When considering the purchase of an existing business, there can be many advantages, such as economies of scale, growth potential and cultural and corporate synergies. These are all great reasons to consider such a transaction. However, many people don’t take time to consider the many pitfalls that could derail your strategic goals. It is critical to your success that you do your homework and leave no rock unturned. The following are the top Do’s and Don’ts that can either make or break a deal:
- Buy businesses that you understand – I am approached constantly by clients and associates that come across a deal “they can’t pass up.” They tell me all the right reasons to buy a particular business and how great it will be. My response is always, “what do you know about this industry?” Often, this person has no experience with this business and simply brushes that off as a minor detail. I cannot stress enough how wrong that thought process is. Always make sure you fully understand the business you are buying, regardless of how good of a deal it may be.
- Form a strategic acquisition team – Never should you approach an acquisition, of any size, without some key players on your side. Your team should include operational experts, a transaction attorney, finance and HR advisors, an IT specialist, and other relevant professionals
- Create a due diligence checklist – Every acquisition will be different, so it is important to approach this checklist with a fresh set of eyes. Make sure it is comprehensive and addresses all legal, finance, HR, IT, lender and strategic factors. It should be easy to follow, assign responsibilities appropriately and provide target dates. This will be your roadmap to stay on course and vet out everything you need to make the best decision.
- Evaluate the Target’s key employees – Critical to any business are its people. Without the right people, and those people “sitting in the right seats on the bus,” to quote Jim Collins’ book Good to Great, a business will fail. During an acquisition, you must assess which employees will be necessary to the overall success of the combined business going forward. Begin to formulate an approach to secure them for the long run. Take time to understand what motivates those people, what they like and dislike about their current employer, and address those factors in a mutually agreeable arrangement.
- Resolve all disclosed and undisclosed issues before closing – Inevitably, issues will be brought to your attention throughout the diligence process. As my mentor always said, everything is negotiable. so there is no reason to panic when an issue is raised. However, you should never ignore these items or wait too long to put them on the table and begin discussions. In my experience, time kills deals. The longer you wait to discuss an issue, the harder it will be to overcome it.
- Ignore your advisors – Your advisors are there to look out for your best interest. They are paid to be skeptics. I always tell my clients, “you are paying me to kill this deal; otherwise I’m not doing my job!” While this is a harsh statement, it’s the truth. As advisors, we have to find all the ways the transaction could hurt you, and then work with both sides to resolve those issues and protect our clients.
- Be afraid to walk away – While this may seem like common sense, it is one of the hardest principles to follow. Sometimes, it is easy for someone from the outside looking in to see how bad this transaction may be; however, if you are in the weeds and have convinced yourself that it’s a great deal, it’s going to be very hard to walk away when the deck is stacked against you. Always remember that if you are having to justify the deal and are continuously bending, it may be one that you need to walk away from.
- Be overly optimistic – Maintaining a positive outlook is great, but you must always be skeptical in your approach. If something appears to be too good to be true, then it may be just that: not true!
- Over leverage – Pulling too much debt into a deal on the onset is never a good idea. The business will need transition and growth capital to achieve the returns you are projecting. Stressing the business to pay higher than typical debt levels may force your company into a bad situation before you ever get started.
- Fail to evaluate key vendor and customer relationships – No business will survive without its customers and its vendors. During the due diligence process, make sure that you always reach out to key vendors and key customers to assess the relationships with previous ownership. Will they continue to work with the business after you purchase it and, if so, what nuances do you need to be aware of?
Hanny Akl is Member and Director of the Firm’s Transaction Advisory Services Practice. For more information, please contact Hanny at firstname.lastname@example.org