Don’t overestimate the benefits

If you concentrated on everything that could go wrong with an acquisition, you probably would avoid that path to growth and stick to developing organically. However, this would exclude you from achieving significant step increase in capability and capacity, as well as possibly resolving some underlying weaknesses in the business through acquisitions.

What you do need to avoid however, is overestimating the benefits which can come from an acquisition.

Forecasting your own revenue and profit for one year in advance is difficult enough, imagine the problems of estimating what the benefits are likely to be from an acquisition. Even with this caveat, far too many acquisitions have come unstuck because buyers have been overly optimistic on the size, duration and timing of the benefits accruing from an acquisition. Not only have they failed to take into account the operational problems of taking over another business but they have failed to properly recognise the delays, costs and disruption which occurs though managing the change process itself. Few such activities ever go according to plan and many go completely off the rails.

Estimating benefits from an acquisition is highly problematic. You have to make so many assumptions just to put one set of numbers together let alone develop a number of possible outcome scenarios. This is then highly colored by the desire to get the deal done and justify the investment.

Too often, executives undertaking the evaluation are undermined by their own desire to get the deal done that they take an overly optimistic view of the outcome from the acquisition. If they anticipate cost saving through overlapping operations or economies of scale, they fail to take into account the costs of making the changes.

New sales opportunities are estimated without also taking into account that existing customers may resent the loss of a competitor or the additional pressure to take up new products or services. Target revenue numbers may be used to justify the investment but the disruption due to the loss of key employees may not have been factored in.

What you really need to do in an acquisition evaluation is to have part of the evaluation team act as devils’ advocates. Their role should be to question the validity of assumptions, put forward possible delays, costs and disruptions and question the intervention and integration strategies. While this may sound negative and unsupportive, what you want out of the evaluation is a highly pragmatic plan with a high probability of success and a good chance of achieving a reasonable return on the acquisition investment.

Even slowing down the enthusiasm to allow for better consideration of possible problems has its merits when so much is at risk. Having an external advisor who has deep experience in M&A activities review the evaluation and the post-acquisition changes will often bring a more objective and experienced assessment of the costs and benefits of going ahead.

In the end, however, you will still need to make the decision to proceed even where some factors cannot be reasonably estimated.

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