Deciding to grow your company by buying a business is one of the most exciting and positive developments that can happen to an emerging growth company—yet the risks of buying a business can be quite high. To keep such risks at a minimum, or at least minimize any negative impacts that may occur, you’ll want to be aware of the risks involved in mergers and acquisitions and what to do about them.
What Are the Risks of Buying a Business?
Past experiences of companies that have gone through the process of courting another company provide a long history of lessons learned—and opportunities for your business to make smart, informed steps on your pending M&A deal. Be aware going in that the other company may have more issues than you initially realize. The integration could be problematic and long-lasting. Some employees you were hoping to hold onto may jump ship if the transition period is protracted, if they feel they do not have a strong role in the newly formed company, or if transparency is lacking, among other factors.
So, is buying a business a high-risk investment? You may view it that way, as you take into account that your company’s reputation and valuation could take a hit from a busted M&A deal or ugly integration. However, these risks could be offset by the potential upside—whether the goal is to create a bigger, stronger company; to inorganically expand into new territory; or to acquire intellectual property needed for your company to succeed in the long run.
You’ll want to understand the risks involved in mergers and acquisitions, and the potential benefits going into any deal. Getting to know this new company, inside and out, will also be critical—you’ll need to be fully informed and fully prepared going into any negotiations with another company.
What do you primarily want from the target company? Is this about IP, a new market, or key talent? You also want to understand the target company’s motivations—and their intentions moving forward. If you want to hold onto some of the leadership there, are they likely to stay, or do you get the sense that the owners are looking to cash out and move on with their lives?
For most entrepreneurs and executives, this is a rare transaction, and it’s not inherently obvious what questions you should be asking and the potential pitfalls you could fall into if you do not tread carefully. Experts in all areas of M&A transactions can play a critical role in helping your company think through its strategic goals and how this deal would tie into them, in addition to considering what the goals of the acquired company could be.
Get the Accounting Team on the Case
Early on, you’ll want to anticipate that, like most strategic moves, this is going to take up considerable time and effort—probably more than you realize. The accounting and finance team will need to put extra time toward tasks that could put their current skill sets to the limit. Among their responsibilities after the close will be determining the fair values of the target company’s assets and liabilities and “scrubbing” its closing balance sheet. They’ll also have to scrutinize the accounts receivable to be sure that all uncollectible accounts have been identified; fixed assets for fully depreciated items that still have value; outstanding debt to determine if interest rates are at current market rates; and contingent liabilities such as pending litigation.
Overwhelmed by this partial list of responsibilities? You’ll want to factor in the need for extra support and expertise before and during this time, to make sure all critical areas get the attention they require while your core accounting team is still able to cover their day-to-day responsibilities.
Keep Your Employees and the Target Company in the Loop
When it makes sense to do so, keep your employees informed about what’s happening and what they can expect. M&A deals fall through often, so it’s usually best to loop them in when the ink is drying, so to speak, on your agreement. But before that day arrives, you can already have a communication plan in place so that you can reassure employees about their employment status and their role in your new, larger company, and have answers ready for their many, many questions.
You’ll also need to prepare an integration plan well in advance, with the help of experts who have taken companies through such M&A transition periods successfully. You’ll want to form an integration team, which should include active executive involvement and a clear understanding of why the deal is happening, why it needs to be successful, and the expected value. No two companies are alike, and the differences between yours and the acquired company will quickly become apparent if you did not do your homework. Communicating clearly from here on out has the added benefit of making you aware of any snags (such as any pending departures of key personnel) as soon as possible.
Understanding the Risk Factors of Mergers and Acquisitions
Acquiring another company is an exciting prospect—it holds the potential for many opportunities for your business and your employees. When you have a full grasp of the risk factors of mergers and acquisitions, you will be preparing the team involved in the best way possible: with open eyes toward potential pitfalls as well as ways to avoid them.
The most efficient and effective way to be so aware and prepared is to partner with trusted advisors who understand the process from beginning to end (post-integration). They can point out all the risks and help you think through how to deal with them, all while keeping you on track toward the important goal in front of you—enhancing your emerging growth company. Could an M&A deal be in your near future? Start the preparation process by reaching out to a RoseRyan expert today.