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3 Common Mistakes in M&A

by on April 2, 2014

Three common mistakes made when buying another company are:

  1. Due Diligence doesn’t uncover what the Seller doesn’t want you to know
  2. Earn out structure to bridge the valuation gap ends in a disaster
  3. Integration management through KPIs doesn’t produce the synergies expected

Here’s what you can expect to learn from these points:

  1. The POINT of Due Diligence (Hint: It’s not what you think)
  2. How to Avoid the Deal Doomed from the Start
  3. How to Know if your Deal is a Success

Due Diligence

There is often a surprise after the deal is done when you discover information you wished you found out during due diligence.  This is often the result of improper due diligence.

Due diligence is often perceived as the request for documents and is managed by completing a due diligence checklist provided by an attorney.  This type of due diligence is backward looking and will tell you only if you should NOT do the deal.  It has no relevance to determining if you SHOULD do a deal.

Due diligence needs to be forward looking.  This is what I call Strategic Due Diligence and is designed to determine if the reasons you’re interested in doing the deal will actually manifest, and what it takes to make that happen.

Earn out Improperly Structured

CEOs are determined not to overpay for another company, unless you’re the CEO of Facebook.  As a result there is often a big difference in the offering priced and the asking price.

In any deal there are three deal prices:

  • The valuation or price at which you want to buy another company. (Inversely, the price or valuation you’re willing to sell the company)
  • The valuation or price at which you will walk away from the deal
  • The valuation or price at which the deal actually gets done

Hopefully the Deal Price is between the Want and Walk price.

Earn outs are used to bridge the valuation gap.  An earn out allows the seller to get the valuation its seeking upon the achievement of agreed upon milestones and the buyer is willing to pay the additional amount when the risk of delivery is eliminated.

The key to a successful earn out structure is control.  The seller wants control to ensure the future money will be paid.

The problem is that most earn outs are structured around financial metrics like revenues or earnings and this inherently creates a problem because how can the buyer relinquish control on financial issues?

A better way to structure the earn out is around specific deliverables that are easy for the seller to control, like product development and aspects of product integration.

Structuring an earn out this way avoids a deal doomed from the start.

Integration through KPIs

Most CEOs don’t think about integration until the deal is done, if at all.  They’re focused on getting the deal done.

Once the deal is completed integration issues are simply added to the tasks of the management team and managed through Key Performance Indicators (KPIs).  This isolates integration tasks to departments and creates a siloed effect for integration.

Integration needs to be managed across departments and managed by a central integration team or hub.  Integration progress needs to be tracked in a dashboard for the CEO and Executive Team to ensure that the reasons for doing the deal are actually obtained.

Make Your Deal a Great One

Thinking about buying another company or possibly selling your own and want to learn more about making your deal a great one?  Contact Mike Rogers today for a complimentary, no obligation, initial consultation to determine if he is the right person to help you reach your goals.  No matter what, you’ll walk away from the meeting with him more confident about your future!

If you’re wondering how you build a company that you can sell for a premium in a few years, contact me to discuss the Valuation Amplification Process.

I also invite you to download the white paper and learn the 5 step process on How to Quickly Increase Your Valuation by Thinking and Acting Like A PE Firm.

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From → Integration, M&A, Strategy

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