Seven reasons why so many business acquisitions fail
Not every business acquisition is a success, with three out of four deals deemed a failure by those involved.
Not all business acquisitions are successful, with three out of four deals deemed a failure by those involved.
The truth is, many businesses don’t have a predefined measure of success. They don’t have KPIs and they often lack a plan for the acquisition and transition. Although this may be the biggest failure of all, there are several other common reasons why acquisitions don’t achieve the success that was planned.
1. Lack of industry experience
A buyer’s lack of industry experience means they can miss key elements of the evaluation of the business. It can also result in the buyer’s ideas about what may increase the post-acquisition performance of the business not coming to fruition.
If you are looking at an acquisition in a new industry, tread with caution and ensure that projections you are making for how the acquired business will perform are based on sound principles rather than assumptions. Having the right team can help you make a realistic assessment of the target business and future projections, and identify value and risk to ensure they are dealt with during the acquisition and in the post-acquisition transition.
2. A long settling-in period
The seller can be invested in the business for a period after completion through an earn-out, deferred payment or a minority equity holding. This is generally to preserve and transition the core value in the business.
However, tension can set in quickly. Sellers who have built their businesses over multiple years without being answerable to anyone aren’t good at playing that role. If you are using a mechanism to keep the seller in the business, find ways to set up the relationship to minimise the potential for problems.
3. Making changes too quickly
Buyers want to implement their ideas immediately. However, they are often unaware that rapid change is destructive for staff, customers and prior owners. If there is a transition phase, they can be put offside by changes happening too quickly. This creates a damaging environment that can impede a smooth transition.
Changes should be implemented slowly and carefully after a significant settling-in period.
4. A falling out among the buyer group
This can be caused by a lack of clarity between the group of buyers on critical issues like decision-making, risk appetite, future direction and how (and when) any of the parties—or all of them—can orchestrate an exit.
Fortunately, such a falling out can be prevented to a large extent by ensuring a proper shareholders’ agreement is in place, and the right issues have been discussed and agreed in advance.
5. Lack of due diligence and general understanding
A lack of due diligence is a massive risk in all acquisitions. It can lead to the purchase of a business with underlying issues or a business that doesn’t provide the intended outcome. Buyers are forced into ongoing problems because of issues that should have been identified through proper due diligence.
In many cases, buyers are focused entirely on the purchase price and not on the ongoing running of the business. The buyers of these businesses only last a few years before re-selling at a lower price because the business didn’t match their dream for it. So, spend money at the front end and check properly.
6. Transaction failure
This is about failure after completion and failure of the transaction process itself.
If a deal hits some speedbumps and takes much more time, energy and money than had been anticipated, it can wear down the buyer and the seller to a point where they lose trust in each other and lose all the momentum in the deal. Or the deal hits problems that ultimately shoot it down.
7. Emotions can kill a deal
A buyer’s emotions can also be the cause of potential issues. Emotions generally play out in one of two ways for buyers – they can either be caught up in the emotion of deal fever and just want the deal done at all costs, or they can become easily distracted and overwhelmed by risks. A nervous buyer will lose sight of normal commercial risk.
While there is much opportunity in acquisitions, there is a downside too. Sometimes dreams don’t come to fruition, but luckily, failures are avoidable.
