What might seem like the perfect acquisition opportunity may, in fact, create risks that threaten business viability.
Christopher Meshginpoosh, CPA, director of the Audit & Accounting group at Kreischer Miller, says that the development and execution of an M&A strategy must be based on careful consideration of the buyer’s business strategy, the pros and cons of both M&A and organic growth options, as well as common pitfalls in M&A efforts.
“The harsh reality is that the vast majority of mergers and acquisitions destroy value, rather than create it,” he says. “Deal-making is addictive and, far too often, buyers jump into transactions without proper consideration of strategic objectives and transaction risks, increasing the likelihood of failure in M&A initiatives.”
Smart Business spoke with Meshginpoosh about what to consider before entering into a transaction.
What steps should a buyer take before launching M&A efforts?
The foundation for successful M&A efforts is the development of an overall business strategy, which ordinarily includes the consideration of potential strengths, weaknesses, opportunities and threats. After identifying these elements, management can determine whether M&A transactions can help capitalize on strengths and opportunities, as well as address weaknesses and threats.
What questions should management ask when considering a potential acquisition?
The first question to ask is whether M&A is the only option. In some cases, it might be difficult to find a suitable target at a reasonable valuation, and overpaying the seller might jeopardize the solvency of the buyer.
In these cases, companies might consider whether strategic alliances, distribution or licensing arrangements, or establishing new businesses organically might be more cost-effective or result in a lower level of risk.
Do you recommend that companies focus on small or large transactions?
Unless a management team has extensive experience with mergers and acquisitions, it is often better to start small; the best acquirers tend to be those that are serial acquirers of comparatively smaller businesses.
How does a buyer know whether it’s paying the right price for a target?
Aside from performing extensive due diligence and preparing a quality of earnings analysis, it is important to make sure that an effort is made to identify a reasonable number of potential targets.
By broadening the pool of potential targets, the buyer can ensure that it identifies the candidate and transaction structure that result in the highest probability of achieving the buyer’s objectives in the most cost-effective manner.
