It’s not hard to think of big businesses that have run into problems trying to grow in an economy that’s expanding in low single digits and where organic growth is very hard to generate. Mergers and acquisitions are increasingly becoming the best way to deliver the rapid growth that owners want and investors demand. Unfortunately merging and acquiring is a minefield – no matter how big or small the numbers involved might be.
The list of businesses that have overreached by borrowing money to buy a rival is long. Think of Hewlett Packard’s $5 billion write-off following its $11 billion acquisition of the software group Autonomy. Or Quaker’s disastrous takeover of Snapple, a deal which ended up costing Quaker $2 million for every day it owned the soft-drink group. Then there was the telecommunications giant Sprint, which ended up writing off a staggering $29.5 billion after buying Nextel. Its due diligence and haste to make the deal happen resulted in one of the biggest write-downs in corporate history.
The list goes on and on. It’s not just a matter of writing down the cost of a failed acquisition, which, in itself, is serious enough for business owners and managers to contemplate. Acquisitions that go wrong almost always end up in disagreement, resentment, and court dates, all of which consume time, money, and goodwill.
Big Business Problems, Small Business Disasters
The examples above might seem like the kind of mistakes only big businesses make, but the truth is that businesses big and small make the same mistakes. The main difference being that big businesses are better equipped to handle the fallout. For small businesses, a failed merger or acquisition can and often does prove fatal.
Even if the interest on borrowing money is at historically low rates, businesses need to take great care in performing due diligence, making sure that they’re spending money on something that will add value and not result in cash flow problems. It may seem like obvious advice, but with so many deals going wrong it is advice that many businesses fail to heed. Even the smallest oversight can result in serious problems down the road.
Take the example of one local client’s business that was in a relatively low-risk industrial sector, but one that is dependent on predictable weather. She wanted to grow her business and improve uneven cash flow by acquiring similar businesses in different regions. What appeared to be a simple, straightforward acquisition strategy was actually riddled with pitfalls and could have resulted in disaster.
The Louisville market, while attractive, is highly susceptible to rapid weather changes, as anyone who has been outside over the last couple of week will have noticed. By buying a couple of small, complementary businesses in other states, the business owner believed she could reduce cash flow volatility. As she found out, uneven due diligence can cause even bigger problems than uneven cash flow.
Two small acquisitions followed, along with a whole raft of headaches.
First, one of the businesses she bought had booked a lot of sales through gift certificates. Once it was announced that the business had been sold, the owners of those gift certificates rushed to use them in the expectation that the new management might not honor them. Those certificates were booked as sales by the previous owner, but the cost of those sales landed with the new owner en masse, which was a nasty shock and further damaged her cash flow.
Second, it turned out that the locations of the other businesses were equally susceptible to changes in weather, only at different times of the year. Rather than making acquisitions that decreased overall business volatility, the new owner ended up with one good thing, a larger business, but more debt and cash flow that was equally volatile.
Small Business Owners Need the Right Partner
Having taken on a considerable amount of debt in order to fund her purchases, the owner ended up in a serious crisis post acquisitions. Unable and reluctant to borrow more money, and faced with a higher than expected cost and uncertain cash flow, the company experienced some very serious growing pains.
After she established a relationship with American Founders Bank, we were able to help this business owner restructure her debt, ultimately improving her business situation. Having been through a restructuring process ourselves, we were able to offer advice and solutions based on real-life experience.
The lesson learned, however, is that due diligence and a knack for foresight are extremely desirable when it comes to acquiring new businesses. We would encourage any small business considering a merger or acquisition to first find the right business ally to help map any hidden pitfalls or potential setbacks.
AFB Business University
Nobody can do it all on their own, and nobody should think that just because their business might be small that big business problems do not apply to it. They do, and waiting until problems arise is leaving things to chance. That is no way to run a business.
With that in mind and based on its own unique experience, American Founders Bank is set to launch AFB Business University, a series of seminars and coaching sessions aimed at business owners and CEOs.