What to Ask While Acquiring a Business

by Adam Kidan

As the economy continues to progress, and capital remains readily available for many people, it might make sense to consider a merger or an acquisition as part of your growth strategy. While this thought might provoke excitement, you need to consider a number of factors before you find yourself signing on the dotted line. I recently came across an article in entrepreneur.com that posted five questions to keep in mind while contemplating an acquisition.

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1. Is there a solid foundation?

Many companies get caught up in the idea of a merger or acquisition because of the promise it entails, but then they end up failing within a few years due to moving too quickly or a lack of infrastructure. If a deal ends up under-performing, or the industry falls out of favor, the business might not be able to have the resources and staying power to stay afloat. To gauge the readiness of your company for a transaction, look inward and perform internal stress tests. !One major challenge facing the current financial services industry is the aging workforce. According to a Financial Advisor magazine, around 43 percent of financial advisors are over the age of 55, and there isn’t yet a steady crop of younger advisors who can adequately replace the more experienced, soon-to-retire advisors. This experience gap could lead to hastily-executed mergers, meaning that financial advisory firms could lose clients due to their up-and-coming advisors being unable to maintain the same level of service and advice.

2. Is it a good fit for your company?

Chemistry with the executive team and staff is a crucial step to the completion of a successful deal. Taking a “holistic” approach when it comes to studying the company will have both short-term and long-term benefits, and such an approach generally requires extensive communication and face-to-face meetings with both the seller and key personnel. These conversations can help a buyer more effectively understand the prospective company’s culture, confirm a philosophical alignment and ultimately make for a smoother transition. Often-times, acquirers focus too much on the mathematics of an acquisition and not enough on the people and culture.

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3. Are there key employees responsible for major contributions to the company’s

success after acquisition?

Employee turnover causes the loss of approximately $11 billion every year, and 75 percent of people who quit their jobs cite their bosses as a reason. Therefore, gaining the trust of existing staff goes a long way toward helping you reduce the risk of losing key people. This is why you need to be both clear and intentional about your commitment to key employees, and recognize their contributions. This should ideally take place early on in the process and well before the transaction is completed. Transparency is essential, and you should be willing to work work with these key personnel on various issues, since they’ll be invaluable during both the transition phase and the upcoming future growth phase. !

4. What level of due diligence should you perform?

To verify its stand-alone value and reveal any red flags that could become problematic in the future, review your company’s portfolio and performance history. When evaluating the numbers, make sure you figure out what it will take to achieve economies of scale, and then identify where the elimination of redundancies will add to your bottom line. Some common items to investigate include current assets and liabilities, employment contracts, vendor contracts, bonus benefit and equity arrangements, equipment leases and credit reports. Some additional items for consideration should include compliance records and demographics surrounding the business that could affect the acquisition’s viability. !

5. Will the acquisition better position your business for the future?

Creating inorganic growth and helping secure a competitive advantage are the key objectives of any acquisition. Benefits associated with scale and efficiency could also help to increase margin. Some of these include whether or not the transaction will create access to new markets, if this acquisition offers access to new technology or new lines of business, and whether or not your company will gain intellectual capital to advance their enterprise.

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