After many months of investigation, you’ve narrowed your acquisition targets down to the one company you want to acquire. The company’s product line complements your own and presents tremendous growth opportunity. Everything is running smoothly and you’re building a great relationship. Then everything goes belly up.
For every acquisition deal that goes through, 10 do not. Deal breakers can happen for a number of reasons; from sharing your intentions with the wrong people to incomplete due diligence. Here are five of the top reasons that deals fall through, and tips for how to prevent them.
1.) Incomplete Due Diligence
While it’s essential to review the company’s financial statements, tax returns and assets and liabilities, financials show only part of the story. Due diligence should also include a thorough review of the company’s operations and human resources departments. Which IT systems are used—are they compatible with your own? What benefits are offered, are there non-competes in place? There should be a thorough legal analysis of corporate documents, contracts and any pending litigation. Finally, have you reviewed the business’ strategic plan? Who are the competitors and what is the concentration of customers?
2.) Unclear Terms: The Letter of Intent
Price is quite important, but what are the other issues at hand? This is where the letter of intent (LOI) comes into play. The LOI lays out the basics of the final deal: the purchase price and terms, closing date, patent control and much more. While the LOI isn’t necessarily the final deal, it functions as a good roadmap for that final deal. The letter contains terms that can offer you protection should the deal fall through. It puts both parties on the same page and simplifies the closing phase of the deal.
3.) Business Erosion
It can take up to a year or more to finalize a deal. During this time, a business can undergo a change in ownership, which causes great uncertainty among clients, employees and vendors. All of these things can kill a deal. Some of this is beyond your control, so it’s important to keep your eye on the bottom line. This is where competent advisors can step in. Let them manage the day-to-day cycles of the transaction and bring you in when it’s time to negotiate. If the company changes to the point of no longer being a viable candidate, you may need to reconsider.
4.) Inadequate Planning
Speaking of advisors, deals either happen or don’t happen depending on advisors. A good advisor will walk you through the valuation process and provide you with comparable business valuations. He or she will help you keep the deal moving along when you encounter obstacles and represent you in sharing bad news to the seller when it’s necessary. Finally, if the deal goes through, a good advisor will ensure all pertinent documents are assembled for the closing.
5.) Irreconcilable Differences
Sometimes the cultures of two organizations just don’t blend. Take a good look at the core values or each company to see if the cultures will integrate in terms of vision, people and values. Sometimes companies go through the entire acquisition process just to find the two cultures are incompatible—think Sprint and Nextel, and AOL and Time Warner. It’s far better to find out during the due diligence phase than after the deal has closed.
Making an acquisition can be one of the most rewarding moves you can make for your business. Far too often, however, the acquisition can hit many of the obstacles mentioned in this blog. We hope the tips offered above will help guide you through each step of the process. Marcum’s merger and acquisition experts are available to address any questions or concerns you may have before, during or after the acquisition.
Also, watch for our forthcoming e-book, “The Anatomy of an Acqusition.”
For more information about executing a successful acquisition, contactKen Haffey, Partner, Advisory Services.
