Mergers and acquisitions is not something either buyer or seller should enter into lightly. Research indicates M&A transactions have a failure rate of 50%. The following are the top 3 reasons M&A transactions fail and what both parties need to keep in mind to not add to this alarming statistic.
1. Not understanding each other’s philosophy. For starters, the buyer and seller need to understand each other’s business at a high level. This sounds obvious and seems so simple to uncover, but believe it or not, you can have a motivated buyer and a motivated seller but still not have a good fit.
For example, suppose a buyer is looking to an acquisition as a short-term fix to declining sales and earnings growth. But the buyer has no plan to integrate the acquisition or operate it long-term because the acquisition does not fit its core business. At the same time, a seller wants an immediate exit and may “cash out” and take a lot of money off the table. However, someone is left “holding the bag” trying to make it work, and ultimately it dies a quick death. The buyer has to write off the goodwill, the principals have exited, and the employees and customers are a part of the fallout or collateral damage.
Like a courtship or relationship, these things can take time to develop. Many of the buy-side transactions I have been involved in have taken anywhere from 6 to 18 months. Timing is critical and sometimes it is best if deals are put on hold until each party gets a clearer understanding of the other party’s business and philosophy.
2. Having differences in business culture. Buyers, sellers, and advisors have underestimated this one for decades. The largest deal I was ever a part of involved merging 1,500 employees (mostly virtual) into the organization. While we broke some glass and it was painful at times, we managed to capture the majority of the key employees and customers. We did everything from forming executive and field-level steering and integration teams with the combined company’s personnel, to employee and customer roadshows. We made sure that we kept the focus on employee and customer retention, sparring no expense at times. To create successful M&A transactions, take the time to get to know each other. If it doesn’t feel right, then wait or politely move on. Some of the best deals I did were the ones I didn’t do.
3. Getting outside of the comfort zone. While it’s always good to think outside the box, for long-term success it is best to stay where you are comfortable and not take unknown risks. This can apply to poor strategic fit, the short-term motivations of the buyer and seller not being noticed, changing the valuation methodology, and sheer desperation by either party. For a buyer, I recommend pursuing companies with a solid track record of performance, similar business philosophies, and culture. I also recommend including a performance-based earn-out so that the seller can share in the upside of a combination and stay within the parameters of your (the buyer’s) valuation methodology.
If you go “bottom feeding,” then it’s “buyer beware” and you get what you pay for. For a seller it is much the same. Make sure the buyer knows something about your business, has a viable plan, and can truly demonstrate that they care about you, your employees, and your customers. This allows you to exit at some point and maintain your dignity by doing it the right way.
While research shows that over half of M&A transactions fail, that means almost half of them succeed, delivering quality returns for business leaders, employees, stakeholders, and customers. With an experienced advisor, M&A can go well for both buyers and sellers. That’s not half bad.
Steve Pomeroy is the founder of Big Change Advisors, a unique M&A consulting firm in Los Angeles that helps businesses achieve big goals while making a big impact on society. To request a free consultation, contact us.
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