There are two major determinants of whether you will make money on a business acquisition:
a) The purchase price and financing.
b) The integration.
To be clear, both the price and the terms of the agreement are crucially important. The way you finance the deal can be the difference between success and failure. When purchasing a business in the small to mid-market (say, up to $50m in annual revenue) far too many investors focus only on the deal itself, to the detriment of the go forward business opportunity. But focusing only on the deal is akin to the young bride who spends a year planning her wedding day without giving much thought to the marriage that will follow. You can make it a beautiful day, but there are years, even decades of hard work to come and the more planning that goes into that, the greater the return.
Let’s look at a few possible operational opportunities post acquisition, depending on the type of deal, and examine their benefits as well as things to watch out for.
The title is self-explanatory – the existing managers of the business buy the firm. From a financing perspective, this kind of acquisition tends to be highly leveraged. That means the managers will borrow a lot of money to do it.
Benefits: Assuming the business has a history of success, is operating in a stable industry, and that it continues to chug along as it always has, the managers will see a financial return on their investment. They will also likely get to keep their jobs. This particular ownership transfer has the added benefit of retaining the people who are most familiar with both the industry and the company itself, thereby offering a wealth of experience when dealing with suppliers, customers, and employees.
Watch Out For: Are systems such as daily huddles, regular performance evaluations, and business dashboards in place and working well? Are the managers (purchasers) fully versed and bought-in to their use? If so, excellent. If not, the culture of the company is likely centered on the people at the top and with the owner and president about to sail off into the sunset it is possible the results of the company will suffer as they take the value and the systems with them.
In this circumstance, people (possibly financially backed by others) have decided to buy themselves a leadership job with the expectation that they will get the return not just of their salary, but also of the increased valuation their leadership and managerial skills will bring to the company.
Benefits: There is often a lot of low hanging fruit the previous owner was either too ignorant or overwhelmed to take advantage of.
Watch Out For: As an individual, you may be simultaneously attempting to learn a new business, understand a new industry, and make the changes that will improve the bottom line. Firing on all three fronts can be overwhelming. Ensure you have a backup plan for all three areas should you need to focus more closely on different ones at different times. This may include positioning a strong general manager as the business expert or retaining a change management consultancy with implementation as part of its service offering. While having the original owner available can be an excellent resource, use this person with caution. The previous owner is an expert, but also has strong ties to the old way of doing things in the company itself and may slow the change process.
Folding a standalone business into your existing operation seems to make sense. The architectural and engineering firms in BC in particular have experienced consolidation over the last while and there is likely more to come.
Benefits: The option is typically pursued because the company is looking for accelerated growth, and purchasing the expertise (in the form of the people) or the client base can be an expeditious means to that end.
Watch Out For: Pay particular attention to the sales and marketing systems (if you are buying for the client list) or the operational processes (if you are buying talent). If the systems are not robust, it is likely the money you are paying is for the people, not the business itself. If you have already tried to lure them away unsuccessfully, it is possible they will leave with the change in leadership. It becomes very important to lock these people in through their contracts or at minimum ensure there is a strong non-compete agreement in place so the value of the firm does not walk out the door within a couple of years of the deal being signed.
The financial side of the deal team will do the financial analysis, look at the ratios, and do some competitive analysis. They will figure out if there is room for improvement and make sure you don’t overpay. But once that room for improvement is identified, the how to improve becomes the key success factor in the acquisition. That’s where process benchmarking comes in as it focuses on the specific processes and procedures, which best practices are used in the company, and the degree to which they are implemented. It also assesses how likely the company is to make the desired changes in a reasonable timeframe.
Knowing what to do is one part of the equation. Getting people to do it is the other. Changing the attitudes, beliefs, and actions of the employees in the organization is no easy task, but it is a task well worth the investment.
Due Diligence Checklist
Assessing the potential return on a new investment? Add these items to your final due diligence checklist to know exactly what you are getting.
- Identify your areas of expertise and compare them to those already in the company. The higher the discrepancy, the more value you are likely to add.
- Identify if you are an expert at changing people’s mindsets or an expert at doing things yourself. Most people are oriented towards one or the other.
- Assemble a team of professionals to augment your skill sets.
- Develop an action plan for which items to tackle on what timeline. As you would with a renovation project, double the time budget.
- Develop milestones to track progress.
- Develop contingency plans if those milestones are not hit. Do it in advance of the purchase for quick implementation when you are in the thick of it.
Bellrock is a management consulting and change management firm where remarkable is expected. If you found this article valuable, don’t be stingy. Share!