Undergoing a merger or acquisition brings many benefits to your business. It could fuel your growth, significantly expand the assets owned by your business, improve your reputation and share within the market and increase your sales book.
If you have decided to pursue a strategy of merger or acquisition (M&A), you will have already done your research to determine that it’s the right choice for your company.
However, even if you enter the process with the best intentions and careful preparation, there are still factors that threaten to derail everything. You need to be aware of these risks in advance to avoid them.
In our blog, we list the most common risks that may occur during the M&A process with practical advice on how to overcome them.
- Overpaying
- Finding the right target company
- Culture mismatches
- Lack of due diligence
- Not properly managing the integration
- Lack of communication
- Failure to maximise value
- Security issues
- Inability to raise funding
- Unexpected costs
- Unforeseen market disruptions
Overpaying
A merger or acquisition comes at a price. Ideally, you want that to be as low a price as possible while still giving the seller a fair price.
If you make the mistake of overpaying for your target company, there are many potential repercussions. Firstly, it means you’re spending more money than you need to on an opportunity that may not deliver the return on investment you hope for.
Secondly, it will harm your shareholder value in the long run, making it hard to satisfy investors and maximise profit potential.
It’s essential to conduct your due diligence and get an independent valuation that uncovers the company’s actual value and undergo negotiations that allow you to reach a fair price.
Finding the right target company
When choosing a M&A strategy, you need to find a company that will progress your goals. This means searching around for an ideal target company. In the case of a merger, you’ll want one that will compliment or add value to your existing operations seamlessly. In an acquisition, you need a business that meets your criteria and supports you in your growth mission.
Again, your due diligence will play a crucial role in determining whether a company is right for you. Spend time in this stage until you’re confident you have the right target, as this will spell long-term success.
Culture mismatches
When you acquire another business, you need to make sure it works with your existing company. There are many facets to consider, including leadership, staff, company values, policies, etc.
If there is a mismatch in any of these areas, it could lead to disruption and prevent the businesses from operating efficiently. When considering your target company, you need to assess how well the culture aligns with your own to assure a smooth transition period once the deal is done.
Lack of due diligence
We’ve already mentioned the importance of due diligence in finding the best deal for your business and paying a fair price. Due diligence is a crucial part of any M&A transaction, enabling you to find out everything there is to know about your target company.
If you do not conduct checks thoroughly, you risk emerging issues later down the line, including HR, legal, environmental or financial issues. These will all undermine the value you receive.
Doing due diligence in advance will avoid nasty surprises and ensure you are getting precisely what you pay for at the end of the process.
Not properly managing the integration
Once the deal has been finalised, you must focus on bringing together the businesses. You need to effectively manage the integration period to maximise value and efficiency while ensuring the merger or acquisition accomplishes your goals.
The transition period will require time and patience, this may include reengineering processes and systems or adopting one company’s over another. Aligned leadership (especially in the case of a merger) will motivate staff, training to bring employees onto the same page, and policies and procedures that make the most of the skills you have and enable productivity are just some of the elements of the integration.
By taking time to consider the needs of your business and managing the integration accordingly, you will generate positive results.
Lack of communication
The negotiation process in a merger or acquisition takes time. There may be periods where you do not hear from the other party, which can cause anxiety. Similarly, if you do not have faith in the team you are working with, a deal can quickly crumble and make it hard to recover.
Due to this, it’s wise to continually communicate with the other party during the process. Make it clear what your intentions are, even when roadblocks appear, which should keep everyone calm.
Similarly, communication will uncover potential issues ahead of time so you can plan how to overcome them before they cause any derailment.
Failure to maximise value
Once you have agreed on a deal, both sides need to work to ensure that value is realised. For sellers, this means doing everything possible to avoid an issue that could lessen the value (and ruin the deal), such as legal action or brand damage.
After the process has finished, the buying company will also need to ensure they make the most of the opportunity by appropriately managing the business and using it to drive growth. In the case of a merger, both sides will need to work together well to achieve this.
A solid business strategy will matter here, enabling you to plan what you will do to maximise value and give you a blueprint to follow once the deal is complete.
Security issues
Another risk that can derail an agreement, and one that appears with increasing frequency in the digital age, are security threats. This could include data leaks, hacks and other cyber-attacks that compromise customer safety or operations.
As part of your target criteria, you should ensure that any company you acquire has a practical protection system, encryption, limited data access, password protection, and careful data policies. Only when you are satisfied should you commit – as you otherwise leave yourself liable to danger.
If you are the seller, try to have these in place to avoid any such issue ruining the process.
Inability to raise funding
Acquiring or merging with a business requires substantial finance. One of the significant obstacles anyone will face during the process is raising the funding they need to cover the costs.
In most cases, you will rely on external support through debt or equity finance (or perhaps a mix of both). Identifying and securing this is challenging, with your business required to find the appropriate funding avenue for your criteria and eligibility.
If you can’t raise the funding you need, completing the process would be impossible. You, therefore, need to ensure you find solutions that work for you and make the right deals.
Unexpected costs
Another common issue that occurs during the M&A is unexpected costs that the buyer has not accounted for. Typically, these are expenses that fall outside the actual sale price, such as legal fees, the investment required post-sale or pressure on cash flow during the integration process.
You need to be aware of these costs in advance to raise sufficient funding and prevent your finances from being overwhelmed. Spend time researching the various costs that may emerge during and after-completion so that you can account for these sensibly.
Unforeseen market disruptions
A deal could be going smoothly, and something out of the blue could disrupt everything. This could include acts of God (like a global pandemic!), market changes and other unplanned incidents.
It’s hard to predict these happening. However, communication will prove crucial in these instances so you can understand what has changed and attempt to get back on track.
It’s also wise to have contingency plans in case something goes wrong to limit the damage and make the best of a bad situation.
Conclusion
The process of an M&A can be long, time-consuming, and full of twists and turns. However, a bump in the road does not mean that all is lost.
By understanding the various risks associated with an M&A, you are at least armed to overcome them. This starts in the early stages, where you must conduct thorough due diligence, stretching into the negotiation and beyond.
Taking the right action to counteract any threats will improve your chances of long-term success and ensure any merger or acquisition drives the intended results.
If you are undertaking a merger or acquisition and need support, we’re here to help. We can discuss the financial implications for your business and find appropriate funding sources.