Why Acquisitions Fail

“Everything’s so green!” – line by King Louis XVI from Mel Brook’s “History of the World”

Over the years, I have worked with many clients on dozens of acquisition transactions. When I think back to the early stages of any of these deals, it conjures up this line from “History of the World.” A potential deal was like a new love; everything looked fantastic and the benefits seemed to far outweigh any issues; leading to that often-used phrase “it’s a no brainer.” For my more strategic thinking clients, this was often the case. I can still picture a mosaic one of my clients created in the early years of his company, detailing product features he thought were required to capture the market. With a solid assessment of the company’s capabilities, he conveyed a clear vision as to what the company would develop and what they would acquire. This became one of many success stories. But what about the failures?

When a client would call, and indicate they were interested in acquiring a company for reasons such as the target company was available or they could be bigger with an acquisition, my antennae would always go up. I quite honestly rarely saw what I considered non-strategic deals for the sake of growth work. By the time those deals were done, they usually started to come undone as the expected returns quickly faded. So besides being poorly conceived, what caused these deals to fail? I can think of four reasons:

  • Growth over culture. Money never trumps culture and nowhere is this truer than in the case of an acquisition. If the deal is not a good cultural fit, it will fail.
  • Poor post transaction planning. The details on how you are going to operate post-deal is a major factor in its success. Broadly addressed as Post Merger Integration, poor execution in this phase is a major cause of deal disappointment.
  • Unrealistic synergies. You can’t just eliminate bodies without contemplating the consequences. As to the market and customers, there were probably good reasons the two companies existed before the deal and thinking one can handle what the other did without a well vetted understanding is fool’s play.
  • Seller’s remorse. An independent owner gets acquired and has the chance to bring his company to the next level as part of a larger organization. Sounds good in theory, but when an entrepreneur has not reported to others in a long time and now he must, it doesn’t always work. If there is an earn out involved, this often complicates the matter.

So, consider the tough stuff in the early stages of a deal when everything seems to be great. Ask the difficult questions and complete the full due diligence including what is going to happen when the honeymoon is over. With the right work, upfront you can avoid transaction failure and everything will look green – especially your bottom line.

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Seller’s Due Diligence – An Emerging Tool in the Sales Process

“A lack of transparency results in distrust and a deep sense of insecurity” – Dalai Lama

I hope this quote doesn’t set too serious a tone for this blog, but much like the probable impact of the most recent election, change is in the air. Over the past couple of years, we have seen a concept emerge which, as one of my favorite clients would say, is “counter-intuitive.” That concept is referred to as seller due diligence (also at times referred to as a Quality of Earnings report) and it is increasing in popularity in mid -market M&A transactions. In the past, we were often approached by investment bankers or companies considering a sale to perform either an audit or a review. But more and more, that request is being modified to incorporate a seller’s due diligence report. But what is it and how does it work? First a little primer.

Accountants are guided by professional standards as to how and what they can say in a report. When it comes to financial statements, the most common accountants’ reports are called audits or reviews. Now the accountants out there will beat me up a bit for my layman’s description, but a review says nothing has come to the accountant’s attention that leads them to believe the financials are not fairly stated. This is often referred to as “negative assurance.” (We are accountants and not literary geniuses.) In an audit, which is more expensive and requires a lot more work, the accountant states in their opinion the financial statements are fairly stated. So in both cases, the focus is basically on the fair statement of the financials and those horribly worded phrases called footnotes. It is more that the numbers appear OK versus what do they really say.

In a due diligence report, there is more color as to the why. For example, an audit or review will show that margins this year may be lower than last year but there is no explanation as to why. A due diligence report would cover this as well as trends, details on balance sheet components and other analysis of the business. So right now, you might have two questions:

  1. Why not get a due diligence report vs. an audit or review?
  2. Why show a potential buyer your weaknesses by providing such a report? Keep in mind, this type of report highlights both the good and the bad.

To answer the first question, the audit and review both provide some assurance that the numbers are fairly stated. There is no such assurance (even limited as in the case of a review) in a report on due diligence. More and more, we are being asked to do both a review and a sellers’ due diligence report.

As to the second point, most transaction professionals will properly advise their clients that big checks are not written by buyers without a due diligence report, so why not make it easier for a potential buyer to understand the inner workings of a target. Being prepared on your own terms for this process is becoming a “best practice” for companies seeking substantial investment or a full exit.

So if you are contemplating this type of transaction, consider a seller due diligence report. I just completed a deal and am convinced its use helped to both identify a serious buyer more quickly and significantly expedite the whole transaction process.

Is it Time to Do That Acquisition?

“Patience hell; let’s kill something” – quote from famous image of two hungry vultures

At times, I think we live to repeat history over and over again.  Unfortunately, many of us only see with hindsight and not what is happening in the present.  How many of us today look back to the 2007 – 2008 time and admit that we should have taken all of our money and invested in stocks (remember GE at $7) and been part of the remarkable gains since then?  As usual, we realize it now when the best is perhaps behind us.

Many discussions I have with clients and prospects these days have a slightly different spin… “Had I only pulled the trigger and acquired that target – I would be so much better off today.”  Well, I have news for you – I think there is still a chance to do a successful deal.  Here is my gut reaction as to why.

First, I don’t know about you but if I have another conversation about the “new normal” I think I am going to vomit.  It is tough to take anemic growth rates that are so low, an extra workday this month versus the same month last year accounts for all of your growth.  How painful is it trying to assess progress that is so small, the tools we have can’t even measure it? What about being congratulated because your break even results are an improvement over past performance?  All of this is wearing on the patience of many entrepreneurs and this pent up frustration is leading them to think like these two vultures.

There is no doubt that your competitor or that target is probably sensing the same malaise.  And, while there is a good chance that the cost to acquire them may be higher than it was a few years ago, back then most felt their financial performance was at an all-time low so there was no motivation to even consider a transaction.  Well, most are now through that soft period and many are singing the famous Peggy Lee song “is that all there is?”  This, my good friends, can lead to the motivation to do something or what we refer to as a burning platform.

There is also a major factor working in your favor… the lending environment.  Interest rates have never been lower, the cash available at banks and investment funds are at record levels and with such strong competition for good deals, terms are as “borrower friendly” as we have seen for a long time.  We are seeing transactions close in reasonable time frames and robust activity is being reported especially in the lower end of the middle market.

So, if expansion and growth are in your strategic plan and you find yourself wondering if the time is right, I would encourage you to go after that deal and execute the transaction that will take your company to the next level.  And, please remember to get the right professionals to help along the way.