If you have been following my posts or read my book you would know that I am a strong advocate for strategic acquisitions to grow mid-size private businesses.
Currently 22% of businesses in Australia are owned by the Baby Boomer generation (born between 1946 and 1963), and these Baby Boomers are looking for an exit strategy.
Each day more and more of these business owners are considering how they exit and they are either putting their businesses up for sale formally, or planning for the sale process.
So whilst it is a great strategy to grow a business and there is ample supply; don’t fall into the 7 Common Mistakes.
Believing that acquisitions are only for big companies and you can’t afford to do it
Most business owners believe that their true focus should always be the day-to-day running of their business and continuing to do what they do well. It can be many years until the growth eventually flattens out. Unfortunately many of these business owners believe that acquisitions could not possibly be part of their scope. They prove this to themselves by imagining they also could not possibly afford to consider an acquisition a part of a growth strategy. And they will continue to believe this without ever investigating the opportunity or the benefits.
Trying to do it without a detailed knowledge of all the required steps and potential pitfalls.
Like any skill or profession you need to be trained and highly experienced to be considered an expert. There are eight important stages to be undertaken and carefully checked to reduce the risks of an acquisition becoming at best a complete waste of time, or at worst fatal to your core business. We have all heard of occasions when a company has bought out one or more businesses with a view to growing and yet has failed, resulting in closure and bankruptcy in just a few years.
Frequently this can be due to the acquiring organisation believing that they knew what they were doing or simply calling in their external accountant or solicitor to assist with the process. Again in many cases, the accountant and the solicitor are trained and experienced at what they do well, but a very high proportion of the time their experience and skill set does not cover off all eight stages required to reduce the risk of a poor acquisition and give the highest chance of completing a strategically successful acquisition with a high return and relatively high chance of success.
Not knowing how to identify and find the best opportunities
Many business owners, when first learning about the concept of growing their business via acquisition in order to solve their declining sales and profits, are generally excited about the possibility of solving their business problems in one ‘easy’ step. All too often they are unaware of the proven ways of identifying the right types of organisation that best suit their needs. It is important that the company fully develop a strategy for medium-term and long-term success and that is in accord with the owner’s expectations as well as the organisation’s skill set.
Forgetting to independently ascertain the target business is ripe for acquisition
Too often businesses that are selling are doing so because the business owner is stressed and looking to bail out. The seller may well be trying to disguise these difficult issues from the potential buyer. Whilst on face value you should believe what businesses are putting forward as being correct and accurate don’t always believe what they say; it is critical to have an independent advisor investigate the target company and assess it for its readiness for acquisition.
Thinking the first opportunity will be the solution (or being too selective and not making a decision)
Once a business owner has come to terms with the concept of growing their company via acquisition then the concern is that he or she might jump in too quickly and buy the first business that comes their way. It is like most things – once you have become aware of a concept and opened your mind to it, you will suddenly see opportunities everywhere. By definition this is because you are now aware of what you are looking for, whereas in the past, similar opportunities were probably there but you were simply not conscious of them.
So the big mistake, having become aware of the benefits, is a temptation to get started quickly and make up for lost time. A word of warning – be careful and take your time to work through all the steps thoroughly. I recommend that you review numerous companies even if at a superficial level. Eventually the right one starts to show itself. This search process can be narrowed down by careful research prior, but be careful about jumping into the first one that comes your way.
Trying to negotiate directly with targets and either doing the deal too quickly and paying too much for the wrong business – or trying to smash them on price and terms only to end up losing a potentially good opportunity.
If the business decides to take on an acquisition strategy, another key mistake that many make is to take their eye off their current business and go to the market themselves. Or they may try to negotiate deals not knowing exactly the ins and outs of how qualified and experienced advisors do it. This can lead to several problems including taking too long to do a deal efficiently, paying too much for the target business or not paying enough attention to the due diligence process. Another possible problem is in not understanding all the issues involved in the integration phase to solidify the benefits of what the company has purchased.
Aiming too big and looking for the one big quick fix
Another key error is that once a business has accepted the concept that acquisitions can assist their growth, they misread the fulfilment part of the strategy by trying for a one-time quick fix tactic. Rather they should understand the ongoing strategy of continuous, modest sized acquisitions and building the business profitably and sustainably over many years, which is how a considered and measured strategy should be implemented. Some businesses see the concept as a quick fix and look for a relatively large target. My definition of a large target is a business which is greater than 65% of the acquirer’s current size. Now this is not a hard fixed number, as there are numerous ways to measure the size of a company; turnover, number of employees, capital employed or alternatively, it may be the number of locations or diversity in products and markets, which are issues that the acquirer will have to deal with when taking over the target.
My experience with the first acquisition that I undertook in my own business was strategically very important and critical to the next growth phase of the business. However it took far too long to negotiate the deal. My competitors became aware that the target business was for sale and also took the opportunity to look at it themselves, thus understanding exactly what we had actually bought. Following the transaction, our major competitor believed they could better our prices in the marketplace and cause stress to our business, which it did very successfully. Do not underestimate the need to negotiate reasonably quickly and with a closed shop. Also don’t underestimate just how your larger competitors may react in the market following the acquisition.
About the Author: Warren Otter
Warren Otter is both an investor and a specialist advisor to medium-size business owners. He is the author of ‘Crank It UP: The proven way to drive your business to greater wealth’ and has been a business owner in the manufacturing environment since the early 1990’s.
He grew his first business from $4.5m to $25.0m revenue back in 2005. In that year he won the Monash Business of the Year award, beating many larger and more well-known businesses.
At that stage Warren had just completed his third bolt on business acquisition and both the award and growth was largely due to the A grade management team he developed.
Also, have a look at the other articles on this site. Best of luck in running and growing your business via acquisition.