“We did an acquisition about 15 years ago. It did not go well…I guess you could say we are still ‘recovering,’ the CEO of a family-owned business recently shared with me during a meeting.

She went on to explain there were a number of integration issues and other challenges that cropped up post-closing that the company was not prepared to handle. From payroll issues to disgruntled employees to operational challenges – the experience was “traumatic,” for the organization according to the CEO.

Fortunately, the company is in a better place today and is ready to explore new ways to grow. While leadership recognizes the potential of a strategic acquisition, because of their previous experience, they are, understandably, hesitant.

It’s not uncommon to have this reaction. But just because an acquisition didn’t work in the past, it doesn’t mean you have to abandon M&A as a tool for growth. You can learn from what went wrong last time and be successful when executing future deals.

There are many reasons deals fail from culture clashes, hidden liabilities, poor planning, or simply inadequate of expertise, but these issues point to one overarching reason for acquisition failure – lack of strategy. Alarmingly, many companies take on a reactive approach to acquisitions, buying whatever company comes their way without first developing a strategic plan. Not having a plan is a surefire way to fail.

In the case of our family-owned business, they decided to take on a strategic approach to M&A this time around. Unlike last time, where they adopted a “plan as you” approach to M&A, they dedicated serious resources to establishing a strategic plan for acquisition prior to even looking at companies. This included identifying potential integration challenges and developing a 100-day post-closing plan long before the deal closed to avoid the same issues as last time. With a firm foundation the company was able to identify the right opportunities for growth and execute a successful transaction.

If you are still suffering from the results of a failed acquisition, I encourage you to adopt a strategic approach right now. Gather your team together to review your growth options in light of your overall strategic vision. Then, you can determine your next steps whether its organic growth, external growth, minimizing costs, exiting a business, or doing nothing. With a strategy in place, you will avoid many pitfalls and maximize your chances for success.

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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Pfizer and Allergan have announced that they are abandoning their $160 billion merger.

This resulted from a political storm around tax inversions, a technique whereby US companies relocate abroad to avoid the high US corporate tax rates. The Treasury department took action to insert new rules that effectively killed the financial benefits of the deal.

According to their agreement with Allergan, Pfizer will pay a breakup fee of $150 million.

Politics aside, this is just a small reminder of why acquisitions that are not carefully planned can prove to be costly errors. Could Pfizer have anticipated the government’s intervention? That’s hard to know, but in principle buyers need to be looking ahead at potential roadblocks that could jeopardize a deal.

Transactions unfold in stages, and each stage can present its own challenged. In particular, a signed letter of agreement (LOI), although an important milestone, does not ensure that the deal is done. There’s a lot of that can happen between LOI signing and the final acquisition agreement. It’s essential to make your plans with that in mind.

Assuming yours is a middle market company, you may not experience the same type of regulatory scrutiny that publicly traded companies do. However, there’s no shortage of other issues that may show up, such as owner hesitancy, problems uncovered by due diligence, cultural collisions and many more.

And the story doesn’t end when you finally ink the acquisition contract. You may “successfully” acquire a company only to see things fall apart during integration.

With every M&A transaction, there are many moving parts. It’s the task of your acquisition team, including both your own staff and your outside advisors, to consider them all. To name a few, you must consider regulations, taxes, legal challenges, due diligence, valuation, cultural integration and—never to be forgotten—your overall strategic purpose.

With any business initiative worth taking, it’s impossible to eliminate risk—but you can and should minimize it. In M&A, the best way to do this is to follow a system that’s been proven in prior acquisitions. I call this the “Roadmap to Acquisitions” and I consider it the single most decisive factor in M&A success. Take a holistic view of the acquisition process from the start to finish, and be both proactive and strategic. In other words, know your end result as best you can, and anticipate all the hurdles you may have to overcome to reach it.

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Signing the letter of intent (LOI) launches the final phase of the M&A process, where you delve into the details of due diligence, deal structure, closing the transaction and integration. In this third phase of the Roadmap to Acquisitions, Build the Deal, maintaining momentum remains critical. Even as the finish line is in sight, there is still much to be done in order to seal the deal and it is important to remain actively involved rather than defaulting to lawyers and accountants. In this final phase you have the opportunity to strengthen your relationship with the prospect and enrich synergies that will result from the newly formed business.

If you’ve followed the Roadmap to Acquisitions, all the work you’ve done previously in developing a strong strategic plan and building a relationship with the prospect will pay off as you navigate this final phase.

In our upcoming webinar, “M&A: From LOI to Close,” I will guide you through the final steps in the acquisition process and show you how to close the transaction.

After completing this webinar, you will be able to:

  • Explain the structure of an LOI and how to make it beneficial to your situation
  • Describe how to manage the Due Diligence process from both the viewpoint of the Buyer and the Seller
  • Utilize strategies to negotiate an agreement that is beneficial to both sides
  • Identify how valuation is affected during the Due Diligence and Closing processes
  • Recognize what is expected at Closing
  • Begin to execute your Integration game plan

Date: Thursday, December 17, 2015

CPE credit available.

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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.

What tools do you use to help manage the M&A Process?

I was recently asked this during our M&A Express videocast “Why You Need a Roadmap.” There are two key ways I would answer that question.

First the macro view. Look at the big picture and develop — or adopt — an end-to-end process. This is a very simple principle, but I have come to realize that few companies actually have a process of any sort for approaching acquisitions.

Second, use well-designed tools within the process itself to help you evaluate and prioritize companies.

For example, in Phase 1 of the Roadmap to Acquisitions, we establish and develop weighted criteria and throughout the process we use a pipeline management tool to track our progress. Throughout each step of the Roadmap, tools like this can help you minimize emotion and increase objectivity as you identify and evaluate strategic opportunities.

 

 

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.

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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.

As you consider acquisition as a route to growth, you may be wondering: How long will the whole process take? This is one of the most frequent questions I hear when laying out an acquisition plan. The answer is never easy to pin down. I’ve worked on acquisitions that were completed in a month, while others took years to finish.

Generally speaking, if you are starting from scratch and following the Roadmap approach that I advocate, you should be able to close on your first acquisition within twelve to eighteen months. If you push any faster, it is unlikely that you will have time to do the necessary research and examine a sufficient volume of markets and prospects.

Many factors impact the timeframe, including the size of the target, the complexity of the transaction, and the psychology of the parties involved. Another factor is your own level of decisiveness. I still have clients who are hesitant to act or who enjoy the dance more than closing the deal. Speed of decision-making is one of the most significant determinants of the time it takes to complete an acquisition. Adopting my Roadmap approach, which is based on a history of successful real-world transactions, should give you confidence to pull the trigger and make the right acquisition when the opportunity appears.

*This post was adapted from David Braun’s Successful Acquisition, available at Amazon.com

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