Too many times, buyers go out looking for acquisitions for the wrong reasons. While the financials may look good on the surface, the acquirer may soon find out that operationally, the company is a disaster. A purchase that was intended to be accretive to earnings—the star horse in the stable—turns into a pig in the mud, thwarting the growth and profitability goals of the buyer.
Where buyers truly miss out, however, is by not purchasing a company based on the financials alone. While the financials may not meet the criteria the acquirer was initially looking for, the company may still hold hidden gems, providing the buyer with the opportunity to purchase the company at a depressed multiple. To find these gems, the buyer needs to conduct a deep dive into both financials and operations.
From a financial perspective, the buyer should thoroughly evaluate historical key performance indicator trends. Uncovering the underlying catalysts for negative trends will allow the acquirer to decide if the issue is ongoing, requires a simple fix, or has already been corrected operationally but has not yet shown up financially. These negative trends may have been caused by key employee issues, the health of the owner, expanding too quickly without being scalable, a few years of poor claims experience, a lack of systems in place, poor medical plans, or simply losing focus on the business. Evaluating the cause of, and performance prior to, the downturn will provide the buyer with a better understanding of the company’s potential moving forward.
FINDING THE HIDDEN GEMS
Lack of Operations Assessments
One of the biggest pitfalls in the due diligence process is not conducting a thorough operational assessment of the target company, including a talent assessment. Having the right people in the right positions is the key to a business’ success, and performing a thorough assessment process using tools such as the Predictive Index will help the buyer evaluate how key management personnel will fit into the organization. Understanding what motivates and drives employees ensures that the buyer can provide them with the incentives needed to thrive, leading to higher retention and productivity. Many times, talent that may have had a major positive impact on the growth of a company is overlooked and a great opportunity is missed.
In some cases, high client attrition may not be negative, as it can reflect that a company is no longer working with underperforming clients. By digging deeper, a potential buyer may find that many clients have been with the company for years because the company has consistently solved growth challenges that their clients were experiencing, which provided true value and increased client relationships and retention.
Sales and Service Model
Many small companies over-service their clients, customizing product and service offerings that, in turn, narrow their margins and make it impossible to scale the business. By simplifying the sales and service model and providing the sales teams with autonomy and the authority to make decisions, many companies have made it increasingly easy to sell and service accounts. While this can’t be determined by the numbers, it can be determined by speaking with the salespeople, service team, and clients. By using this model, a buyer would be able to scale the new business quickly and effectively. The sooner the new buyer can assimilate the acquired company into its own, the easier it will be to meet growth goals.
KEY ESSENTIALS FOR A SUCCESSFUL ACQUISITION
Additional positive indicators to look for during the due diligence process include enhanced processes and systems, more advanced technology, heightened security protocols, a stronger business model, and a tight culture fit. Better benefit plans, workers’ compensation policies, and compliance programs can also dramatically impact the growth and profitability of the buyer’s company, despite underperforming financials.
While the acquisition process can be daunting, the buyer should keep in mind these key essentials for success:
Defining the right criteria for acquisition targets. The acquired company should be able to easily add scale and profitability to the buyer’s company to achieve the desired ROI. The buyer should also take into consideration the value of the combined businesses once integrated, as well as the impact that the acquisition will ultimately have on its own PEO.
Conducting financial due diligence is not enough to make a buying decision; an operational assessment of the entire organization and its key staff contributors will also need to be completed.
Adhering to pre-determined target acquisition criteria—don’t try to put a round peg into a square hole.
Walking away if the target doesn’t meet the pre-determined criteria or target price.
Making sure that the integration plan is completed during due diligence, as the integration timeline and price will need to be considered in the purchase price. This can greatly impact growth, profitability, and return-on-investment (ROI) goals.
Ultimately, acquiring a company should be a mutually beneficial experience for the buyer and seller. By conducting proper due diligence and evaluating the target company beyond a cursory financial review, the acquirer may be able to leverage these “hidden gems,” adding substantial value to the company.
JOE RAYMOND Managing Partner
RVR Consulting Group
Winter Park, Florida