In my early days as a Vistage peer group chairman, we had as a speaker a blunt Yorkshire man who was the CEO of what he referred to as a “corporate finance boutique” in the City of London.
His topic fairly obviously, was buying and selling companies and he had a plethora of little saying that I recall to this day like “never deal with one suitor, have a beauty parade and choose the one you feel you can trust” and “make sure that you have a bottom limit price and below that be prepared to walk away”.
He had another that I still use even though I learned it some years ago. I am unsure as to whether it is a statistic or a rule of thumb but whichever it is, it still resonates today.
He said that “50% of all acquisitions fail and 25% are not successful” and that is a daunting thought for anyone currently in the sale or acquisition of a company.
Perhaps it is a truism but it does say that we have to take great care in buying or selling a company. The original offer, for example, can be chipped away during the negotiation phase until the “walk away” point is reached.
Over the years several of my Vistage owner/manager members have decided to retire and cash in the asset and they have had to go through the dreaded procedure of due diligence. If the acquiring company is listed then the process can be even more demanding.
A recent example, which resulted in the owner aborting the negotiations at a late stage, consisted on at least 500 questions some of which took more than two days to answer.
In his case he was well covered with a very effective Managing Director who continued to run the day to day operations while the owner had to take some three months out in order to complete the due diligence process.
Cost that into any deal!
The question is: if the due diligence process is so comprehensive how is it that 75% of all deals either fail or at best are unsuccessful?
If we look at the questions asked by the acquiring company they virtually all relate to the financial strength of the business, its processes and procedures, and to some extent to its people and markets.
Seldom does it ask questions about the culture of the business and to what extent there is a gap between the two.
More often than not there will also be a gap between the way that the vendor company is run and the acquiring company simply because the corporate mind cannot conceive of a business without an overwhelming array of processes and procedures behind which anyone can take cover.
I have yet to see anyone allow an earn-out to run its course because owners have found the new owners so difficult to live with that they are prepared to lose out rather than stay on in misery.
This is not to say don’t do it. Remember that 25% of all acquisitions are successful and yours might just be one of those.
It all depends on the deal, whether there is a culture gap and whether it can be closed sufficiently to allow the vendor to continue to run the business with as much autonomy as possible. If he/she is to stay on then it should be without the strings of an earn-out.
I well remember one of my members in the throes of the negotiations told me that the acquiring company wanted him to stay on for at least two years and saying rather bitterly “They want adopt my baby but they want me to stay on to wipe its bottom”. The deal did not go through.
There is a vast amount of emotion to get through in these circumstances. Be sure that emotion does not get in the way of a deal that you can and indeed want to live with for the future.
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