Rankine says that the reasons for failure fall sequentially into the five phases of an acquisition:
- Flawed Business Logic
- Flawed Understanding of the New Business
- Flawed Deal Management
- Flawed Integration Management
- Flawed Corporate Development
This article examines the second category in the list.
2. Flawed understanding of the new business
The acquisition process is complex and fraught with risk. If you are aiming to grow your firm via acquisition you cannot avoid investing the necessary time and resources because failure to do so will almost certainly ensure failure to generate the desired returns.
1. Do you have a full understanding of the market?
What are the key factors that drive the market up or down? What are the current and future predictions for the market? Based on Market intelligence, can you see the reasons behind why the seller wants to sell? Has the seller spotted negative trend looming in the market?
2. Do you really understand the business model?
Why does your target firm make money? How does this differ from other firms in the market? Where is it losing out to its competitors? How does this align with your business model and how will you integrate the two into a new joint operation? Where will you make gains through scaling operational and business development teams and processes?
3. Can you justify the synergies?
Cost reductions are typically relatively easy to quantify and deliver. Sales growth is much harder to quantify and even harder to achieve. Often the two are in direct conflict… make cuts to save cost and destroy your ability to deliver increased sales!
4. How thorough is your due diligence?
Often, firms rely on 3rd Party Consulting firms like Deloitte and KPMG to perform their Due Diligence. This tends to be focused on Financials and Legal and often only makes cursory reference to Commercial, Operational or People diligence. In reality the key problems are often centered on people and processes! Due diligence should identify these issues. However due diligence is not just about finding problems. Good Commercial Due Diligence should also identify and quantify the value to the business and provides useful input into the negotiations and post acquisition integration plan.
A full understanding of your target firm’s business model, target market and competitor landscape is an essential pre-deal step to ensuring acquisition success.