How small business M&A goes wrong

Mergers and acquisitions do not have to involve investment bankers.

by Adam Gale
Last Updated: 09 Mar 2017

Mergers and acquisitions get a raw deal sometimes. All too often, they’re seen as code for a lack of imagination, for businesses that can’t think how to grow otherwise. The ideal, after all, is organic growth. It means you’re doing something fundamentally right - your customers love you so much that they spend more money with you and bring all their friends.

Life is rarely that simple, however. Let’s say you’ve reached the limits of organic growth in your area. It happens. Expanding into a new sector or new city is highly risky – it’s essentially building a new business, finding new customers, establishing a reputation where you’re not necessarily well known. A merger or acquisition is surely a smart way to bridge that gap, in the process creating a more secure, diversified company.

It’s not an easy option though. The prospect can be daunting for businesses of all sizes. Smaller firms might look with some trepidation at their larger counterparts, paying eye-watering fees to the likes of Goldman Sachs and JP Morgan, often to see the whole thing fall apart a few years later (AOL Time Warner, anyone?).

So what are the biggest dangers for a small business owner looking at M&A as a way to expand, and how can they avoid them?

You don’t do due diligence

Just to be clear, you don’t have to pay $300m in advisory fees to the Vampire Squid just to acquire the garage down t’road. But that doesn’t mean you can skimp on your due diligence. There’s a balance to be had, but you do have to make sure the firm you want to acquire or merge with is a good fit, that it is what is seems and that you’re paying the right amount for it.

Adam Sternberg is CEO and co-founder of Sternberg Clarke, which provides entertainment for corporate events, weddings and parties. It acquired Torquay-based Trevor George in 2015, after hearing it was for sale through its accountants.

The reason he says for the acquisition was that the highly-regarded Trevor George had a presence in very different parts of the country. ‘There was pretty much no geographical overlap at all. To the extent that we hadn’t even heard of them before.’

Sternberg did his due diligence, of course, but credits his early insistence on talking directly to the selling owner with keeping it simple. ‘It was not done through lawyers. We managed to develop a very good personal rapport, which meant if there were any difficult issues we could sort it out personally.’

You get distracted

An often underestimated problem with undergoing a merger or acquisition is that it is extremely time-consuming. Small businesses generally lack the spare capacity of time required for M&A, without it infringing on their day to day operations.

It took Sternberg Clarke nine months from opening talks to closing the deal, but Sternberg says that the risk of distraction doesn’t stop then. ‘There’s a different set of issues post acquisition. You have to be careful that you don’t take your eye off the ball.’ Set aside more time than you think for it.

You don’t integrate well

Integration is not easy. On the one hand, there’s the risk of serious culture clash, a la Daimler Chrysler. On the other, there’s the nitty gritty issues of integrating systems.

Making sure you have compatible cultures is perhaps easier with small firms. The more time you spend meeting with the other side, the more of a feel you get for how they operate. Systems can be more of an issue.

‘Undertake a thorough review of the existing information and technology landscape across both operations and how the combined processes support business outcomes,’ says Steve Sharp, founder of Searchlight Consulting.

It isn’t just IT – everything from the way you fill in a form or file invoices could be different, and that could be a source of friction. The good news, of course, is that you have the opportunity to learn from the acquired or merged firm, which may actually have better systems in place. It doesn’t just go one way.

You don’t communicate properly

Tensions run high during mergers and especially acquisitions. Why are they doing this? What does it mean for my role? Are ‘synergies’ just code for redundancies?

Unless you want to leak talent, knowledge and client relationships, it’s essential to communicate regularly, openly and clearly with employees of both companies, ideally face to face.

‘Don’t presume that people will know this or should know that,’ says Sternberg, who was fortunate in that headcount reduction was never part of the plan in his case. ‘Each individual will have their own concerns, so it’s not just speaking to the office in general or sending an email, it’s about taking time to speak to everyone in turn – which in a small company is perfectly easy to do.’

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