In the untamed world of acquiring and growing businesses, the result is seldom win or lose, go big or go home. More often than not, it is somewhere in between; perhaps almost meeting goals or simply failing to succeed. We all have expectations...sometimes we meet them; our due diligence was strong and allowed to us to set and meet realistic (even, daresay, ambitious?) objectives. Other times – even when our D/D was exhaustive and thorough, something happens that we did not notice or could not control. More often than not, we have to adjust on the fly; adjust our expectations either shortly after the close or within the first six to twelve months (this is not a bad thing as failing to adjust - sticking our heads in the sand - can be far more tragic). Bottom line, failing to succeed is not the same as outright failure; it is, instead, a more nuanced recognition that changes are necessary either in the way we are doing things or what we thought we could accomplish prior to close. In my previous article, https://www.searchfunder.com/post/the-prequel-preparing-a-fertile-soil-for-your-investment, I discussed the importance of communicating expectations early in the acquisition process. Now I would like to address some of the consequences of not setting and communicating goals clearly enough or failing to properly vet the target.
1. "Is this company financially stable; are there opportunities to improve profitability and can its current and predicted finances sustain growth?"
a. Failure To Succeed (FTS) Example: A company was selling to an investor group. The company’s financial history was solid. The new owners wanted to grow revenue 2x in Year 1. Growth plan looked good and everyone was on board. However, the company’s organic growth could not sustain the growth plan and the new owners did not have the funds to shoulder the investment needed for the growth. In fact, they started throwing in management fees from Day One, adding a drag to the existing profitability...
2. "Who are the people, what is the corporate culture, what holes need to be filled and do we have the team needed to sustain growth?" a. FTS Example: Previous owner was being bought out by new owners. He was getting a three-year employment agreement to handoff the technology and customers of this 40-person manufacturer. New owners based most of their “people” decisions on the opinion of the previous owner but he had little trust for his employees, considered himself the sole driver of whatever success had been achieved in the past. The employees were knowledgeable and could have helped transition the old owner out but he gave little credit or empowerment to the staff. New owners felt the old owner was indispensable. If the previous owner is a micromanager focused on cementing his or her indispensability, there can be no growth or handoff. =====
3. "Do the products/services meet Customer needs, are they delivered to spec and on time; what is the shelf life, are they needed now and in the future; what are they doing for product development?" a. FTS Ex: I am a big fan of quality initiatives such as ISO 9000 and Lean Six Sigma but checking the boxes to gain certification – without achieving the true intent of these programs, i.e., customer satisfaction and internal improvement – is an insult to the initiatives and, frankly, also to the certification bodies. I have seen it happen too often; an inability of companies to leverage quality improvement and product development efforts to meet customer needs – while pointing at the certifications on their walls. =====
4. "What projects and backlog are in the pipeline, what are some past projects, what is in the future? How are projects managed and customers retained?" =====
5. "How strong are the bones of this company, is it on a solid trajectory or is it scattered? What legal, ethical, moral issues could adversely affect the future?" a. FTS Ex: Performing Due Diligence is like being the old gum-shoe private investigator. Yes, you are listening and observing but you also need to ask a lot of questions. And do not assume the answer you receive is correct or even complete. As an investigating military officer, I was taught to ask lots of open-ended questions, listen to the responses, dig a little deeper, find trails to head down and ultimately uncover the truth...ideally a happy truth but perhaps one that will save you a lot of pain in the future. =====
6. "Who and what is the company today? What is the brand (or reputation)? Does it even need one?" a. FTS Ex: One of my acquisitions was a distribution company, a reseller. Profits were strong, customer base was solid. Does a reseller need a brand? It is only selling other people’s stuff, right? This is true but, in this case, the previous owners had a brand – actually more of a reputation than a brand - and it was not good. Late shipments, poor A/R and A/P, terrible communications, etc. I spoke with vendors and customers before I bought the company and asked them if they were loyal. I received a lot of “Yes, I am loyal, but...things need to be done more professionally, communication needs to improve, I need to get paid sooner...”, etc. I liked the industry and the opportunity (among other things) so, long story made short, I bought the company. However, I resigned myself to spending a good deal of the first year addressing the negative brand that had been created by this seemingly unbranded company. At least, in my case, I was aware of the danger going in... =====
7. "Where is the company going; with new leadership/investment, can the company grow; new products, processes, pricing, markets; what is the endgame?" =====
8. "Does the company maintain effective process documentation, what format and how helpful is it in ensuring consistent processes, products/services and minimal inefficiencies?"
a. FTS Ex: I remember a Quality Manager within a large service company whose job it was to promote, maintain and revise the process documentation that defined how things were done in the company. I was amazed to see him handing an SOP manual to a new employee and saying, “Sign the handoff doc and then stick this in a drawer somewhere; you won’t ever look at it.” These documents must be living entities – always improving. My basic process management mantra is:
“Do things according to the documentation. If the documentation is not accurate or meeting the customer needs, improve the documents and then ... Do things according to the documentation.”=====
9. "How much do they want for the company; how is the sale structured; how much are we willing to offer and how is any difference reconcilable?" =====
10. "After all of the analysis is done, what is my gut telling me that the numbers are not?" a. Checklists and spreadsheets are great, as are interviews of managers, employees, customers, vendors...facilities inspections ... financial analyses ... processes, products, services, forecasts. All these and more are critical to success but you may find that there is something gnawing away at you that you cannot wrap a checklist around. Don’t ignore the voice that is telling you to beware of this acquisition. Trust your instincts. It may have nothing to do with “them” and more to do with you. It simply may not be the right fit for you or your team. Beware indeed.
If the necessary time was taken to address these questions, the chances of avoiding failure are greatly enhanced. This does not guarantee success or minimize the risk of failure but it puts us in a better place. More importantly, are we willing to re-visit these questions several times prior to close and then after closing (one week, one month, one quarter, one year...) to reinforce our commitment to the answers – or adjust as necessary.