M&As 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 way these transactions fail is due to inadequate planning. Studies estimate that the failure rate for mergers and acquisitions is as high as 40% to 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 leaders and objectives.
This transition can be hard. Outside help is often needed to manage this process, and many owners turn to business advisors for their expertise. A clearly defined timeline, strategy and plan are essential, and owners must understand they need to be well prepared if they want to be successful.
There are a number of things one has to do to prepare for a sale or merger. For some, selling their company is the biggest business decision they will ever make. While conducting due diligence on your possible buyer or partner, one should review the health or 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 you 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 maximize return for all your hard work.
First, make sure your inventory is in shape. 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 considering your company for a merger or acquisition. If there are errors or inconsistencies, problems and poor evaluations may follow.
Focus on increasing the overall value of your company. Buyers and potential partners needs to see that your company has value in order for you to garner 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 have 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 competitors' goals and objectives, you can make them more interested in you. Remember, in a best case scenario, you create a competitive bidding process. Focus on your competitors' needs, and they will quickly "have to have you" in order to achieve their goals.
Planning
It is always important to have a strategy in the M&A process, including a plan to manage 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.
Most owners go into the acquisition process thinking they are different and that they can "pull off" a merger or acquisition easily. But these transactions require experience. Even with the full knowledge of what pitfalls might need to be dealt with, M&As are still very complicated to complete successfully.
A merger or acquisition is an opportunity where it is necessary to achieve maximum value. 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. Leadership and human capital may be the most significant assets of a business, but 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 use their own management teams to handle the integration of processes, which means that the normal functions and activities of their organizations are negatively affected. This can put an extraordinary amount of emotional distress on management teams, making it more likely that senior managers might leave the business.
However, if owners effectively planned for the transition and utilized trained professionals to help, problems would be limited, and their management team could continue to focus on their specific functions.
It is essential for an organization to develop a broad strategic vision and plan, and communicate them to 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.
Avoiding problems
Mergers combine previously competing companies, create angst among employees who are wary of being considered redundant, and allow competitors to try to take advantage of weaknesses during the transition. They can often cause management to take their eye off the ball due to conflicting cultures.
Equally important is the effect mergers have on customers, who may worry about becoming lost in the shuffle and their service losing consistency. Customer may also feel insecure about the new management.
Although mergers and acquisitions are undertaken to surpass competition, 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 pitfalls:
- Identify key employees and prepare to keep them aboard
- Focus on customer service. Keep your customers in the loop to avoid defections.
- Develop clear priorities for employee activities during and after the transition.
- Create a vision for the future and a strategic direction. Communicate them to all employees.
- Engage in professional advisors who can objectively manage any transition challenges.
- Assess both corporate cultures in advance to develop a clear, concise integration plan.
- Align sales and marketing strategies and carefully prioritize technology integration.
As in all aspects of business, seeking the counsel of an experienced and trusted business advisor is a way to ensure you are covering all your bases. Obviously, planning and strategy are extremely important, and consultants can offer the expertise required to ensure you are ready for such an undertaking.
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 patterns, you can realize the maximum value for your business and achieve your personal and professional goals.
Jeffery Davis is founder and chairman of Mage, LLC, a Needham, Mass.-based consulting firm that provides counsel to emerging companies and entrepreneurs in transition.
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