“This is not a topic that comes up that often,” starts Joel, “but has had me thinking for the last few weeks. I’ve had a successful relationship with one of my key vendors; they’re reliable, competent and provide great customer service. We’re vertically integrated with many of our other services, and I’m wondering if maybe we should acquire this vendor and integrate them into our brand.”

“Fun topic,” responded Mike. “You realize these strategic decisions are a lot more involved than what we can fully deal with in these meetings.” “I understand that,” Joel replied. “I’m mainly looking for your recommendations on the list of the things I should be considering, so I don’t overlook key factors in my decision.” “OK,” Mike said. “So, tell us what started your thinking.”

Joel explains: “As you know, we are a manufacturer that often combines several individual products into a complete system. We make many of the products ourselves, but we also buy products wholesale from a couple of vendors and build those into our system bundles. This particular vendor does sell their product separately, under their own brand, but they also sell it to us white-labeled, and we include it in our systems under our brand. We currently don’t market their product standalone; but I think that’s where the opportunity might be. We’re a bigger brand with a wider reach. I think we could sell more of their product than they do.”

“Interesting situation”, started Cindy. “Is this vendor privately held?” “Yes,” responded Joel. “OK,” continued Cindy. “My first suggestion would be to put yourself in that owner’s shoes. Would they be interested in selling? What would be in it for them? Will they believe that they will benefit from you acquiring them? Are you thinking of outright acquiring them, or are you willing to offer them partial ownership with you?”

“I’ve watched several outright acquisitions of small companies where the business seller has a lot of sweat equity invested. It’s very difficult for that owner to move into a non-ownership / employee relationship,” chimed in Bob. “When you make a decision about their baby which they disagree with, they often find it very difficult to accept. Hard feelings begin, and before you know it, they’re out. How important is that owner to the product / business? Will your expansion be successful if they leave?”

”Good point, Bob,” noted Sarah. “In addition to that, you will have to deal with their valuation of the business. Many owners have an unrealistic opinion of what their business is worth. If you want to buy them out completely, you will have to deal with that. If you offer them an equity position, they are often more willing to see the upside.” It really depends on what they’d be looking for.”

“I worked at a company when they acquired a smaller product design company,” noted Juan Carlos. “The owner of that company became the Engineering Director of that product line at our company. It wasn’t long until it was obvious he was clearly miserable. I have to admit, our CEO was pretty much a dictator, so he hated that! They say that merging is like entering a marriage … that guy wanted a divorce! How well do you know the owner of this company? Will it be a good marriage?”

“I’ve been involved in 4 or 5 acquisitions”, said Don. “There’s a reason that 70 – 90% of the acquisitions fail to achieve expectations. First, there’s only so much you can learn during your due diligence; no matter how thorough you try to be, there’s always surprises after the close. Every case was different. I will say that in the acquisitions we did, we were pretty accurate about identifying the main weakness of the companies we were acquiring, but we underestimated how challenging it would be to overcome / correct those weaknesses. On the other hand, the company that acquired us was too trusting / naive, and were shocked and dismayed when they learned how aggressive (i.e. unrealistic!) the forecasts were upon which our CEO built our future valuation. They definitely overpaid for us. But beyond the financial considerations, the biggest challenge after the close was merging two different cultures. From my experience, that’s the item that is most often completely overlooked. So, my advice would be (1) drill down as much as possible on the financials in your due diligence; leave no stone unturned; (2) pay a lot of attention to culture differences; be prepared to invest in merging the cultures … don’t think it will take care of itself; it won’t; and (3) enlist the help of someone who’s been through acquisitions before … they will see things you totally miss.”

“OK,” said Joel. “Here are my takeaways …

• Understand the WIIFM for the seller, financially and otherwise
• Be thorough with due diligence; make sure valuation makes sense
• Pay attention to culture; have a plan to accelerate the merging of cultures
• Have someone on my team who’s done a couple of these before

Appreciate your advice. If you think of additional items, please email them to me.”

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If you’ve ever wondered what you could learn from your peers, found yourself feeling a bit lonely at the top and/or wanting to get feedback / confirmation from trusted colleagues, yet had no inner circle of trusted confidantes to turn to, this is your chance to give Inner Circle CEO Peer Groups a try.

OPINION POLL

According to a Harvard Business review study, there are four reasons why organizations do not achieve their goals (e.g. acquisition goals):

A – Actions, responsibilities & resources

• Inadequate or unavailable resources
• Actions required to execute are not clearly defined
• Unclear accountabilities for execution
• Inadequate skills

B – Strategy development

• Strategy is poorly communicated
• Leadership uncommitted to strategy
• Strategy unapproved

C – Accountability

• Inadequate performance monitoring
• Inadequate rewards / consequences for success / failure

D – Leadership / Culture

• Organizational silos & culture blocking execution are invisible to top management
• Poor senior leadership

Which is the #1 reason?

HINT: You can read the white paper for the correct answer HERE
A – Actions, responsibilities & resources
B – Strategy development
C – Accountability
D – Leadership / Culture