Why M&A is always Plan B
Understand why M&A is risky for your buyer, and how deals can fall apart.
Most companies, including the biggest and most successful, will never make an acquisition. Many will go a decade or more without buying another company.
That's because M&A is very risky.
Why buyers regret acquisitions
There are many reasons why deals go wrong for the buyer.
Over-paying, over-ambitious growth forecasts, mistakes in integration, hidden tech debt, unforeseen regulation, issues missed in due diligence... ask a CFO of a regular acquirer and they will have seen them all.
Even if it goes well, M&A requires upfront investment, distracts execs for an extended period, and the integration of the target company can take years.
What a buyer is thinking
Here’s the thought process that takes place at the Board level within the potential buyer of your company…
They are setting their strategy for the next few years, and have a clear goal to achieve. That might be to grow its core business by more than 20% per year, or to launch a new product or in a new market next year.
The first question they’re asking themselves is:
How can we achieve this goal with our current team, resources and IP?
If the answer to that is clear, then Plan A is an organic strategy. This is the default.
This comes without the risks of an acquisition – plus some major benefits. The work is done by your people, who you trust and who know your business. You don’t have to pay a significant amount up front. You don’t have to worry about integrating new product and sales teams, or dealing with the founders post-exit.
Plan B
But if the answer to that question is unclear, then an acquisition might come into play.
It's usually because they are lacking one or both of:
- Time. They need to achieve their goals quickly, and buying a company which already has a great product, customers and team will get them there fast.
- Skills. They lack the skills, technology or other IP to do themselves, or it will take them more resources (and longer) to figure that out than to buy a company which excels here.
The question then becomes:
Who can we buy to help us achieve this goal?
And that's where your business comes into play.
Why this matters
M&A deals are fragile. They very often fall apart.
The biggest threat to a deal is not them suddenly buying someone else, or finding something crazy in due diligence.
It's them giving up and going back to Plan A because it's simpler and less risky.
Just recognising that will help you move faster through the deal and only fight on the key negotiation points. It's only done once the cheque's in your hand.
Six Strategies for M&A
In a separate post, we've broken down six strategies that underpin why companies do M&A, so you can understand who might buy you. That includes taking out a competitor, opening up a new market and integrating their value chain.
Check it out here.