| Avoiding Buyer’s Remorse in
the Acquisition of a Company
"You often cannot buy a ‘dog’cheap enough." Tuerk & Associates |
Webster defines remorse as:" A gnawing distress arising from a sense of guilt for past wrongs." Obviously, avoiding remorse is the goal of every buyer. However, in my long experience in the merger/acquisition business, I have observed that too many transactions do not meet the purchaser’s objectives and thus result in buyers remorse. The level of remorse is no doubt tied to how badly the acquirer missed his/her goals. On the other hand, we have all seen acquisitions that work well and do increase the market value of the buyer’s business, sometimes by very material amounts. So the answer is not to avoid making acquisitions, but to make positive ones and avoid "remorse." Again, based on my experiences in this field, I would like to share five interrelated, common sense guidelines that anyone contemplating making acquisitions should follow. Like any guidelines, there are exceptions, but I believe in these five strongly. They are not given in any order of priority; all are equally important and as you will see, are in many ways interrelated. THE NEED TO PLAN The first guideline for any potential buyer to consider. Before embarking on an acquisition search, develop a strategy of what you want to accomplish through making an acquisition. Focus on building on strengths and correcting weaknesses. When the strategy is set, develop written criteria describing features of the desired target company including investment limits. This will save time, money and possible embarrassment by concentrating on affordable prospects that fit. Planning should also cover how you can accomplish a "proactive" search. It is very desirable to find potential sellers before they succumb to the auction process. The "proactive " search requires a time commitment – if you or your staff cannot do it, hire a qualified professional. It will pay off in spades. STAY CLOSE TO YOUR CORE COMPETENCIES The second guideline. The further away a buyer strays from products and/or markets it understands, the higher the risk. Suppliers, customers and competitors offer integration possibilities. Taking present products to new markets or new products to present markets also are attractive options. But making a free form acquisition, i.e., new products in new markets increases risk and the potential for eventual remorse. WHAT YOU SEE IS WHAT YOU GET This is the third guideline. Just like a leopard does not change its spots, nor does a business change its stature. A superb operating record with growing market share and above average margins came about because of inherent strengths in the business. Similarly, shrinking market share and below average market ratios say something. Unless the buyer has successful experience as a "turnaround" expert, do not expect the future to be a lot different from the past. As a result, I believe that one can afford to pay a premium for an outstanding company with a superb record. On the other hand, you often cannot buy a ‘dog’ cheap enough. DO YOUR HOMEWORK This fourth guideline is good practice, briefly stated. Be thorough in your analysis of the target company. Be leery of answers you receive from the seller. Not only is the sale probably the largest financial transaction he/she has ever done, it is also a highly emotional one. The founder who grew a business looks upon it as a baby; selling it is very emotional. The seller will not see the "warts" that an outsider can observe. When questioning the seller - probe, probe, and probe some more to find the real answers. And, if there are parts of the operation you do not understand, hire a competent consultant to help you. It will be money well spent. THE PEOPLE ISSUES Last, but not least, is the guideline involving a most important company asset . Bear in mind that entrepreneurs normally make terrible employees. Part of the reason for their success is the "maverick" streak that often does not mesh with a corporate environment. The problem is exacerbated if the entrepreneur becomes "liquid rich" from the sale. It is not uncommon for such people to suddenly develop tastes for travel, yachting, golf, etc., rather than being the former driven business person. If the buyer is counting on the former owner to continue to manage the business after acquisition, use incentives. Such inducements should not only pertain to compensation, but should also be built into the purchase price. Making as much of the purchase price as can be negotiated contingent on the company’s performance after the purchase is an excellent motivator. Following these guidelines should go a long way toward buyers avoiding that gnawing distress arising from a sense of guilt for past wrongs that Webster defines as REMORSE Tuerk & Associates is a high quality merger/acquisition and valuation organization serving middle market companies. The firm has over thirty years of successful experience in selling companies in almost every manufacturing, wholesale, service and retail sector. Most recently they have added additional capabilities in the technology-based businesses including electronic components, instruments, software, information systems and defense electronics. Author - Conrad Tuerk, President |
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