Thinking About an Acquisition? Make Sure You Are Ready First.

In a recent article, I wrote about how important it was to prepare your firm for sale even if you are not thinking about an external ownership transition. You can read that article here. This week, I want to take a look at the buyer’s side and the questions that should be asked before making an acquisition or merging with another company. The A/E/P industry is experiencing fantastic growth in many markets around the United States and M&A activity has been at an all-time high since the great recession of 2008. Capital has remained steadily available and that generates a lot of excitement around making an acquisition as part of your growth strategy. There are also several good reasons to consider buying another firm:

• Inorganic growth immediately:
  • Increases your firm’s assets and income
  • Diversifies risk
  • Expands market presence and adds additional services and competencies
• You will have the opportunity to increase your firms value.
• It can help eliminate competition.

Contemplating the idea of making an acquisition is exciting. It can be easy to get swept up in all of the possibilities, but before making a commitment, start by asking yourself a few questions.

1. First and foremost, are YOU ready?

I’ve written before about the steps that sellers must take to be ready and these all apply to buyers as well. Buyers are not the only party that performs due diligence. Sellers will want to know that the foundation of the company that is buying them is strong. There are dozens of studies that estimate the number of M&A deals failing to meet financial expectations anywhere from 50 – 90 percent. Odds are better for the A/E/P industry, but it still behooves you to take a step back and analyze whether your firm can withstand the disruption that an acquisition entails. The cost of an acquisition goes beyond the purchase price of the business you are looking to buy. In addition to capital, you will expend a lot of time and energy to make the integration or partnership with the acquired company work. You will need to have your house in order financially, structurally, and strategically. Consider performing internal stress tests to determine whether your firm has the infrastructure and resources to handle the change.

2. Do your values and culture align?

Possibly THE most important factor when considering a deal is the cultural and philosophical fit between the two companies. It is easy to get wrapped up in the numbers, but it is hard to put a value on values. I like to get buyers and sellers together on the phone, and in person, as soon as possible. M&A is a lot like dating and making sure there is chemistry between the executive teams is crucial to a successful deal. This takes a lot of time, phone calls, and face-to-face meetings, but the dividends you will reap are immense. Your conversations should center around culture, values, company structure, firm history, as well as financial history. Do you feel like the target firm is a good fit?

3. Who are the key players that will be crucial to the success of the firm after the acquisition?

While you do not want to share that you are looking at a possible acquisition until the time is right, it is important to be as transparent and authentic as you can be. Especially with key personnel that are going to be essential for the success of the firm during and after the acquisition. Millennials, the future of the industry, consistently rank authenticity as the most important trait that can be possessed by a company or leader. Some estimates put the turnover cost for mid-level employees at 150% of their annual salary, but more importantly, gaining these key players trust can go a long way in ensuring a successful partnership. These people can act as ambassadors that make integrating two firm cultures much easier. To gain their trust, executive leadership must be clear about their intentions, flexibility, and commitment to the partnership. If executed correctly, these key players will be growth drivers long after the deal has been closed.

4. Is this firm a good strategic fit?

This one may seem like common sense, but it is easy to get distracted from your initial vision and start rationalizing the integration of the acquired firm. Focus needs to be on the business plan and vision for your firm. Does this firm objectively fit into that strategy? An acquisition provides immediate inorganic growth. In the A/E/P industry, the value of a firm pursuing an M&A strategy and a firm with a purely organic growth strategy can be vastly different. Mergers and acquisitions can be a tremendous value driver. In addition to inorganic growth, you may see benefits from economies of scale and efficiencies. Will the acquisition open geographical markets or new market sectors? Are you seeking to add new services to your product offering? These questions must be answered before moving forward with any deal. M&A has the potential to make your business, and the potential to break it. Therefore, it is imperative that careful consideration be given to whether the seller fits into your strategy.

5. Finally, where should you focus your due diligence efforts?

OK, you’ve determined you are ready for an acquisition, you believe that the seller’s values align with your firms’, you have identified the key players, and the company fits into your long term strategic vision. Now, it is time to perform a thorough examination of the company’s history and portfolio to determine its value and reveal any red flags. Items that should be reviewed will be detailed by your attorney once they understand the particular risks of the specific target firm. In general, due diligence items will always include financial statements for the last three to five years, paying close attention to current assets (especially accounts receivable) and liabilities. Backlog and contracts, projections, revenue concentrations, bonus plans, benefits, equity arrangements, leases, credit reports, employment contracts, compliance records, and many other contracts that might affect the success of the deal should also be reviewed. Change is difficult for any organization. Careful evaluation of these key areas, management of emotions and expectations, clear communication of intentions, and an executive team that champions the change will go a long way to ensuring a successful transaction. This is a good start to thinking about the exciting world of M&A. Phil Keil is a client consultant in Zweig Group's M&A division. You can contact him at PKeil@zweiggroup.com