Not all acquisitions turn out as well as originally anticipated. It is one of those skills for which people say, “If it were easy, everyone would be doing it.”
The dealmaking world is extremely competitive, and competitors are not going to let you win without a fight. And there are several reasons why some acquisitions do not generate the expected value.
The first is that something was missed in due diligence. Often, if you have missed something, it likely does not change whether you would have made the acquisition. However, it may mean you paid more than you could have. In this instance, you have to decide whether to pursue remedies in the purchase agreement and recoup purchase price from the escrow account.
The sellers of a business generally downplay the risks and amplify the reward. It’s your job as the buyer to determine the real story. While bringing in outside experts is highly advisable, nothing substitutes rolling up your own sleeves and seeing the diligence yourself. You will never have perfect information, but at the time of acquisition, you should have accounted for as many of the risks as you can and adjusted your valuation accordingly.
The second reason deals fail to meet expectation is simply not executing on the plan as well as you could have. Having the right people involved makes a huge difference and, at times, the skills required to execute the plan are not matched well with the people assigned to execute it.
You have to expect that the competition is going to react negatively when you roll out your strategy. But you need to avoid helping the competition by being overconfident, too rushed or too slow to implement the strategy, or by not waiting for the needed information to make the ideal decision. Unfortunately, sometimes not only is the conclusion wrong, but so were the data used to draw the conclusion.
Finally, it may be that the circumstances or assumptions that were the foundation for making the acquisition have changed. Ideally, you anticipated and accounted for some changes — such as regulatory changes, economic recessions or changes in customer tastes — in your due diligence. But other things are difficult to anticipate.
At a minimum, any of the above reasons will extend the life of the investment and drive down rates of return as you work through the challenges. Fortunately, the more you do acquisitions, the better you get at it. Your due diligence skills improve, and your team’s ability to assimilate acquisitions and anticipate challenges gets better.
Very few acquisitions go as expected, and that is not always a negative. Some of the best acquisitions I have done have been when we responded to the change and came out even better. If you expect the unexpected, you are one step ahead and have a higher likelihood of having success making acquisitions.
Jeffrey Kadlic is co-founder and managing partner at Evolution Capital Partners