A business acquisition is a complicated process involving a lot. A company, with all its employees, is wholly or partially taken over by another company, for example as a strategic move to stimulate growth, strengthen its market position or achieve synergy benefits. The success of a business acquisition depends on several factors, including synergy, proper integration and communication. It all hinges on careful preparation and thorough due diligence.
So: what should you look for in a business acquisition?
Synergy and achievement of strategic goals
One of the most important aspects in a business acquisition is that the two companies are strategically matched. What is meant by this? Think of it as a marriage, where you want your standards and values to match as well. Similarly, the goals, values and corporate cultures of the organizations should be well matched. It is then important to do extensive research beforehand to see if the products, markets and skills present in the company match or complement each other well. This research is crucial to know whether the acquisition is a smart strategic move and whether there is a chance of success.
A business acquisition is not an end in itself. You want to achieve something with a business acquisition: whether it's growth, recruiting staff, gaining margin advantage in the supply chain or adding expertise, production capacity, IP rights or adding new products to your existing portfolio.
Research shows time and again that those who keep their goals firmly in mind when searching for the ideal acquisition candidate are the most likely to succeed. Taking over a company for the sake of taking over or "growing for the sake of growing" often leads to disappointment afterwards.
Timing is also critical. After all, your own organization must also be ready: taking over a company is a major drain on your business. Not only during the acquisition process itself, but also in the period afterwards. It demands a lot of time from part of the management, who already have enough tasks in their own organization. If an acquisition process takes a long time, or if several acquisitions take place in a short period of time, this will distract the attention from the own organization, which can lead to internal problems. Employees notice that their supervisor or manager pays less attention to them. This causes unrest, uncertainty and reduced productivity. You therefore more often see that after an acquisition, one's own turnover declines somewhat.
Financial health
Of course, you don't want to buy a cat in the bag in a business acquisition. It is therefore essential to thoroughly evaluate (or have evaluated) the financial health of the target company prior to the business acquisition. Analyze financial statements, cash flow, debt and all other financial indicators to get a clear picture of the financial situation. But existing contracts and their execution can also lead to financial challenges in the future. Consider customer contracts that may be terminated by the customer in the event of a business takeover, or the delivery of non-conforming products. In doing so, also be sure to uncover any hidden liabilities or risks that could negatively impact the value of the acquisition. This requires thorough due diligence (more on that later).
During an acquisition process, as a buyer of a business you try to get a good picture of the future earning potential of the business. However, this is often a case of taking a long view, if only because the future performance also depends on the successful integration into your existing company and the goals you want to achieve with the acquisition.
Legal/regulatory aspects
Not only will you want to conduct a legal due diligence to identify all risks . The necessary contracts will also have to be drawn up to record all the agreements surrounding the acquisition and the distribution of risks found during the due diligence. Sometimes you may have to file a notification or even obtain a permit in order to make an acquisition. This may be the case if your company or the company to be acquired has a certain size or market position.
Value of business to be acquired
Below the line, it is not difficult
The valuation of a company in a business acquisition is often very secretive and complicated. But at the bottom line, it is not that difficult. Compare it to buying a house: you pay attention to the location, the number of square meters, the state of repair of the house and, above all, how you think you can improve the house in the future (think of a new bathroom, kitchen or laying out a garden). It's the same with buying a business, ultimately it's about future earning potential.
You look at the products or services a company provides, its organizational and financial health, its intellectual property rights, and most importantly, the added value the company brings to your business. Consider, for example, access to new markets (other industries, foreign countries), adding products to your product portfolio, obtaining important intellectual property rights, additional personnel, expanding production capabilities, increased sales and profits, etc. That added value will be different for everyone. While one entrepreneur wants to expand abroad, another entrepreneur is desperate for more capacity to work out his own orders. This also means, as in a marriage or buying a house, that for one person certain weakness is a blessing, while for another it is a burden. Consider a company with a beautiful factory and an overly empty order book. If you have undercapacity yourself, you see an opportunity in this. If you have excess capacity, then it's a burden again.
Due diligence
Of course, you don't want to buy the proverbial cat in the bag. Therefore, in addition to paying close attention to your own ears and eyes, you will want to hire consultants to investigate whether all the promises made about the company are true. Compare it to a building survey when buying a house. Your advisors will look for potential risks and the proverbial dead bodies in the closet. This will involve examining all aspects of the proposed business. Consider finances, legal matters, operational processes, customer base and personnel. But topics such as IT infrastructure, the environment or corporate social responsibility(ESG), for example, are also subjects that are increasingly being addressed. A due diligence investigation helps you identify potential problems or risks and ensures that there are no surprises after the acquisition.
A successful business acquisition runs on good integration planning
Detailed integration plan
Proper integration is the No. 1 success factor for a successful business acquisition. Successful business acquisition requires good integration planning. Even before you take over the business you will have to think about how you are going to make sure that the business to be acquired will be well embedded in your own organization. There is often more to this than meets the eye, even if you initially want the acquired business to continue to operate on its own. There will have to be someone within the organization who becomes the "face" of the new shareholder at the acquired company. Someone who is ready to answer any questions there may be from staff members, for example. What is often underestimated is that a business acquisition is very stressful for employees. It makes them uncertain about their job security, their performance and the future. So reassuring the staff and being there for them is certainly very important.
But there are also practical matters that need to be taken care of. Think of the transition to a new ERP or accounting system, harmonization of working conditions, adjustment of the website, informing customers and suppliers, IT infrastructure, the bank, etc. A lot of practical matters that, if left unresolved, often lead to friction and lack of clarity. As a result, the performance of the acquired company soon starts to suffer.
Lay out the benefits of merging, create a detailed integration plan and designate a team to deal specifically with the integration. Proper planning will keep the operational running and minimize the risks of the transition.
Communication is key
Communicate in a timely, clear and open manner
Be clear and open in your communication during a business acquisition. Make sure all employees are aware of what will happen in the business acquisition and what it means for their role. The consequences of a business takeover can be significant for employees: they may be afraid of losing their jobs, they don't know where they will end up, and they also don't know whether they will be able to contribute to the company in the future, under new management. They become insecure about their own performance. Managers, who were used to making their own decisions in the old situation, may no longer dare to do so, for fear of doing something wrong. If good communication and visibility from the new owner is lacking, uncertainty and "paralysis" sets in. You can guess what this can do to motivation and work morale, and you will soon see that reflected in the turnover figures and turnover of (good) personnel. A situation you obviously want to avoid, so make sure you communicate clearly and in a timely manner so that employees feel involved and know what to expect.
The same goes for suppliers, service providers and customers. They, too, wonder if anything will change for them after the acquisition. Credit limits at suppliers may change, or customers may be reluctant to place new orders. The reverse is also true. It may be that as a new shareholder you feel the need to professionalize matters, think for example of concluding contracts or making firm agreements, where previously this was only done verbally or via email. This can sometimes meet with resistance, but it may also be that the customer or supplier is very happy with it.
Timely, clear and open communication removes a lot of uncertainty and ambiguity and also ensures that things go as smoothly as possible or perhaps even better.
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Do you have questions after reading this article, or would you like more information? Perhaps you are thinking about a business acquisition yourself? Feel free to contact us, we would be happy to advise you.
