Make your acquisitions matter

Don’t let a poor evaluation of benefits make your next acquisition a flavourless fizzer. By TOM McKASKILL.

By Tom McKaskill

Some acquisitions are not worth doing and others should have been done. It is amazing how poorly potential buyers identify and analyse potential benefits that accrue from an acquisition.

More often than not, the focus when buying a business is on the obvious without consideration for secondary benefits, or the buyer fails to see that the obvious benefits are undermined by serious failings in other parts of the business.

Too often the analysis is undertaken at a surface level, thus missing underlying problems or obscure opportunities. It is no wonder that so many acquisitions fail to deliver a positive return on the investment or fail to achieve the anticipated acquisition objectives.

Probably the most serious shortcoming of most acquisition evaluations is to look at historical performance without considering what the business might be capable of under new management, especially with the loss of the former owner. By focusing on the historical performance, the intended buyer misses two major insights – what the business would do without the former owner, and secondly what the business might be capable of if the buyer concentrated on its potential rather than its history.

Few acquired businesses can duplicate what they did in the past. They either grow with renewed management, more resources and the application of new knowledge, or they falter where the new owners don’t have the knowledge, resources or experience to take the business forward.

In evaluating the future of a business, it is what will happen to it in the future that is important, not what it has done in the past. While the past might give some indication, many things will change during the transition from one owner to the next, thus basic assumptions about the nature and capability of the business need to be challenged.

What is needed is a systematic process for analysing the current and future performance of the business. This must be done at both a financial level and an operational level. We should be interested in both how the firm got to where it is, but also whether it has the underlying capability and capacity to continue in its present form.

This means re-evaluating the product/market interface as well as its ability to prosper in any anticipated changes. At the same time, it makes little sense undertaking an acquisition unless the new owner can extract more from it than the previous owners.

In any conventional valuation process, the buyer will be paying for what has been achieved. Given the risks in any acquisition, the new owner should be looking to where their contribution to the firm can provide a vehicle to gain a contribution well beyond that imbedded in the purchase price.

The analysis of the future profitability of the acquired firm should be undertaken within a framework of new owners and new opportunities. If all that can be done is to continue as before, then, given the risks of change, disruption and employee loss that is almost always associated with acquisitions, one must ask; why do it?

Basically, successful acquisitions are all about generating a premium on the investment. The major evaluation consideration should be on how a new owner can do more with the business than the previous owner.

Only by undertaking a thorough evaluation and looking for opportunities to exploit the acquired resources will the buyer avoid a loss and only undertake those acquisitions that have significant upside.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.