that teaches essentials of mergers and acquisitions in 20 minutes or less.

When to Walk Away

May 13th, 1:00 PM – 1:20 PM ET

Register here — it’s free

In this important videocast, you’ll learn clear criteria for abandoning an acquisition before it’s too late. The information here can save your company millions of dollars and years of heartache.

After the videocast I will be answering questions, so please have your questions ready. In the meantime you can contact or submit questions at any time by commenting on this post or using the contact form.

Learn more about M&A Express.

Subscribe to the blog.

How do you go about finding companies to buy? Do you begin your search by contacting a list of usual suspects? Rather than falling back on the usual suspects, consider using a truly strategic approach to finding the right company to buy. A demand-driven approach to picking acquisition targets will help increase your chances of successful M&A.

Join me for the second videocast in the new Capstone series, M&A Express: “Where to Start Your Search.”

You’ll learn how to look beyond the “deal” to consider long-term market forces that can make or break the success of your acquisition.

Where to Start Your Search

April 9th, 1:00 PM ET

Register here — it’s free

The information in this videocast can make the difference between a successful acquisition…. and a disaster.

After the videocast I will be answering questions, so please have your questions ready. In the meantime you can contact or submit questions at any time by commenting on this post or using the contact form.

See you on April 9!

Learn more about M&A Express.

Subscribe to the blog.

Here’s a quick reminder to those of you who may have missed out: the first videocast of M&A Express “Why You Need a Roadmap” launches tomorrow, March 5 at 1:00 PM ET. Click here to register.

In this videocast, we’ll be taking a deeper look at an essential element of acquisitions: the M&A process. My hope is this videocast, along with the entire series of M&A Express, will be a resource for you as you continue exploring proactive, external growth programs and mergers and acquisitions.

Why You Need a Roadmap

March 5th, 1:00 PM ET

Register here — it’s free

 

In line with our mission of helping companies grow, Capstone is pleased to offer this new resource for middle market owners and executives at no cost.

I’ll be answering questions live, so please feel free to submit your questions when you register or at any time during the videocast.

See you tomorrow!

What is M&A Express?

M&A Express is a high-impact series of videocasts presented by David Braun, founder of Capstone and author of Successful Acquisitions. Each videocast runs 20 minutes or less, and delivers cutting-edge insights on proven growth strategies for middle market companies.

M&A Express is free!

Click to learn more and register

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Register now for the first videocast in the new Capstone series, M&A Express: “Why You Need a Roadmap.”

Having a roadmap for your acquisitions is essential for success, but far too often I see executives and business owners pursue M&A without a plan. Many take on a “we’ll know what we’re looking for when we see it” approach while others simply do not know where or how to begin planning for M&A.

In this videocast, I’ll explain the three primary phases of the acquisition process, and key guidelines you must follow for each phase.

Why You Need a Roadmap

March 5th, 1:00 PM ET

Register here — it’s free

 

The information in this videocast can make the difference between a successful acquisition…. and a disaster.

After the videocast I will be answering questions, so please have your questions ready. In the meantime you can contact or submit questions at any time by commenting on this post or using the contact form.

See you on March 5!

Learn more about M&A Express.

Subscribe to the blog.

Photo Credit: Colby Stopa via Flickr cc

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.

“The danger with a mergers-and-acquisitions boom is that chief executives could allow themselves to get carried away by the thrill of the hunt, reducing their focus on internal investment projects that might have a better chance of bearing fruit,” says the New York Time’s Dealbook column.

M&A activity has reached record highs and shows no signs of slowing. The $2.2 trillion in announced deals globally this year is an increase of 67% over the same period a year ago. This may be good news, but there are accompanying risks.

More mergers and acquisitions typically are a positive sign for the economy, but as activity increases so does the number of failed acquisitions. Executives can make irrational deals driven by excitement or pressure for acquisitions rather than strategy, because cheap capital is available or because others are executing deals.

This year we’ve already seen the failure of a few large acquisitions: Pfizer – AstraZeneca, Fox – Time Warner, Sprint – T-Mobile. Even completed acquisitions still may fall short of expected synergies.  We’ve seen a large number of tax inversions and consolidations, which are primarily driven by cost savings. This is concerning because once you’ve cut costs to become “leaner” and more efficient you have to employ another strategy to grow revenues. I’ve rarely found cost savings to be a strategy for long-term growth.

To further understand this phenomenon of irrational deal-making we can explore the M&A cycle that can be categorized into four phases.

  • Phase 1 – There are few mergers and acquisitions due to sluggish economic conditions.
  • Phase 2 – M&A activity increases as financing is readily available in an improving economy.
  • Phase 3 – Activity is robust: executives feel more confident about the economy and they execute more deals.
  • Phase 4 – The market is frothy and executives start making “dangerous” deals driven more by excitement and momentum than strategy. Premiums can rise to 100% in this final phase.

The excitement from the M&A boom in Phase 3 drives the onset of riskier deals in Phase 4 that are more likely to fail.

It’s natural to be enthusiastic about a deal, but avoid getting swept up in the excitement and acting on impulse without focusing on strategy. Following a proven, systematic process can help you objectively evaluate your M&A opportunities to make sure they are aligned with your growth strategy. I recommend you develop a strategic acquisition plan before you jump into searching for prospects or executing a deal. Using a process will minimize your risks, help you avoid making a bad acquisition, and increase your chances for a successful acquisition.

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