A potential acquisition is an exciting possibility—and an end-goal—for many startups. The financial rewards are obviously appealing as can be the potential to take your company to the next level in terms of development and reach.
Unfortunately, many acquisitions get derailed at some point in the process. Knowing the potential barriers to acquisition can help you to prepare and smoothly jump over hurdles and through hoops on your way to a successful acquisition.
In my experience, I’ve seen that the following issues are the most common offenders in causing an acquisition to go south:
1. Disagreement over valuation. When there are differing perspectives as to how a company ought to be valued, this can make it very difficult to reach a pricing agreement. Marketplace understanding is a key valuation issue: when there are different visions related to the existing marketplace—and where it is heading—this can significantly impact perceived company value. Likewise when you’re dealing with investors who have unrealistic (i.e. inflated) expectations for what the return on their investment should be, this can be a real deal-breaker.
While some companies might try to set the purchase price with earn-out payments, these often don’t work out well due to lack of incentive and other potential performance issues. Rather than agreeing to a hold-back of a portion of the purchase price, it’s better to do the work up-front to agree on valuation and negotiate a price that all parties can agree on.
2. Incomplete or non-standard documentation. If you don’t have all of your records and documents in order, and in a format that is easily shareable, this can cause acquisition delays. While there is some confidential information that you wouldn’t want to share prior to the deal going through, you do want to make sure that you have proper documentation ready for when it’s needed.
Proper acquisition preparation can help. All of your accounting records should be in order, prepared in accordance with generally accepted accounting principles (GAAP). Similarly, your corporate governance, legal records, HR, and employee documentation should also be in order, and easily shareable.
Contact Early Growth Financial Services for help preparing your financial statements in accordance with GAAP.
3. Personnel issues. When key team members don’t want to work for the acquiring company, this can throw a big wrench into the works. One way to mitigate this is to make sure to have a merged vision statement and a company culture match. Once your company is acquired, how will it integrate with the acquiring company? How will the teams blend? Why is acquisition the best course of action for your company and your team? Opening the lines of communication early can help key team members have a positive outlook on the acquisition and make them more open to the merge.
Of course, in some cases, no matter how much and how positively you communicate the change, there will still be some team members who won’t want to get on board. You have to accept this possibility and talk through plans for removing these team members from the acquisition equation and covering their roles.
4. Technology differences. Sometimes there is a disconnect between your company’s technology and that of the acquiring company. This can make integration difficult and can lead to acquisition delays. Proper due diligence should hopefully uncover this sort of potential technology integration issue—but it doesn’t always.
Something to consider is that the less your product/service can be “messed with,” the better your chance of smooth integration. So if your product is already technically sound, there may be no need for the acquiring company to reconfigure it to fit with their technology. In other words, if it ain’t broke, don’t fix it. If the technology does need to be reconfigured, it can be helpful to make sure both companies share the same vision and communicate their expectations for integration.
5. Lack of established processes. Clear implementation plans are necessary for project managing an integration. Also, when unexpected issues arise, you need to have a system in place to address and resolve them. Early on, it’s essential to create a system for decision-making so that both your company and the acquiring company know who will decide what under which circumstances.
6. Weak leadership. Perhaps one of the largest stumbling blocks on the road to acquisition is a leader who is not committed to this change. If your company is in acquisition talks, your role as company leader is more important than ever. It’s up to you to guide your team, to keep communicating the vision, and to demonstrate courage and enthusiasm throughout this transition. As a leader, you’re used to making hard decisions so you should be well prepared for this mission.
The goal of acquisition should be more than just a lucrative cash-out. A successful acquisition should ensure that employees are excited and that existing customers remain satisfied customers. If you understand the barriers to executing a successful acquisition—and are ready to face these barriers openly and honestly with your team and with the acquiring company—you may be one of the few who do close the deal.
Running into acquisition roadblocks? Tell us about it in comments below or contact Early Growth Financial Services for M&A prep and support.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.