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Ah, the merger and acquisition process. It’s an exciting time, but it’s also one that’s filled with frustration, uncertainty and lots of frantic number crunching.
As someone who’s been on both sides of the fence—having sold my business and now looking to acquire a new one, I’ve seen a fair number of mistakes that are often made during mergers and acquisitions (M&As).
This is especially true if it’s your first time coming to the table. The M&A process and all of the work leading up to it can be tremendously consuming, with your attention pulled in a million different directions. It can be difficult to know where to focus and how to get everything together in a way that’ll help you to portray your business accurately while at the same time enabling you to bolster your company, getting it into a strong position to sell.
If you’re thinking of selling your business, or if you’d like to someday, here’s a look at some common mistakes that are often made before and during M&As:
Miscalculations
Mistakes often come in the form of miscalculations. While overly generous financial projections may have the benefit of making your company look good on paper, they’re never a good idea. Once a potential buyer runs the numbers and looks more closely at your company’s financials, they’ll be able to see the exaggerations that are propping the figures up. This could result in a less favorable price or terms, or even kill the deal entirely.
Here are three especially common miscalculations that I’ve seen in my search for a new business:
• Being Overly Generous With Add-Backs
Many companies use shared resources; that is, they pool resources or share employees with another company. Sometimes this takes the form of a shared retail or office space. However, when it comes time to sell, some companies will then attempt to claim the full amount as an add-back, meaning that the entire expense is added back to the profits of the business, making it look like they’ve generated more than they really did.
• Using Loopholes With Accrual Accounting
Accrual accounting is a common form of accounting for businesses and is often used during M&As. However, this is one area that’s often open to exploitation. Some companies will attempt to project six months using the same numbers as the previous six months, on top of using the accrual accounting method. The projections could be inaccurate, especially if there were a number of expenses that were delayed, or somehow didn’t make it into the time period.
• Using Startup Figures For Future Growth Projections
During the startup phase, growth can be rapid for VC-backed companies, and sometimes businesses will attempt to use those initial rounds of funding in future projections, even though it would be more accurate to leave those figures out.
General M&A Mistakes
The most costly M&A mistakes often involve neglecting to get the company in a strong position to sell. If you’re getting ready to sell, here’s a look at some common mistakes that could mean leaving money on the table:
• Relying Heavily On One Traffic Source
Relying too heavily on one traffic source or platform is a classic mistake for web-based businesses. Many e-commerce companies rely solely on Amazon for sales. Before you sell, it’s a good idea to diversify your traffic sources as much as possible. You’ll also want to make sure you’re growing your email list. Having a list of subscribers will make the business that much more attractive to potential buyers.
• Poorly Negotiated Terms On Receivables
If you haven’t done so already, working to negotiate a better deal from your suppliers is a fast way to boost your profit margin, making your numbers more attractive to a potential buyer. Vendors are often willing to offer discounts for things like recurring orders or bulk purchases, so spend some time working to secure the best deals possible.
• Keep Good Records
If your record-keeping hasn’t been that great, now is the time to change that. Make sure you have a good system for expenses and income, as well as a filing system that allows you to find things easily. You’ll also want to make sure you’re keeping business and personal expenses separate. Likewise, make sure you have solid reasons for any dips or negative changes that have occurred—buyers will ask about them.
• Creating a Business Model That Doesn’t Transfer Easily
All too often, business owners create systems that are built around them and their way of doing things. Naturally, this type of business is much harder to sell. Instead, work to create systems that aren’t contingent on you being there—ones that anyone could step in and use. You may also want to consider creating a clear road map that the buyer can use to continue to grow the company, including new products, new markets or other information.
• Getting Distracted
Finally, it’s easy to get caught up in the process of selling, often at the expense of neglecting everyday business operations. This is especially true when there’s interest in your company. However, this isn’t the time to take your foot off the gas. Any negative changes to the business will be a red flag, and if the potential deal falls through, you’ll be back to square one anyway.
It’s easy to make mistakes during the M&A process. There’s a lot that you don’t know when it’s your first time going into it. For this reason, it’s a good idea to bring a professional on board as soon as you’re thinking of selling. A good investment banker, financial advisor or consultant who’s experienced in M&As will be able to help you to sidestep many common mistakes and show you what you can do to get your business on solid footing and in a position to command the best price possible.
