Six steps to acquisition failure
By Kevin Appleton and Murray Pollok23 April 2014
Kevin Appleton has made his fair share of acquisitions over the years. Here, he offers his guide on common pitfalls to avoid.
As market sentiment gradually recovers acquisitions are appearing again on the agenda: the recent sale of Streif Baulogistik to Zeppelin Rental being a case in point.
I have had the opportunity to be involved in a number of acquisitions of businesses in the course of my career. Some have worked brilliantly whilst others less so. Here are some reflections - six mistakes of the acquision game - on how to ensure you don’t waste money in an acquisition.
1. Acquire a company whose market position is based around an individual leader
Often the most successful smaller businesses are ones where a single owner-manager has been instrumental in its growth and profitability, owning the key relationships with customers, suppliers and staff.
This owner-manager will leave the business as soon as any earn-out period is over and there is a certain inevitability that staff and customers will follow as soon as he sets up his next business in competition with the one you bought.
2. Acquire a business with a highly concentrated customer base
Some businesses have made themselves immensely successful on the back of three or four customers. There is always a likelihood, given an ownership change, that the bonds of loyalty these customers felt to the acquired business will weaken.
The change of ownership can make these customers nervous and, even if there are no service issues, they will have already initiated a supplier review which leads to partial or total loss of business
3. Acquire a business whose culture is diametrically opposed to yours
If you find that you have little common ground with the acquired business it will lead to an endless series of misunderstandings, arguments and deceptions. Needless to say, none of these are good for business effectiveness and leads to a waste of productive energy.
4. Treat the acquired company like idiots
Employees of acquiring companies can develop the view that their company has been successful in concluding the acquisition partly because they, personally, are imbued with superior intelligence, wisdom, virility and energy. They then behave towards their new colleagues with that attitude of superiority.
The truth is that you acquire businesses because they are good – often better than the acquirer on many levels – and they need to be treated with appropriate respect. Don’t do this and you will find many key people leaving, while you are left with the dummies who think themselves superior
5. Leave the business completely untouched
This is the counterpoint of the previous risk. Some business are acquired and then left entirely untouched and unintegrated by their new owners – through fear, excessive deference or just sheer lack of ideas.
The only point in making an acquisition is because you think the business can achieve better outcomes under your stewardship. By encouraging interaction between old and new businesses you can be surprised at the number of new opportunities that are generated in both directions. Conversely, if you do absolutely nothing with the business then why would you think it is better under your ownership?
6. Acquire a business requiring a complete asset refresh
A common practice in the rental industry is for businesses who are thinking of seeking a sale to suspend or dramatically slow down their rate of investment in new fleet. This can lead to a situation where the acquiring company not only pays for the business but then has to effectively rebuild the business’ asset base in a very concentrated period – effectively substantially multiplying the price paid for the business.
This list isn’t an exhaustive recipe for failure – ensuring that the price paid will support an economic return is also pretty important, for example – but these would be some of the most common, avoidable errors.
More than in any other area of business, ego can quickly grab a hold in an acquisition process and rational judgment and common sense go out of the window in the desperation to ‘do the deal’. Keeping this little check list in front of you, and measuring your acquisition targets up against it might save you a whole lot of money.
The author: Kevin is former CEO of Lavendon Group plc and former Divisional Chairman of Travis Perkins plc. He is currently Managing Director of Yusen Logistics UK Ltd, non-executive Chairman of Horizon Platforms Ltd , non-executive director at Ramirent Oyj and non-executive director of the Freight Transport Association. To comment on these articles please email: IRNfeedback@khl.com