After the handshake
How to avoid an acquisition ending badly
My client was happy, but couldn’t quite bring himself to relax, because, as he reminded me “the hard part is after the sale.”
At the risk of impeding my M&A consulting practice, I agree with the observation that far too many acquisitions end badly, resulting in disappointing profits and broken careers. When you see or live through one of these sad stories, as I have, you have to ask what could have been done differently?
What follows is a list of “do’s” and “don’ts” drawn from my personal experience, which I’ve judiciously supplemented from other M&A industry sources.
1 — Be sure your company is well-suited to handle an acquisition before you begin the process.
You must have the financial strength, a strong management team and the systems in place to make the deal work. I’m reminded of two very bright MBAs out of one of the nation’s most prestigious universities who went on a buying spree of safety distributors in the mid nineties.
They knew the mechanics of structuring leveraged buyouts, but they did not have the management experience or the operational systems in place to make it work. The only winners after the crash were the sellers who got paid nicely at closing for the businesses.
Many of you will remember the Figgie International distributor acquisitions in the nineties that resulted in Safety Supply America. Despite diligent efforts on the part of its field management, this deal crashed. Most observers and participants said this was due to a lack of pre-existing sales and purchasing planning, all of which was exacerbated by the lack of an integrated IT system.
2 — Be sure you really understand what makes your targeted acquisition work, or not work!
If they are in a similar business, but go to market differently or have dramatically different compensation expectations, or major cultural differences, you need to know this and have a plan to overcome such potential pitfalls. Sometimes, the synergies and economies of scale you thought were in place don’t really exist, which can cause debilitating, post-closing profit pain.
3 — Don’t let your ego get caught up in an emotional bidding war resulting in paying too much.
We’ve all seen this happen in publically-traded companies. Believe me, it happens in the world of industrial safety.
There are numerous examples that come to mind in both the distribution and manufacturing segments of our industry. Judge the deal on its merits for your company’s future and don’t forget that “walking away” on price with a friendly handshake can leave the door open for a later round of talks if the seller’s presumed deal didn’t go through.
4 — Try to be on your best behavior during negotiations.
Leave your ego at the door when entering talks and make friends with the potential seller. You can always be friendly and firm and preserve the relationship even when the going gets tough. There are books written on this subject, but you’d be surprised how often personal chemistry can make or break the deal.
5 — Don’t place too much, or too little, faith in the management of the existing team.
Try very hard to analyze what’s working well and what’s not. As a rule of thumb, it generally makes more sense to go carefully with changes than to plan a wholesale shakeup. You really don’t want the best performers to quit because of the uncertainty of their future before you’ve had a chance to get to know the players.
6 — Think realistically about existing sales trends.
Also the continuity of key customer and key employee relationships. For instance, you can count on your competitors doing anything they can to gain an edge, including but not limited to, hiring away your starting lineup. In general, a buyer’s marketing due diligence is the most critical part of the pre-acquisition homework.
7 — After the closing, make every effort to understand the acquired business.
And its customers, its employees, its suppliers, its current and potential markets, and its competitive environment. Do whatever it takes to open the lines of communication to ensure the quality of information that goes into refining your plan. As one turnaround pro told me in an interview years ago, the feedback you get will help you pick some of “the low hanging fruit” which can cheer everybody up on all sides of the deal.
8 — Get on with the plan and modify it where needed.
By now, in a perfect world, you’ve developed a sound understanding of the business, you’ve fine-tuned your objectives, and you now need to get moving as efficiently as possible to maximize sales and profits. And, since cash is king especially after an acquisition, you can’t forget balance sheet performance.
It’s amazing, but true, that
after an acquisition there are often many quick, non-controversial, financial buttons to push that for some reason never got pushed before out of ignorance, tradition or both. The little things, such as negotiating extended payment terms, taking all cash discounts, charging more for shipping and handling, honing in on late paying customers, and returning dead inventory, all have a way of adding up.
9 — Underscore your commitment to make existing good will become excellent good will.
Seriously, the importance of making a strong showing of service and quality to your new customers after acquisition time can’t be understated. A lot of times, your customers are quietly sitting back there thinking, “Here we go! I found a great supplier who’s taking care of me. But now this new hotshot company that bought them is going to screw it all up because they’re probably a bunch of numbers guys who don’t really care about the customer.”
10 — Love your existing suppliers.
But it’s also time to let ’em know you’re going to shop around. You may be shocked to find out about better deals that never came knocking, because competitive suppliers had given up on ever trying to get through your purchasing door.
I remember years ago in an earlier life that I put all business forms “out on contract” at the company where I was the new boss. Everyone was amazed that we saved over 30% for the year, but they shouldn’t have been!
11 — Be sure to continue paying full attention to your existing business.
This goes without saying, but it’s easy to get sidetracked in the excitement of pursuing the new deal. So, don’t get sidetracked!
In summary, the long-term rewards of a successful acquisition usually erase the painful memories of the process. Think about the really big, strong and respected companies you know; very few have gotten where they are without a successful acquisition program in place over the years.