Are Mergers & Acquisitions The Best, Way to Grow Your Business?

Acquisitions.  Mergers and Acquisitions, M&A.  Sounds exciting, strategic, the art of making business deals.  It can be.  As a veteran of over 70 completed M&A actions and another 30 or so that never completed I can tell you from my own experience just how exciting they can be.  For many businesses, this is an excellent strategy for growth.  For others, this could be a recipe for disaster.  A KPMG study  reported on in Moneywatch states that 83% of merger and acquisition deals fail. The article suggests this is because of mismanagement of risk, price, strategy, cultures, or management capacity.  The common reason is poor planning.  What can you do to help ensure that if you use this strategy, your M&A action succeeds?

In my relatively robust M&A career, I have seen business acquire others for a myriad of reasons.  Among these are:

  • To improve the flow of product or services through the organization
  • To add a new service or product line or expand into new geographic territory
  • To meet a personal need

Yes, to meet a personal need is a not uncommon reason for acquisitions.  This can be anything from:

  • Creating rapid growth in with the goal of then selling the now larger entity for a quick profit (an interesting idea that I find fundamentally flawed),
  • fulfilling a personal emotion such as ego, or
  • simply deciding that you want to be a business owner, and instead of starting from the beginning you have the resources to purchase an established business.

No matter the reason, having an effective well thought out plan, and the means to properly evaluate the fit of an acquisition, are important to success.  Two methods of evaluation appropriate to a small to mid-size enterprise (SME) stand out.  These are a cultural evaluation and a capacity evaluation.

These are a cultural evaluation and a capacity evaluation.

A cultural evaluation is just what it sounds like.  An evaluation to determine the cultural fit between your business and the business you are acquiring.  A simple approach would be to evaluate the following of BOTH your business and the business you are acquiring using the following criteria:

  • What is the vision of your and the acquired business
  • What is the strategy of your and the acquired business
  • What are your shared values
  • What are your shared goals
  • What shared business assumptions do you have
  • What policies do you have? How are they alike and different?
  • What are your traditions
  • What beliefs do you have? Are they shared or different?
  • How do you get things done as compared to how you say you get things done?

A capacity assessment is usually done when you are considering only buying a businesses customers, its “book of business” if you will.  The success of this effort is contingent on your business being able to retain the business customers you are purchasing and your ability to absorb the extra work because you are not purchasing any assets (equipment or labor) of the business you are acquiring.  These are also difficult to identify as the seller will still holding those assets and must now liquidate them and most often a fully depreciated rate.

In simple terms, you must determine whether or not your business can successfully perform the new business at a profitable rate.  If you are already at full capacity, you must hire more workers or obtain more equipment.  You may; if geography allows, be able to hire employees from the seller you purchased the customers from.  If not, then you must hire from within your market.  If you are not successful in doing this, your newly purchased business can cause irreparable harm to your business due to a variety of reasons resulting from your inability to meet customer needs and standards.

To determine your capacity, you must first determine how much you can produce in terms of product or service.  There are different methods depending on your industry.  Once you have determined your production capacity, you must look at your labor ability/productivity.  How much of that capacity is being used?

The next step is to determine labor efficiency.  While in some methods it is a product of your ability/productivity it can also be determined independently.  The skill level of your workforce, available hours and other items are used in determining this.

Lastly, you must look at your physical space; it’s design and configuration as well as the processes you use.

M&A can be exciting, fun and very profitable.  It can also be fraught with great risk resulting in a significant financial loss for your business.  Properly planning for M&A is an important step but not a guarantee of success.  Ensuring you have highly skilled people helping you with the process is crucial.  How you determine, that is another article for another time.