Top 7 Rookie Buyer Mistakes

Buyer Be Aware 

by Terry Stidham

1.    Not Doing the Math

Let’s say you’re Company A, and you have your eye on acquiring Company B. 

Ideally, 1 plus 1 will equal 3 or something greater.

Then why does it often turn out to be more like 1 plus 1 equals 1.5? 

You need to understand what the combined companies will look like. Start with an analysis of the strengths, weaknesses, opportunities and threats of your company and the same analysis of Company B and then do a combined analysis, the ‘layering effect.’ What are the savings? What are the cross selling opportunities? What the threats, like loss of customers or key employees? Are there any legacy issues that can present problems?

Of course it’s easier to the analysis on your own company (though I am surprised at how often companies don’t) than it is do to it on an acquisition targets, especially a privately held one, but you can still get information on your acquisition target. There are sources like Factiva, Capital IQ, D&B, Google and then there are the industry publications. 

Have your key management speak to other people in the industry to help size up your target. This can help you get a sense of what the two companies really look like together. You also have the right at some point in the process to look under the hood and inspect the books, speak to customers, vendors and key employees. I have developed an in-depth confidential questionnaire to uncover the good, bad and ugly.

2.    Letting Emotions Drive the Deal

As CEO, you are undoubtedly passionate about your business. That’s to be expected and applauded. Getting emotional about completing a deal is different. The tendency is to get excited about the possibilities of buying Company B, and before you know it your enthusiasm becomes infectious, to the point where your key management does not challenge you about downside risks of doing the deal. Getting emotional can keep you in a deal that shouldn't go forward.

3.    Lack of Perspective

Losing perspective is about getting lost in the process. If you've invested a lot of resources – time, talent, money – exploring the deal, it’s easy to think that you have to go forward with the acquisition irrespective of the price you pay. Ask yourself why you want to buy Company B. In your analysis, does it contribute to the top and bottom lines? Do you gain a new distribution channel? Does it eliminate a competitor? Make sure that it is a well-founded rationale and a sound business case that is 
moving you forward, and not the sheer force of momentum. 



4.    Ignoring the Red Flags

There can be hundreds of potential red flags.  Don’t ignore them. Don’t try to justify them away. Dig deeper, ask questions, and if you aren't satisfied with the answers or can’t find resolution, walk away. Red flags are signals to pause or even stop. Failing to do so is often a byproduct of getting caught up in the deal or losing perspective. Don’t close your eyes to the red flags. 

Did Company B have unusual charges or losses that aren't adequately explained?

Does the predictive index (assessment) on the CEO show instability?

Is there unusually high turnover on its management team?

Are there troubles fulfilling orders? If so, why?

Are there cultural gaps or differences in competency levels that will make it difficult to combine people and departments from both companies?

5.   Thinking Inside the Box

Let’s say you see some red flags, or deal just does not make sense. It’s time to review your other options. What if you only bought part of company B? Or maybe it would make sense to partner with another party to do the acquisition.  What about a joint venture? How about structuring the deal where instead of buying Company B for $30 million outright, you pay $20 million upfront and $15 million in potential earn-outs?

It is important to understand your alternatives. I recently had a client who wanted to purchase a company to expand his distribution and increase his overall sales. 

I performed as assessment of his company and the company they were interested in acquiring.  The analysis showed that the client really needed 20% of the target company. Why pay for 100% of a company if you only need 20%?  I recommended that my client partner with one of the other potential acquirers. The end result is that the client paid 10% of the total purchase price for the 20% of the company that he needed.

6.    Not Placing Yourself in the Seller’s Shoes

Your interest and Company B’s are not aligned. You want to pay the lowest price possible and possibly structure the deal with a future payout; they want to get the best price possible—now! Obviously under that scenario you both can’t get what you want and can often stall or kill the deal.

Put yourself in Company B’s shoes to understand why they are selling. Is the CEO looking to retire or play a transitional role? Is Company B being sold at the height of the market? Are there negative trends in the industry that are eluding you?

7.    Failing to Make the Case for the Deal

Try to prove your key points as to why you should acquire Company B.  

Can the two combined cultures really work together or are the management styles and daily ways of operating incompatible?

Can you gain incremental customers or will they leave to go to your competitors?  

Can you really achieve your cost synergies

How will your people and customers fare during the acquisition? 

Can you structure a deal so that you don’t overpay? 

You need to run worst-case, middle-of-the-road case, and best-case scenarios for the acquisition. 

Being aware of these mistakes should help you avoid them. Align yourself with seasoned advisors and remember your real work begins once you complete the acquisition.