The buyer has spent years searching for the near perfect company. The Corporate pressures for growth through acquisition have become intense. The seller and their counsel are pushing for a rapid close. Banks, accountants, and other advisors are creating constant roadblocks to a simple close. With all of these pressures it is easy to understand why a buyer overlook the many risks that they run in successfully buying a company.
A disciplined approach and proper guidance during the acquisition process is critical to ensure that a successful acquisition is achieved. Corporate buyers approaching an acquisition for the first time or with an overextended Corporate Development team are absorbing excessive deal risk which could compromise economic return expectations. The following are several of the most often overlooked risks that Corporate buyers should be aware of as they approach the closing of an acquisition:
Customers Matter. The most important asset in any acquisition is the Company’s ability to sustain historical sales and profits into the future. Ultimately, the individual customers supporting the sales and margins are the most important facts to support. The analytical due diligence associated with customer growth and profitability are only part of the due diligence. Customer conversations, customer centric market research, and talking with key sales people are often essential steps in minimizing the risk that key customers erode or disappear post closing. The risk of customer erosion and deterioration are magnified as the size of the company lessens.
Off Balance Sheet Risks. Beware of that which you can not easily see. The shareholders of Enron will more than support the importance of this statement. Many risks associated with a business may not be known or reported by the company. These risks may include long term pricing contracts which may be subject to pricing revaluation risk. For example, the fuel company entering into long term supply contracts in a highly variable market without the proper pricing protection. Other risks may include unreported environmental issues, employee related liabilities, and latent product liability liabilities.
People Matter. The employees and management of the acquisition company are often an important reason for the acquisition. In the rush to review purchase agreements, negotiate financing documents and to ensure the best terms and conditions, often employees are the forgotten asset. As a general rule of thumb, spend two hours of due diligence and repoire building with key employees and management for every hour that you spend on legal documents. It is important to be creative and persistent as most sellers will try to limit and restrict access to this important asset.
Proven Due Diligence Guidance. It is important to have an independent advisor to guide a Corporate buyer through a successful acquisition. The removal of the emotions, the preservation of repoire with a seller for post closing interactions, and the ability to ask the right questions are just a few of the important reasons to engage an advisor. A formal and structured due diligence methodology that is well thought out and properly executed is critical. A competent advisor will provide 3 times the value to a transaction than the fee charged.
The opportunity that a strategic acquisition presents to a Company has tremendous potential to transform the business’s future. The question whether that transformation is positive or negative is highly dependent on the buyer’s discipline and focus during due diligence.
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