A business acquisition that goes wrong inevitably results in disappointment and hand-wringing, as the purchasers try to figure out how they missed the signs that the deal was far from perfect.
But for those who can put the loss of time and money behind them, take the failure on the chin and heed the lessons learnt, much greater success often beckons with future acquisitions.
Here, we’ll look at what went wrong for three US technology business owners and how their failed acquisition attempts shaped their future strategies.
Carl Shepherd, the co-founder of HomeAway, has overseen 18 successful global business purchases in the last eight years. During his time as chief operating officer at Hoover’s Online, prior to joining HomeAway, he was involved in several acquisitions. One in particular did not go as planned.
The target, an online business, had strong traffic but did not have the necessary advertising in place to gain from it. Hoover’s Online was relying on its own advertising sales team and strong sales at Hoovers.com to brace the acquired operations. As the business sale completed, however, the ad sales market fell dramatically, and the cost per thousand impressions (CPMs) dived with it. Hoovers had not put any plan in place to develop alternative avenues of income quickly enough.
Shepherd would advise buyers to be very clear and strategic about their criteria for a business. Here are his basic rules for small business acquisitions:
1. Develop a friendship with the target to find out what makes them tick – is it the company values, retaining key employees or profits? How willing are they to sell up when it comes to the crunch?
2. Small enterprises are likely to have a sale figure in mind and may discount traditional valuations. Find out early on if the figure they want is realistic for you.
3. Use the best financial advisers that you can to make the process as easy and efficient as possible.
4. Suggest that the seller follows suit and gets the best advice they can, which will make working together a lot easier.
5. Direct the integration process from the start, with a particular focus on the cultural fit.
6. Make your plan, and decide on whether to keep key staff and IT systems. Share the plan with the seller - can they see any weak spots?
In another example, Robert Smith, the founder of search engine marketing firm Champion Media Worldwide, initiated a purchase of the assets - including customers and buyers etc - of PC Guys. Smith’s aim was to merge his growth training products with PC Guys’ products. Surprisingly, it was only at a later point that they discovered PC Guys offered mainly a one-off service to domestic customers, wanting their computers cleaned of viruses, with charges of under $60. Champion’s ongoing service products were priced much higher at $500-$2,500, and so the target’s customers were clearly the wrong fit.
Champion managed to recover quickly, however, and tightened its due diligence procedures to target future acquisitions with more success.
Anthony Mongeluzo, the president and founder of Pro Computer Service, was interested in another IT company that appeared to be solid and healthy. Mongeluzo snapped up the business when the owner, who was moving away, asked him if he would buy it. On closer inspection, it turned out that the seller had lied about his revenues and forged the accounts. But the damage didn’t stop there, the seller had been telling customers that he had bought into Pro Computer and was an equal partner to Mongeluzo, then proceeding to offer “bad solutions”.
Mongeluzo bought and exited the business in a matter of three weeks. Since the acquisition failure Pro Computer takes a more formal approach to its procedures, and asks targets for all previous bank statements. Pro Computer has grown by 20 to 50 per cent each year and attributes a significant portion of this success to its acquisitions.
These buyers did well to pick their businesses back up and carry on, armed with fresh insight and knowledge about the acquisition process. To follow their examples, be sure to avoid walking into a business purchase blind. Whilst you can take the vendors’ presented figures as an indicator to guide your decision to enter into a pre-sale Heads of Agreement, before signing the deal always conduct your own due diligence to verify the information and uncover any ‘nasties’.
Thus you can avoid learning the hard way, potentially putting your enterprise in a critical risk situation.