Are You Risking Your Business Success on a Coin Toss?
There are four ways to drive the growth of your business;
- Establish your existing brand in new markets.
- Increase market share in existing markets.
- Introduce new products to existing markets.
- Create a new category not yet in existence (Blue Ocean).
Acquiring an existing business can be an important part of your strategy when you are following any of these approaches. Yet most research reveals at least 50% of acquisitions fail to meet their original success criteria resulting in limited or negative return on investment.
Therefore, the probability of a successful acquisition is on par with a coin toss.
The negative implications for small to mid-market firms can be extreme, robbing them of much needed cash, diffusing focus, and possibly impairing their ability to execute in their core business. Unlike larger organizations, the small to mid-market firm may not have the additional resources and money available to rescue a failing acquisition.
The standard process flow for acquisitions is represented in the diagram below;
Evaluation: This phase consists of the analysis of strategic fit, cultural fit, financial performance projections, estimation of integration costs, and financing options. The results of this analysis, when compared to the threshold for the desired return on investment, will determine whether the acquisition is pursued or not.
Acquisition Design & Negotiation: The final design and negotiation of the deal happens after the fit analysis has been completed. This either ends with a finalized transaction (legal, business and financing terms), or a decision not to pursue because the return on investment threshold will not be met.
Integration: This final phase is where the real work gets done. No matter how detailed the analysis, or how intensive the negotiation, the integration of all but the simplest acquisitions will consume the most resources and time. This phase ultimately determines the success of the acquisition.
This brings us to the three major reasons acquisitions fail to deliver promised business results;
- Cultural Fit: An assessment of cultural fit should be completed in the Evaluation phase. Lack of cultural fit should be considered a deal breaker. If the cultures of the 2 organizations have little in common, the likelihood of successful integration is extremely low. Unfortunately, this analysis is often not considered in the first phase, if at all. Most leaders are more comfortable crunching the numbers than assessing the culture. As well, the confidentiality of most acquisitions can make this assessment tricky. However, there are simple ways to successfully assess cultural fit in conjunction with strategic fit. It is critically important to make this cultural fit assessment as much a priority as the number crunching.
- Integration Costs: A realistic assessment of integration costs should also be conducted in the Evaluation phase. It is during integration that the nasty surprises typically surface, so a reasonable contingency for surprises is prudent. A few of the elements to consider are; the orientation of the acquired organization to your culture (Purpose, Values, Envisioned Future), assignment of the requisite senior leadership to ensure successful integration, events & process aimed at customer communication and retention, infrastructure alignment (systems, technology, physical assets), and strategic alignment.
- Change Management: Unless the acquired organization will remain as a stand-alone unit, you must have a detailed plan for the necessary change management to support the integration. As we all know, human beings aren’t big fans of change unless they understand the Why, and have great leaders who can energize and mobilize their activity. Change management is critically important, consumes money, requires senior leadership dedication, and takes time. Have a plan and don’t skimp on the details.
We know acquisitions can be successful as research reveals some 30-50% meet or exceed their return on investment goals. By giving reasonable attention to these three common failings, in addition to the typical due diligence required for any acquisition, you can significantly improve your probability of success.
Successful execution of your acquisition(s) depends upon being disciplined, following a proven process, and sweating all these important details.
Better than a coin toss wouldn’t you say?
Article by John Leduc
Image: Out There: Flip A Coin. By Susan Lacke