The real truth about M&As

Oct 27, 2008

When it comes to mergers and acquisitions of A/E and environmental firms, there’s so much misinformation out there. Common misconceptions abound, such as: You can’t sell a firm that isn’t profitable. Not true. Nearly every firm can be sold— if priced properly. “Merger” is a politically correct term for acquisition. Some will say there is no such thing as a merger— that one firm or the other always dominates. I don’t believe that has to be the case. There certainly are cases where both firms bring something different to the deal that makes it much more of a partnership situation than it is one of dominance and submission. Acquisitions always involve the buying company using the money of the selling company to buy it through an earnout. There are companies that pay cash for other companies— certainly not all, but some go down this way. We’ve come a long way in our industry when it comes to mergers and acquisitions. Here are some more truths from my experience in this business over the last 28 years: Firms get better at buying companies the more they do it. This is definitely one business where having a lot of experience really helps. Experienced companies don’t waste time, have a process for making decisions, know how to set a fair price, and can communicate a realistic timetable to a seller. It’s nice to try before you buy. If you can work together on some projects, it’s best— for both buyers and sellers. There’s a lot to learn about each other. Working together, more than once, may keep each of you from making a mistake. You cannot do too much due diligence— as a buyer or seller. The more you learn, the better. Finding out about past clients who were unhappy, learning about a buyer’s history of being “slow pay,” all this— and much, much more should be known by both sides before getting hitched. Sometimes what seem like minor details can derail the whole deal. If you find out that a seller’s office lease has a transfer clause and their landlord won’t let you as the buyer assume it, that could be a real barrier to closing the deal. Just think: a 65-person firm selling for a price of $3.5 million with 10,000 square feet of space at $30 per foot with six years left on their lease— that’s $1.8 million. That’s more than half of the sale price— at risk to the sellers if the buyers don’t pay the remaining lease payments. Inexperienced buyers ignore the pre-purchase firm culture and make unnecessary changes. I have seen this time and again. The policies of the buying company are rammed down the sellers’ throats. The organization structure is changed needlessly. The compensation plan is thrown out the window. The “ham at Easter” traditions are done away with. These are the things that cause major problems. Inexperienced sellers believe buyers who say they’ll leave everything alone. Buyers ALWAYS change things. That’s just the way it is. Good buyers change what needs changing and don’t change what shouldn’t change. You have to move the people around between the buying company and selling company if you want a real marriage. This is the best way to really get people working together and absorb the selling company into the buying company. Paying too much may be the biggest mistake you can make. That’s always been my problem with highly profitable companies— they cost too much to buy. Then any deterioration from the performance projections results in a radical lengthening of the payback period. Don’t expect the employees of the company you’re buying to be thrilled. People get into routines. Changes that violate those routines are stressful. If you are buying, it’s your job to reduce this stress unless you want a lot of turnover— and who does when you are buying a professional services firm? Originally published 10/27/2008

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.