5 questions to consider before a merger or acquisition
Summertime is often a time when advisors relax, sit back and decelerate. This is a dangerous trap, as now is the best time to get out and visit clients. Advisors should be out talking to business owners and providing valuable input.
So what are our clients telling us? Many clients are concerned with the health care act, retirement planning and product diversification. Some of our clients are struggling to find the right employee. A few of our clients are looking for ways to manage cash flow as profitability continues to increase.
Now, more than ever, clients are talking about how to grow their business — not just organically — but through mergers and acquisitions. As balance sheets are healthy once again, clients are considering this alternative as a way to increase the value of their stock.
However, without proper guidance, this process can be dangerous territory. The fact is that many mergers and acquisitions fail. Some sources say as many as 75 percent of all transactions don’t yield their anticipated results. How can you, a business owner, avoid failure?
First, find the right advisor. I say that selfishly as a CPA, but I also believe that it’s imperative to have the right team assist you in the process. Find an advisor who will work with you, who doesn’t bill by the hour, who understands how you think and operate and who listens to you.
Then, once you find the right person, you need to discuss these five questions that are at the heart of every merger and acquisition.
1. Does the transaction fit our company strategy? Perhaps a preliminary question is, “What is our company’s strategy?” What is it that you do or will do in the future to create a sustainable competitive advantage? Figure out what you’re good at and do it.
2. Are the cultures of the companies a fit? Cultures can make or break a deal. A company’s culture prior to a deal may not be the same after a deal. Culture is a moving target, and the failure for culture to align is a tremendous risk.
3. Do you know what you’re buying? What is the benefit of combining the two entities? These “synergies” are highly sought after, but not always achieved. This question is best answered in the due diligence process. We are often tempted to think that due diligence is a compliance audit with a checklist of documents to review and procedures to perform. That is far from the truth. The purpose of due diligence is to gather intelligence about the target. The past is an imperfect forecast of the future.
4. Can we integrate the businesses? Issues with integrating businesses kill mergers and acquisitions. Establishing a transition team with clear direction and the authority to make decisions may lead to a successful integration. Once this is done, communicate regularly with all members regarding goals and action items.
5. Are we paying the right price? We see this step as the one where the most time is spent. Valuation, negotiation and the structuring the deal drive up time and professional fees. Sometimes these costs are necessary, but not at the expense of the first four questions. Remember that the buyer is paying for a market return based on future results and inherent risk. The seller is seeking a “walkaway” amount that allows other goals and objectives to be met. Understand what the other side really wants and that this is not always what they say they want.
In order for a deal to be successful, the human side of the acquisition must be viewed equally from the operational side. Strategy, culture, synergy and integration are more important than the negotiation and determination of price. Asking these five questions in every merger and acquisition increase the chance of success.