Merger & Acquisition Insights

3 Signs Your Acquisition Effort is Dysfunctional

Posted on October 19, 2021 by admin

You are attracting a lot of deal flow. You are evaluating many companies as part of a potential purchase. It feels like you are doing all the right things… except closing deals. What is going on?

Activity does not necessarily equal results. That is especially true when it comes to growth through acquisitions. Below are three signs that your effort to grow through acquisitions is dysfunctional as well as three actions you can take to become more efficient.

  1. Trusted advisors are bringing you deals that do not make sense.

Business owners regularly share with me that they are getting frequent opportunities to acquire smaller competitors. Sometimes as frequently as three to four seller leads per month. Often these opportunities are made available by trusted advisors (insurance professionals, consultants, industry friends, etc.). The problem is that many of these acquisition opportunities do not convert into closed transactions. Think about how expensive and inefficient it is to have your most well-paid employees evaluating twenty-plus deals each year that do not close.

Functional Tip: Provide your circle of trusted advisors with a written profile that describes the characteristics of your ideal acquisition. Spend some time with them. Explain why you are growing and what you are specifically trying to accomplish through an acquisition. This empowers those who have a vested interest in your success to bring value to you in a more meaningful way – maybe even in a way you do not presently see. Through this adjustment, your trusted advisors will likely bring you fewer deal opportunities that have a much higher percentage to close – saving you time, frustration, and most of all money.

  1. Smart people on your team are making simple things complicated.

A common behavior of companies learning to grow through acquisitions is to make a transaction something that it is not. For instance, if your offer on a business is essentially the value of the equipment plus the drivers/earnout, why is your team doing extensive due diligence on the financial performance of the business or even getting a third-party quality of earnings analysis? There is no risk that is not already covered through the structure of the deal. Pursuing irrelevant due diligence requires more time and money, without adding value or reducing risks.

Functional Tip: Get your non-starters addressed and out of the way before you do any significant due diligence. I have seen buyers waste two to four weeks of time processing thousands of lines of information when the real “non-starter” could have been addressed in a 2-minute conversation before even signing a non-disclosure agreement. Additionally, remember different deals/deal structures require different types of due diligence. Prescribe your solution accordingly to make sure your deal gets to the finish line.

  1. The deal is going under contract before you can make an offer.

The potential changes in the capital gains tax have many sellers placing a premium on speed and certainty of close. The problem is that many well-intentioned buyers are not currently equipped to operate in this manner. They start with due diligence before verifying they are in the same universe when it comes to the money and never gets on the dance floor.

Functional Tip: After an initial review of the company, assume the rest of what you discover in due diligence will be 100% satisfactory. Then, submit a written non-binding indication of interest (an offer) subject to due diligence. The key is to find out if this deal can get to the finish line in a matter of days not months. Money is typically the most important factor for both parties so start your due diligence there. The seller will appreciate the efficiency and courtesy of your approach and likely lean into your effort. If you or the seller determines that the valuation gap is too wide, no worries. Move on and be grateful for the hundreds of hours you just saved.

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