But I can tell you, the ones that succeed are the ones that go in with intention, and they plan for the negative.

PLANNING STARTS WITH INTENTION.

What I would say to anybody contemplating getting into acquisitions, if it’s not something they normally do, is when you go into an acquisition, establish your intention. What is it that you want to accomplish immediately, what you want to accomplish in the short term, in the medium term? And what’s your long term objective for this acquisition? Because otherwise I think you’re going to find out that what you wait to find out may not play out the way you want to, or in your favor.

The other part is planning. You’re actually trying to figure out what this business is going to look like in the aftermath of the closing. There are integration issues. How is it going to integrate with your current structure? There are planning and budgeting issues. What is the budget? What is the expectation? That’s equally important because your banks might have lent money to you on the basis of forecasts and so, equally important, because you may have to get approval of the budgets that are associated with the acquisitions. So your due diligence is where you do all of that. You do your planning and you do what is called a post-acquisition implementation plan. If you really do have intent, which I spoke about earlier, and you at the very least have to do the verification side of things.

WHAT IS DUE DILIGENCE?

There are two purposes of due diligence. The first purpose of due diligence is the obvious one. To verify what the seller told you, that led you up to a purchase price. The verification stage is where you talk about the legal assertions that were made. Do we own what we say we own? Is there what we call warts on the corporation that you’re buying? So, are there leans or are there related tax impositions or any other thing that is associated with the legal entity that you’re buying? Those are much more about verifying.

And then there’s the second element of verification,the numbers. It’s not quite an audit, but you’re going through the numbers that were presented to you and make sure that they make sense. In some cases you do a full blown what they call a quality of earnings. In other cases you just bring your financial people in to run analysis on the numbers.

WHAT COULD GO WRONG?

The biggest pitfalls are the unknowns. You know, I did a conversation in one of my previous things where I talked about “fail fast”. Well, the pitfalls are you’ve got to make the decisions and come up with the situations, identify them and solve them fast. Because the faster you identify the situation, the better the chance you have of mitigating against the negative or adverse outcome of that situation.

And the common pitfalls are that you miss or underestimate the impact of on the employees. And then you have a significant exit of employees from the organization. The client side of things is also a common pitfall. You underestimate how much client attrition there might be associated with the merger of two entities. It’s less common, but certainly given larger sized acquisitions, there really is a real statutory or legal or regulatory pitfall that you better be mindful of if you don’t contemplate the competitive landscape, and what the regulators might think about that you might find yourself in trouble and executives, which is a real concern, is brain drain. So I talk about employee flight, but it’s an even bigger pitfall if it’s executive flight, know, who you want to keep on your management team, know who’s important and if necessary, bake it into your acquisition agreement.

SCENARIOS: POST-ACQUISITION

The wait and see attitude is an attitude that often leads to trouble, because in a wait and see attitude you might have issues like severance considerations. You might have issues like union considerations. You might have issues like the morale or the fit between the acquiring entity and the bought entity. So the planning side of things is where you actually run scenarios. What does it look like post acquisition? How does the union relationship in company A compare to the union or labor relationship in company B? What are the potential terminations or what’s the expected continuity of employment? What is going to happen to the client reaction? Quite often situations where companies will say, I was fine with two separate entities, but when you bring them onto one roof, there are considerations for your clients. There might be statutory considerations or legal considerations around competition. If you don’t do a proper post-acquisition implementation plan, and instead you do a wait and see, history tells me that can be very costly.

OK. WE OWN THE BUSINESS.  NOW WHAT?

You know, there are different elements to an acquisition that one has to consider at various stages leading up to an acquisition. So, for example, there’s the accounting side of things, which is your day to day activity. And quite often again people are starting to deal with that post acquisition sort of saying we’ll deal with that after closing. The reality is should be lining up the accounting, particularly if you’re a multiple entity organization, to ensure that the accounting associated with what you’re buying can feed into the reporting of what you already own.

The other things you got to consider are just the day to day activities, banking, credit cards. What happens and how do you ensure that the deposits go to where they’re supposed to go to? How do you ensure that you’re able to write a check the day after you’re close? And those things have to happen at least a few weeks before closing because it takes time for the banks to do what they need to do.

I’ve had acquisitions where we’ve sort of said to clients, listen, we better start figuring out our banking. For example, something as simple as opening the bank accounts and ordering the checks and the like. Well, we can’t do that till we close. And I say, okay. And then the day after close, you got to pay the rent. The day after close, you’re wondering, where are my deposits? Your deposits are going into the seller’s bank accounts because that’s where they’ve historically gone. And so you’ve got to think about these things before you’re close. You’ve got to be aware that you’re running a business the day after closing.

FINAL THOUGHTS.

Plan. Plan. Plan and intention. Understand why you’re buying this business, what you expect to achieve by buying this business, and what you’ll do if those things don’t pan out. Have intention. If you go into a transaction without intention, I’ve seen many of those transactions fail. When I started doing acquisitions, I’m embarrassed 35 years ago, I will tell you that they said at those times 85% of acquisitions fail. Today, I think it’s probably a lesser number, but I’ll bet you it’s still greater than 50%. But I can tell you, the ones that succeed are the ones that go in with intention, and they plan for the negative.