Organic growth of businesses takes time.
Fortunately, business acquisition presents itself as a viable option for both expansion and scaling. But as with all things business, it’s a process fraught with its own set of advantages and disadvantages.
In today’s blog, serial entrepreneur Priscilla McKinney discusses some of the toughest lessons learnt from her recent acquisition. She candidly pinpoints the M&A errors she made and presents cautionary advice or “speed bumps” worthy of consideration.
Without further ado, let’s get straight into it.
Speed Bump #1 Failure to have a mentor to seek guidance from
Not every idea is a good one and not every idea should be pursued. Even if an idea sounds like a great one the timing might be wrong.
It’s absolutely critical to have an experienced mentor with whom you can discuss fit, timing, and opportunity. They can caution you, poke holes into your arguments and hopefully knock some common sense into you when you most need it.
Lesson: “I am very open to risk and I didn’t have a counterpart to say “No, you can’t do that.” That was my first mistake.”
Speed Bump #2 Failure to thoroughly research the industry
The average small business owner simply does not have the time of day to conduct an in depth review of every company in their industry.
However, this is not an excuse to be ignorant of who’s who. Especially when an offer is presented before you.
It probably goes without saying but an initial offer shouldn’t be the only offer you’re considering.
If you’re really serious about a business acquisition, be prepared to do your homework and learn all you can about the key players and minor entities in your industry. This means you must hire or outsource the due diligence side of things to a qualified agency.
Lesson: “Another problem is that I didn’t have access to knowing who’s who in my particular industry.”
Speed Bump #3 If information isn’t forthcoming that’s a red flag
Once an offer has been made and a Letter of Intent drafted and shared with the seller, due diligence can begin in earnest.
If at any time during this process, information is scant, dodgy and the seller is playing hardball and failing to provide sufficient documentation, these are all major red flags.
Lesson: “There were a lot of interesting things that were disorganized in this business. I asked for contracts…the owner didn’t know where the paperwork was…”
Speed Bump #4 Failure to carefully assess the documents presented
Sellers will play all sorts of games to pass time and make it appear as if things are progressing smoothly. Don’t be distracted.
Meeting clients in a series of meetings organized by the seller inadvertently put pressure to consider the deal more seriously.
Perhaps this pressure coupled with survivor bias and belief that this business was a good fit led to overlooking and carefully assessing the documentation presented by the seller.
The key lesson here is to take yourself emotionally out of the deal and delegate due diligence to a seasoned M&A team.
Lesson: “If I could just fault myself for the biggest thing, it was not combing through those contracts to a tee.”
Speed Bump #5 Failure to interview clients independently
While it’s not a typical occurrence to have immediate access to clients prior to closing, in the event that you are given a green light by the buyer, go ahead and interview them separately.
A more common practice is to have a 3rd party conduct a satisfaction/feedback survey during the diligence phase without revealing that the business is being sold.
Lesson: Could Priscilla done something differently? Yes, she could have hired a firm to conduct a survey which would have allowed her to put my finger on the pulse of the customer base.
The bottom line
Done right, business acquisition can be an excellent way to increase your portfolio, raise your company profile, and acquire new talent. Poorly executed it can sink your entire operation.
Priscilla McKinney’s final piece of advice is to hand over the vetting process to M&A veterans. A trusted team that’s comfortable with business valuation and has connections and insight into different industries.
We couldn’t agree more.
If you’re thinking of business acquisition or selling, and you would like to work with M&A advisors, we’re only one phone call away. Contact us today for more information.