It might seem like a great idea to buy a company but there
are many pitfalls along the way. Most buyouts of companies
end up failing for the buyer because they ignore these 7
deadly sins.
Make sure you don't fall into these common traps.
1. You pay too much
The most important part of the deal when buying a company
is what you agree to pay when you go in. The reason
private equity works is because they will always seek to
pay the minimum price and they won't even consider looking
at a deal that is overpriced (unless competitive ego gets
in the way).
Don't get into a bidding war. Don't buy into the Seller's
or Broker's stories. Don't pay more than you can afford to
finance. And do negotiate hard and get the lowest price
you can. It's simple common sense but the lower price you
get going in, the more profit you make coming out. That's
just good business.
2. You have no experience in that industry
Sometimes it's great to have a fresh view brought into a
company from another industry. However, if you don't know
the industry then you can easily underestimate timings,
costs, salaries and the competition.
If you're set on entering into a new market then do your
research first and ideally bring along people with
experience in that arena. You may be the exception who
bridges the gap and moves from one industry to another
successfully but that road is littered with the damaged
careers of many who didn't.
3. You skip due diligence
Of course you're cost conscious when you buy a company and
Due Diligence can seem like an awful lot of effort.
However, buying a company without proper Due Diligence is
taking a major risk.
If you buy a car without checking it over then you might
find it has some faults that need additional work. If you
buy a house without a survey you can find serious problems
with damp and subsidence which could cost you a lot to put
right.
If you buy a business without Due Diligence you could be
taking on major liabilities (including tax, NI and VAT) as
well as the potential for insolvency, personal bankruptcy
or even criminal penalties as a director of the company.
There are so many things that can be hidden in the history
of a business and its directors and as a new director you
inherit all those past issues and become responsible and
liable for them.
Always make sure you undertake proper Due Diligence and if
you have any concerns about the company you're buying then
either back out of the deal, get it checked by a lawyer or
structure the deal in a way that protects you.
4. You forget about your own business
It can be very exciting chasing after acquisitions, making
deals and completing a purchase. However, if you forget
about the running of your own business during the 3 to 6
months you'll spend on the acquisition process then you
might not have much to bolt it on to when you've finished.
When you're making an acquisition, you'll often have your
best team members around you (your CFO & COO).
Unfortunately, these can be the key individuals who keep
your business running when you're not around.
It's tough to run a business and an acquisition but you
need to juggle both at the same time otherwise you will
ultimately lose out. It can be a good idea to use more
external resources to help you through the process and free
up some of your time.
5. You ignore the staff and the good ones leave
The process of being acquired can be very unsettling for
employees in the target business and often they are left in
the dark until after the deal is completed. They will know
something is happening as their bosses run around with bits
of paper and panicked expressions and they might deduce
that the outcome will be bad. If they expect to lose their
jobs then they'll start to look for new ones.
Unfortunately this can mean that some of the best staff can
have already lined up new jobs before you acquire the
business. And if they've not been treated well by the
previous management then they may choose to leave soon
after the deal is completed.
Another common issue is the lack of communication which
often occurs after the deal is completed. The staff in the
acquired company are left to wonder what's happening and
given no direction. And it won't take long for the good
ones to find new jobs.
As part of the acquisition process you must find out who
the key employees are and engage with them as soon as you
can (before or after the deal) and keep them enthused and
motivated about the future of the new combined businesses.
If you don't then you'll only have yourself to blame when
you have a new business and no-one decent to run it.
6. You leave the business to fester
Along with a lack of communication after a deal is
completed, the purchasing company often goes back to
focussing on their own business and fails to properly
integrate the business they've acquired.
When the previous owners have sold out, unless they are on
clear incentive programs or earn-outs, they can easily lose
their motivation to keep driving the business forward.
They can decide that it's no longer their issue. It's now
yours and they'll wait to be directed by you. And with
no-one driving the business it won't be long before things
start to slip.
As part of the acquisition process you must create an
integration plan and implement it as soon as possible after
the deal is complete. Make it clear and communicate it
widely. If you don't then every day will see your new
acquisition losing value.
7. You lose the customers to the competition
The customers are often the last to hear when a company is
taken over. But as soon as they do they expect to be
contacted and assured that business will continue as
normal, or even improve.
If you don't communicate with the customers after the deal
they'll assume you don't care about them. And then they'll
go and find someone who does care about them, namely your
competitors.
Many customers will have experienced the chaos that can
ensue after an acquisition with confusion over accounts,
contacts, deliveries and payments. They'll be watching to
see how you handle these things and they'll be acutely
sensitive to the fact that it's your problem and not theirs.
Again, create your integration and communication plans for
customers well before the deal is completed and make sure
you start implementing them immediately.
If you're thinking of buying a company then watch out for
these seven howlers and make sure you protect yourself with
these simple actions.
----------------------------------------------------
Andy Warren is the Managing Director of Marshall Keen Ltd.
He is a chartered accountant, successful CFO and
entrepreneur with experience in M&A, Corporate Finance,
Business Growth and Exit Strategies. Marshall Keen
http://www.marshallkeen.com specialises in providing CFO
services to early and mid stage technology businesses. Andy
is also the author of How to Buy a Business for a Pound
http://www.buyabusinessforapound.com
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