As the economy recovers and lenders are becoming more lenient, business owners’ thoughts are turning to mergers and acquisitions or M&A. The experts freely admit that they’ve learned far more from their mistakes than their successes, and it’s definitely a seller’s market.
Based on other business owners’ experiences, here are a few things to avoid when evaluating M&A targets.
1. Poor Due Diligence
As a buyer, it’s your responsibility to find out everything you need to know about a company’s operations, market, customers, management, pricing and more. Every company is different; therefore, the due diligence process may vary from one merger to another.
While you’ll certainly rely on your current management team’s experience, it’s important to branch out as well. Mergers are quite daunting, and if necessary, you should seek financial, operational, and legal help from outside sources.
By avoiding shortcuts now, you can save a great deal of time, money, and frustration in the future.
2. Failure to Interview the Target’s Top Customers
Acquisitions decline in value if the target loses its main customers during a transaction. To minimize the risk, you’ll need to ask relevant questions and determine each customer’s level of commitment to the post-merger company.
By interviewing top accounts and getting their views of the target company’s responsiveness, quality, and value proposition, you’ll get a better idea of the level of loyalty and customer satisfaction.
3. Not Assessing Cross-Cultural Issues
Stubbornness and an unwillingness to see things from the target’s perspective will likely ruin an otherwise good deal. During interviews with the target’s managerial team, ask questions about the corporate culture and carefully consider the answers you receive.
While it’s important to consider the way the target does things, in the end, you’ll have to choose a culture and form a transition plan.
4. Moving Ahead Without a Plan
According to recent statistics, almost 70% of strategic mergers fail because of substandard implementation. The creation of an integration plan should come after due diligence and it should be ready for implementation immediately after closing. Branding, integration plans, and post-merger communications with employees and customers are crucial.
By keeping the lines of communication open, it’s easier to find the right answer to the question “Should I sell my business?”
5. Lacking Employment Contracts for Key People
There’s always a hidden exit for a key businessperson; during a merger, it’s important to find and block it. Sellers must deliver key team members to buyers upon closing, which requires careful consideration of employment contracts. If a key person is reluctant to sign a non-solicit or non-compete agreement, it may bring trouble in the long term.
Every offer must be benchmarked, its sensitivities analyzed, and its risks quantified. If a combined company doesn’t bring an ROI exceeding the buyer’s capital cost, the seller set the price too high. An outside advisor may help all parties understand important issues, thereby enabling a successful merger.
These are the top six errors to avoid when completing a corporate merger or acquisition. While some of these mistakes may seem minor, each may leave you in a position where it’s almost impossible to achieve your desired ROI. When these pitfalls are avoided during M&A, you’ll be on your way to a more rewarding experience.