In the last series of articles, we examined the “10 Biggest Mistakes Business Sellers Make” when selling their businesses. This month, we begin a new 3-part series by considering the other side of the merger/acquisition equation: the “10 Biggest Mistakes Business Buyers Make” when making acquisitions.
Most business owners and CEOs will have the opportunity to consider an acquisition at some point, whether buying out a competitor, a product line, or another type of opportunity. Based on our experience over the past 25 years, we’ve developed a list of the biggest mistakes owners and managers make when considering an acquisition. Acquisitions are too expensive to practice! Follow the tips below to avoid costly acquisition errors.
Mistake #1: Not having definitive acquisition goals and objectives
As mentioned in a previous article, “a failure to plan is a plan for failure.” This especially rings true when considering acquisitions. Too often, we see buyers approach a potential acquisition with no clear plan of what they are looking for or why they are even looking.
Acquisition opportunities may be categorized into two types: proactive and reactive. Proactive opportunities are those you seek out yourself; you literally contact other business owners to see if they are interested in selling their business, company, product line, etc. Reactive opportunities are just the opposite: they are acquisition opportunities that come to you; you don’t necessarily seek them out.
Before you go hunting for acquisitions, you need a well-defined strategy of what you seek and why. However, if an opportunity finds you, you should also understand why an acquisition would make sense to you: that is, either it should represent an opportunity to expand your product line or offerings, or your territory, or perhaps to remove a competitor.
Whether you proactively seek growth through acquisitions or await opportunities to find you, to ensure success, develop your acquisition goals and objectives before you go out hunting for deals.
Mistake #2: Not having your funding/financing in place
A key element of your acquisition plan is how you will finance any acquisition, regardless of size. Not all acquisitions are self-financing. You need to determine how much of your company’s capital you are willing to invest along with how much debt you are willing to take on to complete a transaction.
Beyond having an idea of what you can afford to spend before you go shopping for acquisition opportunities (or opportunities present themselves to you), having your financing lined up prior to making an offer gives you a “leg up” on other potential suitors. “Certainty to close” is a huge factor sellers consider when deciding whether or not to say “yes” to an offer from a buyer.
For example, we are currently working with a buyer-client who has borrowed a significant sum from its lender in anticipation of potential acquisitions. When we tell a prospective seller, “Financing is not an issue, we can write a check for the deal,” this has proven to give great comfort to the potential sellers we’ve approached, which has led to better deals for our client.
Prior to your hunt, meet with your lender(s) to determine what you can afford and what type of leverage you have from your own business before making any offers to purchase another company.
Mistake #3: Time kills deals
Time is a deal killer for buyers and sellers. While we are not advocates of “rushing” deals, if you are not properly prepared, or don’t have proper human resources allocated to complete a transaction, time will kill the deal.
Selling a business is never easy and is fraught with emotion for business owners. Sellers rarely understand how much time deals take nor do many sellers have the “stomach” for the time necessary for the due diligence process. If you, the buyer, are not prepared to move efficiently through the process, you will only add to the seller’s apprehension and anxiety, making closing a deal even more difficult.
Before you make an offer to acquire, develop a timeline you expect to follow throughout the process. Be sure to share your plans with the seller and their advisors. Sharing your timeline will help everyone involved keep on task and will significantly increase your odds for a successful closing.
We have seen too many deals languish and die due to poor planning and buyers whose staffs do not have enough time to devote to the acquisition process. Only you can determine if you and your team have the time necessary to successfully close a deal. We always suggest you have at least one person on your team who can devote a significant portion of his/her time to the acquisition process.
The first three mistakes all deal with planning: acquisition plans, financing plans, and timelines. Without these three key elements, closing a deal will be much more difficult, if the deal closes at all. Next month, we look at mistakes #4 through 7. If you have any questions about the Top 10 Mistakes Buyers Make, please feel free to contact me to discuss them.
