Buying a Firm

Jan 30, 1995

If you listen to the “experts,” you could easily be convinced that it’s darn near impossible to successfully acquire a firm. By “successful,” I’m not just referring to getting the deal done. I’m talking about a complete integration— so the “two” firms become “one.” Mergers and acquisitions can be a great way an A/E/P or environmental firm to grow. The road to a happy marriage is filled with potholes. But if you follow my advice, there’s little chance that any of them will cause a flat tire that keeps you from reaching your destination. Here are some thoughts to consider if you are thinking about buying a firm: Don’t pay too much. I have a friend— the CEO of a prominent, international A/E firm— who has bought more than 15 companies. He believes many buyers consider an acquisition a failure often because they simply paid too much. It only makes sense to structure the deal so that the downside risk is low and the probabilities of making the numbers pay off are high. Yet, for whatever reason, typically rational people sometimes get emotional (and illogical) when it comes to buying a company. Ego takes over, and they make bad decisions (such as paying too much). Take another look at rescue missions. One of our clients has successfully acquired a number of financially troubled companies. He figures that if he can help the owners/managers turn things around, they will have an allegiance to him as their savior. A lot of these so-called “rescue missions” can be done for very little cash. The upside potential is high, but the risk is low. Develop all of the possibilities that meet your criteria. Don’t just react to opportunities that come in the door. I always give this advice to my clients, but they don’t always heed it. I liken the situation of buying a company to that of buying a car. You probably aren’t making the best purchase decision if you drive by a new car dealer, see a car on the lot, and stop in and buy it, without considering your other alternatives. Consider branch offices of other firms. I really like the idea of buying a firm’s branch office for two reasons. First, they tend to have fewer hard assets, so they often cost less than an equivalent “stand-alone” firm. Second, and even more importantly, branch offices are used to being part of a larger organization; small, stand-alone professional service firms are not. This makes it much easier to integrate somebody else’s branch office into your overall company. Do a thorough due diligence that is more than just looking at reports. You have to look at the work-in-process, accounts receivable, and so forth. But you’ll learn even more by talking to the employees and clients of the company you are thinking about buying. I realize this is not always easy— the sensitive nature of many of these deals can affect employee morale and the selling firm’s ability to get work. But that doesn’t mean you shouldn’t always take this step! Plan for the integration in every way. Before the deal goes down, resolve issues such as how the different benefits plans will be integrated, how the new ownership will be announced, how the employees in both companies will communicate with each other, and so on. The better you plan, the more likely you are to avoid unpleasant surprises after the fact. Change the name of the company. In most cases, the name of the acquired operation should be immediately changed to the parent’s name. This doesn’t mean that all of the acquired firm’s goodwill is lost. A name change, handled properly, can be viewed as a positive by both the employees and clients alike. It can also go a long way toward breaking down any “us-versus-them” feelings that crop up after the marriage. One name sends a clear message that you are one company. Move around work and people early. This always helps the interpersonal relationships in both operations and is bound to lead to better communications, more synergy, and better profitability. Visitors from one operation, if treated well when out of their home territory, will be the best goodwill ambassadors. It’s critical that the buyers feel good about the people in the company they bought; and it’s equally important that the sellers feel good about their new parent organization. Sure, there are plenty of ways to screw up when buying another company. But by following the suggestions above, you can improve your odds of success. Originally published 1/30/1995

About Zweig Group

Zweig Group, a four-time Inc. 500/5000 honoree, is the premiere authority in AEC management consulting, the go-to source for industry research, and the leading provider of customized learning and training. Zweig Group specializes in four core consulting areas: Talent, Performance, Growth, and Transition, including innovative solutions in mergers and acquisitions, strategic planning, financial management, ownership transition, executive search, business development, valuation, and more. Zweig Group exists to help AEC firms succeed in a competitive marketplace. The firm has offices in Dallas and Fayetteville, Arkansas.