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Top 10 acquisition considerations

(Editor's note: This is the first part of a two-part series about actions to take and questions to ask when acquiring or selling a business.)

Successful business acquisitions are difficult to achieve. In fact, the prevailing wisdom is that 50 to 90 percent of all transactions fail to achieve their underlying value proposition. While it can be a difficult (and enjoyable) process with no guarantees, by performing your due diligence, you can lay the groundwork for a successful acquisition.

There are a variety of reasons why business combinations don’t meet their value proposition. These can include incongruent strategies between the acquirer and the target or within the target pre- and post-acquisition, confirmation biases, sunk costs, deal fever and integration challenges. To increase the likelihood of a successful acquisition, here are 10 questions to consider to help avoid a failed transaction.

  1. Identify the reason(s) why you want to buy in the first place. Is it to grow, to diversify, to cross-sell products and services to different customer bases, or to block a competitor in a defensive maneuver? Whatever the reason, have a clear objective as to why an acquisition makes sense.
  2. Understand the timing of a potential acquisition. Depending on the situation, it may be prudent to wait for a more opportune time to move forward. Similarly, it may make more sense to start a competing operation from scratch and leverage your existing business and non-productive assets, rather than paying for an existing enterprise.
  3. Look for red flags. Does the acquisition target suffer from stagnant revenues, a shrinking industry, customer concentration, eroding margins, stiff competition, or other competitive factors? All businesses have issues, but are the identified issues ones you can deal with?
  4. Know at the start what circumstances or fact patterns will cause you to walk away from the deal. If you detect red flags, which are of sufficient concern to hold-up or derail the process? How will you handle these situations, and are you willing to stick with your initial assessment of potential deal breakers? If these are not identified pre-due diligence or if you don’t stick to them, chances are that sunk costs, deal fever, and other biases will overwhelm you and cause you to move forward despite obvious warning signs.
  5. Consider whether the transaction structure makes sense. Are the risks on both sides of the transaction properly proportioned? Are the possible rewards allocated appropriately? Are incentives properly aligned?
  6. Assess whether the expected timeline through closing is realistic. What internal resources are required, and are they available? When should external service providers be engaged? Will you receive answers to your questions in a timely fashion that allow you to move forward, considering the target is juggling day-to-day operations and the transaction process?
  7. Create a plan for integration (and move quickly post-closing). How will the target’s operations run post-closing? Will it be integrated all at once, in multiple phases, or run separately for the foreseeable future? Who needs to be involved? Which positions may be redundant, and how will these redundancies be identified? Planning for integration should begin well before the transaction is closed.
  8. Anticipate how cultures may clash, and the steps to take to minimize these issues and/or work through known challenges. Are you comfortable with the capabilities of the target’s management, as well as the tone at the top of their organization? What cultural differences have you identified that you need to get ahead of now? Will the pace of integration affect, or be affected by, differences in culture?
  9. Communicate effectively in a timely fashion, with the appropriate audience(s). Who needs to know what and when? Have you controlled access to confidential information as stipulated by the target? Are your internal and external resources clear on what you are expecting of them?
  10. Be mindful that you will be working with the seller and key management post-closing, so it is best not to create a hostile deal process. Are you being reasonable in your efforts and demands? Are you trying to “win,” or trying to create a successful transaction for all parties? Will you surprise the seller with a series of demands and changes in the final negotiations, i.e., purchase price reduction, indemnification, earn-outs, etc.?

The deal process can be a lot of fun, but it can also be a grind. Realize this process is just one important step toward achieving your value proposition, and keep the above questions in mind as you navigate through to your goal.

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Rodney Rice & Ben Barnes

Rodney Rice, CPA, CGMA is Partner-in-Charge of RubinBrown’s Denver office Assurance Services Group. His experience includes service to both publicly traded and privately held manufacturing and distribution companies, to governmental and nonprofit organizations and to employee benefit plan entities. He can be reached at 303-952-1233 or Rodney.Rice@rubinbrown.com.

Ben Barnes, CPA is Partner-in-Charge of RubinBrown’s Private Equity Services Group and specializes in acquisition and disposition structuring, internal accounting controls, business performance analysis, due diligence engagements, and merger, sale and acquisition planning. He can be reached at 314-678-3531 or Ben.Barnes@rubinbrown.com.

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