Move Carefully in Making an Acquisition

Find a business that operates at a loss. Add their revenue to yours. Cut redundant costs. Increase your bottom line. Simple formula – success is in the details.

We’ve decided to do an acquisition. We think this is a good time to try – we’ve heard that prices are lower, some owners are anxious to get out. We’ve never done one before, so we’re not sure where to start, or what to look out for. We also don’t have a lot of room for error. However, without an acquisition, we’ll have difficulty hitting our growth and profit goals, and may be facing a significant loss next year.

Top Thoughts: Acquisitions are potentially a great way to grow the business. Most acquisitions start with lots of optimism, and end up not delivering the expected results. Figure out what your company needs, then go get it. Be careful to pay only for assets you can secure. Look for buyers who are ready to do business.

If you feel like you’re beating your head into the wall, it may be faster and more profitable to do an acquisition as a way to beef up revenue and profit. Perhaps the recession has taken a toll on your customer base. Or costs have risen faster than profits. Or new innovations are pulling customers away. Or you can’t locate the human talent you need. When the core business maxes out, add to the mix of what you own.

Keep in mind that when all the dust settles, most acquisitions fall far short of expectations. That’s not a reason to avoid doing one, just a warning of caution. It is possible to do an acquisition well, and help your company get to the next level. The answer is in the details of how you go about acquiring and managing the newly acquired business.

Start by profiling what your company is good at, and what areas need help. Fill in 2 columns, strengths and weaknesses, for each of the 6 Sisters: Leadership, Sales, Finance, Marketing, Operations, Human Resources. Be realistic about where the company needs reinforcing.

Build a shopping list. Need customers? Need goods to sell to existing customers? Have unused production capacity? Need equipment and expertise to improve profitability? Strong enough at marketing? What about training and development?

Get to work to find acquisition targets that meet your company’s short, mid, and long term needs. Figure out the value that would come from adding specific attributes, volume, skill. Think of the acquisition as time sensitive – if you can’t reap rewards within 1 – 2 years, it may not be worth doing.

Check on the security of the assets you’re buying. Are there outstanding liens or loans due on hard assets. If you’re planning to acquire personnel, which is the case in most acquisitions, are confidentiality agreements, non-competes and golden handcuffs in place – on the right personnel.

I recently heard a business owner brag that he had sold his company, only to start another company and lure former employees and clients to that new entity. The acquirer folded within 2 years. Not particularly admirable, but certainly possible without the proper contracts.

Consider the potential seller’s motivation and experience. If this is their first conversation about selling the business, and they’re just shopping around, they may not be as realistic or quick to close as you’d like. If they’ve been to the doorstep of a deal before, only to have it fall through, the experience may help to reduce their expectations, or be a warning sign that they’re unrealistic.

Ask about the sellers advisors. Beware if there’s no lawyer or accountant to work with. At a minimum, that will slow the process of information gathering and document creation. Trust is built between buyer and seller by putting information and deals on paper and affixing signatures, no more, no less.

Have an acquisition process ready to roll the day you take possession. Put people in charge. Quickly secure personnel, inventory, equipment, customers, and production, in order to minimize losses. Know how much revenue has to be produced, at what margin, to make the acquisition work. Measure results daily, until the new business is on track.

Looking for a good book? Do-It-Yourself Business Sales Guidebook: A Proven System to Help You Sell a Small Business with Less than $1 Million in Revenue, by Ben Brickweg.

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