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Avoid Common Pitfalls when Acquiring a Business

Originally published: 08.01.16 by Carl Kampel


Avoid Common Pitfalls when Acquiring a Business

Studies have shown that more than 50 percent of acquisitions fail to achieve their strategic purpose and create value. These companies find that the premium paid for the acquired company was greater than the value to the acquiring company. Some of the more high profile failures are Hewlett Packard’s acquisition of Autonomy as well as Time Warner’s acquisition of AOL.

Acquisitions are difficult transactions, and despite the statistics, all acquirers believe their transaction will add value.

The purpose of an acquisition should be to achieve a corporate objective through which the acquisition is the means to achieve the goal. While no one can guarantee future success, there are indicators that can be evaluated to enhance the probability of success.

Answering the following five questions can help any business owner who is considering an acquisition increase their chances of prosperity.

Is bigger better?

One guaranteed way to grow a company is to acquire another business. While top line growth may be achieved, organic growth may not be sufficiently emphasized, and bottom line growth may not achieve the increase in value to stakeholders.

Successful companies build organizations by developing coordination between various parts of the organization, including systems, processes and a shared culture. This is difficult to


achieve with a large number of acquisitions in a short period of time. The real question becomes, “is bigger better or just … bigger?”

Why are we acquiring this business?

A strategic plan for combining two businesses should clearly communicate how the combined enterprise will be able to accomplish something in the marketplace that could not be accomplished as two separate companies. Without that combined value, the focus, purpose and actions that need to be taken post-acquisition will be less clear, and time and energy will likely be expended on non-productive activities.

Do we have enough acquisition experience?

Companies and their management can sometimes become preoccupied with selecting, negotiating and completing an acquisition.

Management with little acquisition experience is sometimes reluctant to accept new ideas and ways to do things from the acquired business, despite having bought the business for its skills and expertise. Employees of the acquired business can often feel the acquirer is not open to change, which can lead to integration challenges and turnover of the acquired employee base. If management cannot prepare an actionable integration plan that can be shared with employees of the business being acquired, the likelihood of success is diminished.

Who will be in charge?

The answer to that question can sometimes determine the success or failure of a transaction. A straightforward blueprint of the management structure and decision-making process simplifies communication to employees and helps alleviate the uncertainty that usually results from transactions. A clear understanding of the expectations of the organizations and how decisions will be reached will help all those involved understand the new organization.

Just as important as the strategic vision of the new entity is the process of communicating the goals of the combined organization. Communicating the integration timetable and whether all operations will be integrated or remain autonomous will likely allow everyone to focus on the objective of enhancing stakeholder value.

Are we paying too much for the business?

While there is no question the purchase price is an important consideration to any acquisition, it may not be the most important consideration. While that may seem counterintuitive, the concept of paying less for a troubled company generally masks the real costs of integration and fixing what is currently broken. On the other hand, overpaying for a productive business will simply delay and slightly diminish the return on investment.

The above questions seem simple enough but companies have shown time and time again that they can often be overlooked. Identifying, negotiating and completing an acquisition can be very difficult and time consuming, but if done correctly, can create sustainable value over the long term.

 


Carl Kampel, CPA is the director in charge of professional standards at Ellin & Tucker, an advisory role that ensures all aspects of client accounting, regardless of the complexity, are conducted with the highest level of service and accuracy. Visit ellinandtucker.com for additional information.

 




About Carl Kampel

Carl Kampel

Carl Kampel, CPA is the director in charge of professional standards at Ellin & Tucker, an advisory role that ensures all aspects of client accounting, regardless of the complexity, are conducted with the highest level of service and accuracy. Visit ellinandtucker.com for additional information.




Articles by Carl Kampel

Avoid Common Pitfalls when Acquiring a Business

While no one can guarantee future success of a business acquisition, there are indicators that can be evaluated to enhance the probability of success.
View article.