January 14, 2005

Ready for an M&A? Tips to survive a tricky process

By Jeffrey Davis and Jeffrey Ross - managing partners of Mage RossFialkow Capital Venture

There are a number of reasons why entrepreneurs would consider such a move, including industry consolidation, family issues, expansion, financial problems or competitive opportunities.

However, even if a transaction looks extremely attractive, business owners need to be aware that the M&A process can be very tricky. Selling your organization or merging with another business should be undertaken only if you are sure your company is ready for what may be a marathon.

M&A’s provide a wonderful opportunity for entrepreneurs in small or mid-sized businesses to capitalize on their potential. However, they are complicated projects that require an overall strategy that includes effective due diligence and long-term planning. As a matter of fact, the most common ways these transactions fail is due to inadequate planning. Studies estimate that the failure rate for merger or acquisitions is as high as 40-70%! A recent KPMG Survey even estimated that only 17% of transactions actually succeed in creating shareholder value.

Business owners need to realize that selling their business or merging with another company is not only a marathon for them, but for their employees as well. Everyone is going to have to learn how to adapt and work in a new culture, change their focus, and adjust to new leadership and objectives. This transition can be hard.

For some, selling their company is the biggest business decision they will ever have to make. While conducting due diligence on your possible buyer or partner, one should review the health of your own company. This step is rarely a focus for many M&A firms and banks whose sole goal is to sell your company quickly. However, it is imperative to get your business running at its peak and maximize its value before your enter into this process. If it’s not performing at its best, it might be undervalued and you might not get a second chance to achieve a maximum return for all your hard work.

First, make sure your inventory is in shape. If you are a service company, get your receivables in order. Having too many outstanding bills is never the sign of a healthy organization. Also take some time to review your financial structure and statements to make sure they are in order. These points are important to investors when considering your company for a merger or acquisition and if there are errors or inconsistencies, problems and poor evaluations may follow.

Focus on increasing the overall value of your company. Buyers/potential partners need to see that your company has value in order to garner the maximum interest. In today’s business environment, the sources of value may be more than just revenues or cash flow. For many businesses, strategic and intangible assets are their real value and can include such things as brand names, company reputation, niches, know-how, innovation, business processes, valuable customers, talented employees or important suppliers.

It is important to identify what makes your organization valuable to your competitors and build on it. If you have great locations - it might be your real estate; if you carved out a strategic niche - it might be your customers; if you have great products - it could be your ability to innovate new ideas. Whatever it is, find your strategic advantage and leverage it – it will make you more attractive for a potential M&A deal. By understanding your competitor’s goals and objectives, you can make them more interested in you. Remember, as a best case scenario, you are trying to create a competitive bidding process. Focus on your competitor’s needs and they will quickly ‘have to have you’ in order to achieve their goals.

It is always important to have a strategy for the M&A process which includes managing the transition, a vision of your company’s post-merger life, and a plan for your personal life after the merger. Are you going to take a larger or smaller role in the new entity? Are you going to retire? Are there family members to consider? Are your employees prepared? These are important questions that should be addressed in a strategic plan. Unfortunately, many entrepreneurs disregard the planning process which can lead to significant problems.

Consolidating the operations of companies with vastly different cultures is difficult, and if you overestimate cost savings, fail to keep key employees aboard or ignore customer relations, your company could be in for some very rough times. A good plan is essential to avoid these mishaps. For example, many owners underestimate the costs a merger or acquisition can have on their company’s time, resources and energy.

An alarming rate of senior managers leave their positions within a year of a merger. This leads to even more problems when the company is in desperate need of senior management.

Many owners even use their own management teams to handle the integration of processes, which means that the normal functions and activities of their organization are negatively affected. This can put an extraordinary amount of emotional distress on their management team, making it more likely they might leave the business.

It is essential for an organization to develop a broad strategic vision and plan and communicate them to their employees. This creates a basis for expectations, accountability and commitment that will help the business achieve its goals. Good planning can help a company get through the difficult growing pains that are common with the sale of a company or a merger.

Mergers combine previously competitive management, create angst among employees who are wary of being considered redundant, allow competitors to try to take advantage of weaknesses during the transition, and can often cause management to take their eye off the ball due to conflicting cultures. Mergers may also make customers feel uneasy about becoming lost in the shuffle.

Companies must demonstrate solid integration performance and maintain employee productivity to actually reap the benefits. Post integration plans for the buyer are essential before merger talks come to an acceptable conclusion.

The following are just a few ways to avoid some of the issues state above:

- Identify key employees and prepare to keep them aboard.

- Develop clear priorities for employee activities during and after the transition.

- Create a future vision and strategic direction and communicate it to all employees.

- Assess both corporate cultures in advance and develop a clear, concise integration plan.

If you enter the process with a clear direction and objective, set reasonable goals, intelligently evaluate the worth of your business and engage the right buyers or partners, you can realize the maximum value for your business and achieve your professional and personal goals.