2 Lessons to Learn from M&A Mistakes

Lesson #1 – Never Underestimate the Value of Relationships

I recently witnessed the sad decline of a once powerful company, and I can trace many of its problems to mistakes made just after the company was sold. This company was a giant in its industry. Its team seemed to do everything right, and its standing in the marketplace seemed unassailable. At least, that’s what the buyers believed – nothing could shake this company’s position in the marketplace. 

Just after the sale, the new owners assessed the sales staff, many of whom had 20-year relationships with their customers and were well paid for their work. The new owners identified sales commissions as a prime place to save money. The owners pushed their older sales staff members to retire and let many of the others go. They replaced a seasoned sales team with a younger, less expensive one.

This cost-cutting strategy might have worked for another company, but the new owners executed their plan without understanding their customers or their sales team. The experienced sales team had developed close relationships with the company’s customers during decades of working together, and their customers were loyal to their sales reps. Customers didn’t respond well to losing a trusted relationship or having someone new take over their accounts. They began ordering from the competition, even if it meant higher prices, and the company was unable to lure them back.

You know the rest of the story – the company couldn’t recover from a drastic reduction in sales revenue and declined in value. It eventually was sold again, and now has no independent position in the marketplace. The company’s demise could have been avoided if the new owners had taken the time to get to know their customers before taking action on a major restructuring plan.

If you are contemplating an acquisition, I would advise you to make no major changes immediately after the sale. Take some time to get to know your team, your customers and your vendors. Those relationships matter enormously, and understanding them can provide valuable insights.

Lesson #2 – Prepare Before You Sell

The second lesson is for everyone who owns a business, whether you have plans to sell or not. Many of my clients have found themselves in an enviable position – a potential buyer has queried them about selling their companies, even though the companies weren’t officially on the market. Interested in the initial queries, my clients began negotiations without doing much preparation first.

If you’re in this position, I urge you to slow down. Unless you are a veteran of buying and selling companies, you will begin negotiations in an unfair position from day one. The buyers, on the other hand, will be well prepared. They will approach you already knowing what they want from the deal and with basic information about your company. You need to be just as well prepared.

When you start thinking about selling your company – as a result of an unexpected query or as part of a larger strategy – you need help from professionals. I’ve heard owners say they didn’t want to incur any extra costs while they consider a deal because they wanted the most money possible from the sale. Although I understand the reasoning, I believe that philosophy is short sighted.

You’ll need help getting your financial statements in order, at the very least. Weak financials can result in uncertainty, and uncertainty can kill a deal. Few buyers will take the risk of buying a company with incomplete or troubling financial statements. It’s likely that you have never needed to look at your financials from an M&A perspective. Working with an M&A advisor, however, will provide the framework for cleaning up any financial issues before the potential buyer reviews them.

You also need to balance the cost of hiring an advisor against the real possibility of leaving money on the table. Most deals are based on multiples of earnings before interest, taxes, depreciation and amortization (EBITDA). If your CPA is able to increase your EBITDA by $100k and your multiple is five, the CPA has just increased the asking price of your company by half a million dollars, and that is certainly worth the fee a CPA might charge. Let me add that it is very common to find an increase in EBITDA when financials are reviewed from an M&A perspective instead of the traditional audit perspective.

Finally, the buyers are not passive participants in sale negotiations. They will be looking for ways to decrease your EBITDA, and they will be very well prepared. Most buyers are M&A professionals or work with M&A professionals and spend their work life finding, structuring and closing advantageous deals. You need pros on your side of the negotiating table.

For weekly insights into enterprise complexity, please sign up here: