Ready, Aim, Acquire: Improve Your Buying Success

BY KEN LUCCI

Have you ever watched a movie set in a Revolutionary War battle scene where the commander on horseback shouts to his troops: “ready, (pause) aim (pause), fire!”

Did you ever wonder why he doesn’t just yell “shoot” instead? The answer is because the commander is instructing the troops to perform three distinct functions that must be executed in a very specific order to hit the mark. READY means to prepare yourself and your weapon, AIM means to align the sights of your weapon squarely on the target, and finally, FIRE means to squeeze the trigger.

These three words can also be a metaphor in business that applies to acquiring a company. Often, when acquisitions fail, it is because a buyer neglected to execute important elements of the process in the proper sequence—or worse, skipped them entirely.

Consider some surprising data about the success rate of acquisitions in general. According to a variety of studies conducted over many years by educators and experts—including Harvard Business School, McKinsey Consulting, and books such as Mastering the Merger by David Harding and Sam Rovit—it may shock you to learn up to 70% ultimately fail. Based on this research, there are seven common reasons why you are setting up your acquisition to be unsuccessful.

#1 Buyer Is Not Financially Prepared
If the financial condition of the buyer is not healthy, they may not be profitable or have too much debt, low cash reserves, poor accounting practices, or a combination of all these issues. Some buyers think acquiring another business will somehow solve their own financial problems; unfortunately, this is usually incorrect. Buying another operator when your business is not financially sound is like adding another story to a building that has major cracks in the foundation. Solutions for this include would include buyers examining their own financial reporting, management, critical profit metrics, and overall financial position in advance. Pore over your own financial situation, including profitability, asset performance, debts, cash reserves, and borrowing capability before you consider acquiring another business. Combining two financially unhealthy businesses is usually a recipe for failure. Only consider acquiring when you know your own business is financially strong and you can demonstrate it with accurate financial reporting to ensure you have a firm foundation on which to build.

#2 Buyer Is Not Operationally Prepared
When the buyer’s business is operationally weak or has fatal flaws evidenced by frequent service issues or process failures, it is advisable to fix these problems before you consider an acquisition. Whether it is inadequate staffing or process or performance problems within departments or functions—namely, if mistakes, service complaints and failures are frequent—stop and permanently fix these issues. Adding more activity will weaken an already poor performing operation.

One way to address this is to gather your team and perform an operational SWOT Analysis of your business. Review your Strengths, analyze your Weaknesses, identify Opportunities for improvement, and examine Threats to your existing business viability and create a detailed plan to solve these problems. There are a variety of free SWOT analysis templates and instructional outlines online and the process is usually easy to DIY. The key is open and honest communications and an executable plan.

#3 Buyers Have Not Answered the Most Important Question
Why acquire now? When potential buyers contact us to assist them acquire another operator, we ask them what they are trying to accomplish and why they want to buy this business. If they do not have a clear reason or say, “because the owner wants to sell,” we normally press harder with questions like:

❱ Is this the least expensive way for you to grow and increase market share?
❱ Does buying this business create a competitive advantage and what is it?
❱ Do they have a first, second, or third brand position in the market or on Google page one?
❱ Does buying this business add service offerings or new profitable clients to your business—or are you buying low-profit trip volume?
❱ Has the operator been consistently profitable with diversified clients, or is most of their revenue from just a few large clients or affiliates?

If a buyer does not have a compelling reason why they want to acquire the business, it does not necessarily mean you should stop the process. All it signifies is that more due diligence is required to determine whether doing this adds value to the existing company and a plan can be implemented to ensure the transaction will be a success for all parties.

#4 Buyer Picked a Financially Unhealthy or Fatally Flawed Target
In many cases, operators want to sell because their business has major problems and inherent flaws. Normally, this means the business is in a poor financial state or worse—it has never been a profitable enterprise. It could also mean the business has had a major negative event such as a major accident, loss of a large client, key staff leaving, or another financial problem like major expenses they cannot afford. We observe businesses that have captured customers due to being the lowest price fall apart after a major negative event occurred. Normally, businesses that have been historically profitable and financially well managed can overcome even catastrophic events. The only way to uncover potential financial or operational flaws is for the buyer to perform a very thorough financial and operational due diligence process prior to committing to purchase the business. If flaws are uncovered, many can be overcome before the acquisition or with a successful integration plan. However, fatal flaws that are very challenging to overcome include when the seller’s trip pricing is substantially lower than the buyer’s prices and/or revenue concentration is among only a few large clients or worse a few large affiliates. When operators have consistently priced services for maximum profit and have large, diversified client lists, most other flaws can be subdued during a methodical acquisition and well-executed integration.

#5 Inadequate Due Diligence Prior to Purchase
Many buyers get excited about the idea of buying another business, especially if the operator is a direct competitor. Excitement should not overshadow a professional financial and operational due diligence process. The due diligence process is when a buyer requests and examines information and records relating to the seller’s business, including financial, legal, regulatory, administrative, operational, and personnel details as well as client and pricing information and records. The more thorough the process and the more complete and accurate data provided by the seller, the better the buyer will understand the true risks and value involved in acquiring this business.

If a seller is unwilling or unable to produce the needed information and records on a typical due diligence list, the buyer should be very hesitant about acquiring the business. The lack of providing proper business information and records begs the questions: 1) What is the seller hiding? and 2) Is this business worth buying?

#6 Communication Missteps During and After the Acquisition
Poor communication and lack of adherence to a strictly timed communication plan can result in missed opportunities, while causing disruptions and additional risks to an acquisition. Normally a communications plan includes speaking with critical staff members, key vendors, and important clients of the company being acquired. Communication at the initial stages of an acquisition process is usually only between owners and perhaps executives within each organization and M&A professionals. But at some point—normally right before the transaction is set to close—buyers should communicate with critical internal staff including executive, operations, sales, and client facing team members. It is also customary for the buyer and seller to communicate with key vendors and visit with clients to frame the transaction in the most favorable light.

Communicating with key stakeholders including employees and clients when the timing is appropriate can limit disruption to the seller’s operation and acquisition-related client defection after the transaction is complete.

#7 Post Transaction Integration Issues
A successful acquisition takes prior planning and a well-executed integration plan. A recent study by Bain & Company found that over 80% of acquisitions failures were due to poor integration after the transaction. Contributors included the inability to retain key staff members, excess client attrition, failure to realize anticipated revenue, and operational synergies and expense savings.

Successful acquisitions always leverage the best practices, people, processes, procedures, and cultural elements of both buyer and seller organizations into a cohesive and well-executed integration plan. Conversely, when buyers approach acquired company stakeholders as a vanquished party and adopt a “We do it better, so it’s our way or the highway” mentality, the likelihood of a successful acquisition is diminished. Most successful acquisitions start with as little disruption as possible, and a thoughtful, people-centered approach to integrating the businesses.   [CD0126]