Most common post-acquisition pains and pitfalls?
September 10, 2024
by a searcher from University of Florida - Warrington College of Business Administration in Miami, FL, USA
Hey everyone,
I'm curious to learn about the most common pitfalls people encounter after an acquisition.
What are the biggest challenges you faced, and how did you solve them?
Would you ever consider hiring an integration consultant to help get you set up for success during the first 6-12 months?
Thanks!
from University of Florida in Miami, FL, USA
Common Post-Acquisition Challenges and How to Navigate Them
1. Seller-Related Issues
Dishonesty: Some sellers misrepresent financials, inventory, or their involvement in the business. This can lead to nasty surprises post-acquisition.
Interference: Even after the sale, some sellers may violate non-compete agreements or badmouth the new ownership to stakeholders.
Unintentional misinformation: Not all inaccuracies stem from malice. Some sellers genuinely believe their numbers are accurate but lack the skills to provide truly reliable data.
2. Financial and Operational Hurdles
Working capital shortfalls: Many buyers underestimate cash flow needs for growth and operations. Always plan for more working capital than you think you'll need.
Revenue sustainability concerns: Overvaluing "blue bird" sales that may not be repeatable, failing to account for product portfolio changes when projecting future revenue
Short-term performance dips: Expect potential revenue declines and cost increases in the first few months. Be prepared for a potential "J-curve" in financial performance during the first year.
Operational blind spots: New owners, especially those lacking industry experience, may miss critical issues during due diligence.
3. People and Culture Challenges
Cultural integration: Merging new leadership styles with the existing company culture can be a delicate process.
Employee retention: Keeping key staff can be a major hurdle, especially if they were close to the previous owner.
Hiring challenges: Finding new talent that fits the evolving company culture is often harder than anticipated.
Change management: Employees may resist new processes or leadership styles. Be prepared for some pushback and potential turnover.
4. Relationship Dependencies
Customer relationships: Often more tied to the previous owner than anticipated. Take time to solidify these connections.
Vendor relationships: Key suppliers may need reassurance or renegotiation under new ownership.
5. Systems and Process Gaps
Lack of robust systems: Smaller businesses often require significant investment in new tools and processes.
Unrealistic expectations: Buyers sometimes expect large-company systems in a small-business environment. Adjust your expectations accordingly.
Navigating These Challenges
1. Due Diligence Best Practices
- Seek industry-specific mentors or advisors to help identify potential blind spots
- Conduct thorough customer and vendor interviews to gauge relationship strength
- Carefully analyze the sustainability of historical revenue, especially for product-based businesses
2. Integration Strategies
- For smaller deals, most experts advise against hiring full-time integration consultants
- Consider bringing in specific functional experts (e.g., accounting, IT) on an as-needed basis
- Set the tone for the new culture early, but be prepared for some pushback
3. Financial Management
- Plan for more working capital than you think you'll need
- Be prepared for a potential "J-curve" in financial performance during the first year
4. Leadership Approach
- Avoid coming in with a "know-it-all" attitude, especially if you lack industry experience
- Take time to understand the existing culture before making sweeping changes
- Identify key employees quickly and work to secure their buy-in
Thanks to the contributors!
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from Columbia College in Salt Lake City, UT, USA
If you are newer to the process or the industry you are entering, a big one is blind spots during due diligence that show themselves afterward. Essentially you don't know what you don't know and could fail to dig in areas where issues are hiding. This occurred with me in some unfortunate ways that would've been relatively easy to discover if I had known where to look and what to ask. This one is tough to overcome without good mentors or hard-earned experience. Sometimes consultants and such can help depending on the deal size, industry, etc.
Similar to cooked books but not as nefarious is simply ignorant sellers who think their numbers are accurate enough but it turns out they are not. Outcome may be the same as cooked books but often harder to spot since the seller may be very genuine, just not skilled enough to know.
Another is the seller thinking they have more of a system for business generation (lead gen, sales, etc.) but if its overly reliant on their personal relationships and personality, it dies VERY quickly. If the business is not contract-based (i.e. each sale is independent), they often want value and credit for past sales that were "blue birds" - not very repeatable. Building multiples off of blue bird sales may kill you. The higher percentage the revenue can be considered "blue bird", the more exposed you are to it not repeating when new ownership takes over.
One that is maybe more exclusive to product businesses, e-commerce, etc. is treating the company as if it has good will, brand equity, etc. when often it is simply the individual products that do (at least for smaller companies). I had one company that had a massive portfolio of products - many needed to be cut due to poor performance, so the seller cleaned up the portfolio (somewhat) before the sale but didn't review or remove any revenues generated by those products from the past performance numbers, as if all those purchases would simply transfer to other products but that was not the case at all. Also, even if individually they didn't do that well, across hundreds of skus, the revenue added up in a major way (even if the management headaches didn't justify keeping them). The key here is to spend sufficient time rebuilding the revenues based on each product that will continue - with a bundle of hundreds of skus, that can be easier said than done but would've saved a lot of heart ache later. The size of the deal can make this easier to justify of course.