In August 2010, CMA Management magazine published a good article by Howard E. Johnson entitled: “Beware of the seven deadly sins”. I came across it lately and thought it would be useful to restate the contents of the article for potential buyers. Loosely summarized, even if the article is more than 10 years old, its contents remain current.
Mistake 1: Lack of strategic fit
Instead of looking for acquisition targets that suit him, the buyer waits for opportunities to present themselves. This method has the serious disadvantage of allowing the acquirer to analyze only the opportunities that are offered to him rather than those that could have strategic value. This practice causes the buyer to invest time and resources in opportunities that are not compatible with their objectives. The buyer is looking for an opportunity, often a "cheap" one.
Mistake Error 2: Inadequate analysis
Often, to save time and money only a superficial due diligence is conducted. The buyer often relies too much on the seller's representations and convinces himself that in the event of a discrepancy, the seller's guarantees will cover the discrepancies that may arise. This creates many difficulties: complaint, irritation and vague integration plan, which will quickly make the transaction much less profitable.
Mistake 3: Overemphasis on EBITDA
EBITDA is a measure that is better understood than discounted cash flows. However, the latter better measure the return on investment. Discounted cash flows calculate additional capital expenditures, capital repayments, and additional working capital to accommodate growth.
Mistake 4: Insufficient focus on the balance sheet
The balance sheet reveals the quality of fixed assets, the amount of working capital needed to support business operations, the quality of inventory and accounts receivable. Additionally, it is important to understand what the capital requirements will be to maintain operations.
Mistake 5: Too expensive synergies paid
The classic synergy is the saving of the salary of the target company's CFO which is sometimes "added" to the price of the transaction. In return, the buyer often forgets pooling and integration costs, investments in the computer system, departures and replacement of labour and others expenses that may arise following a transaction.
Mistake 6: Too much focus on price
As the focus is on the price, the other conditions surrounding the transaction are often overlooked. The other conditions are grouped into 3 large families:
1- determining what has been bought (assets versus shares);
2- validating the terms of payment (amounts over time);
3- negotiating the contractual clauses (sales contract, employment contract, non-competition contract, shareholder agreement for partial acquisitions).
Mistake 7: Poor integration
Integration is what makes the difference between successful and unsuccessful acquirers. Unfortunately, there is no miracle recipe. Integration requires experience and a good transactional process. An integration plan must be prepared from the start of discussions and validated with due diligence. This plan should be adaptable as the integration progresses.
Do you have questions about business acquisition mistakes? Or, you need help with a business transaction? Do not hesitate to contact Galion Conseil.