Potential Pitfalls with Mergers & Acquisitions

 

Mergers & acquisitions are a viable way for the company to grow faster. But by no way is this route foolproof. Some of the things that can go materially wrong with M&A are below, so do your homework and prepare to avoid these established pitfalls accordingly.

1.     WRONG POST-SALE TEAM

The skills needed to build a small stand-alone company are somewhat different from the skills needed to develop a larger company through M&A operations. You want to make sure that everyone has prior experience in dealing with M&A-related problems such as integrating firms, teams, financing, etc. within "Newco" and someone who knows how to run a much larger business, usually with more scalability procedures and controls. Note, the position of the CEO must shift as the organization scales.

2.     MERGING TEAMS & CULTURES

Let's face it, mergers are very much like marriages.  You are merging people, personalities and cultures.  You are individuals, personalities and cultures mixing together. And, marriages, sometimes resulting in divorce, do not always go as expected. But in the M&A context, "divorce" is usually much more difficult to do, meaning you are stuck with these problems, whether you like it or not. So it's vital that you do your homework to ensure that senior management has specific responsibilities and can gel together as a new team. "we"us"us"them,"them “we

3.     BIG COMPANY LETDOWN

Sometimes, entrepreneurs believe that selling to and working for a large company would fix all their issues, because big corporations have larger budgets, etc But big businesses offer as many headaches as they do solutions, having lived through two sales to billion-dollar businesses. Compared to the light pace of start-ups, with many levels of bureaucracy and policy makers, large corporations run like a snail. And, usually, the forces that are at the top concentrate on much larger fish to fry" Which implies that your start-up would most likely get "lost" within a large corporation, unless you have a well-documented agreement outlining their promised help in advance. (DEEB, 2018).

4.     MISSING FINANCIAL TARGETS

Let's say you have two $5MM businesses coming together.  It is reasonable to estimate that the combined business could do $10MM in revenues together, if not more from the cross-selling of the respective products.  But, the reality is, you have a higher chance that revenues are only $7-$8MM when the dust settles.  Why?  Because key employees may become disgruntled by the merger and leave the company.  Or, the target was overly optimistic on the health of their sales pipeline, etc.  So, build in a cushion for situations like these, and make sure the pro forma economics still work for you.      

5. EARNOUTS NOT PAYING OUT

Earn outs are payments made at some point down the line to selling buyers, long after the transaction is closed, after the selling company meets some negotiated financial or output target. If you are a buyer, earn outs can work well, as most buyers realize, earn outs very seldom pay out to sellers as much as the sellers hope for. Sellers commit to terms that assume that the earnings will be reached, and when it is not a bleak reality sets in. So if you're a seller, no matter how well written you think your earnings are as you expect things will most certainly not pay out. So, take more cash in hand upfront, where you can. And even though a zero earn-out is reached, be satisfied with the deal (DEEB, 2018).

Conclusion

This is not meant to be a catch-all list of potential pitfalls, but it's simply some high-level stuff to keep in mind when going down the M&A path to protect yourself. Get a good advisor to help you with your negotiations and a good lawyer to make sure it is properly documented.

Reference

 

DEEB, G. (2018). Potential Pitfalls With Mergers and Acquisitions. Retrieved from Alley Watch: Potential Pitfalls With Mergers and Acquisitions