Bargain! But will it float?
Wednesday, June 4, 2008/
When buying a business, it can be a good idea to have a bale-out plan – just in case. By TOM McKASKILL
By Tom McKaskill
When buying a business, it can be a good idea to have a bale-out plan – just in case.
If you are going to spend time in the acquisition game you are probably an optimist.
If you dwell too much on what can go wrong, you will most likely talk yourself out of this activity. That being said, a little bit of risk mitigation can go a long way to protecting you against things that can and do go wrong.
My first acquisition was of a 54-employee software firm in San Diego. They were our major software supplier and we decided we needed to take control over their R&D activity to ensure we had the underlying technology to allow us to produce the layered application software products we developed.
The business was owned by two aging founders who decided that this was as good an opportunity as they would see to take the money and run. We negotiated a price of $2 million but were only able to raise venture capital for $1.5 million. We had to meet the balance out of profits. The purchase agreement was signed after a national auditing firm signed off on the accounts.
It would have been an ideal acquisition if only the auditors hadn’t discovered some irregularities in the accounts several months later. Our investment looked more like $1 million after the adjustments.
Within a few months we ended up in litigation in the US Federal Court against the previous owners and the auditors. This activity polarised the staff, distracted us from operating the business, sucked up lots of time and cash and almost sent the San Diego business into bankruptcy. The action lasted five years and we eventually lost on a technicality (just to make matters worse).
We had simply left ourselves with too little room for mistakes. We had stretched ourselves to the limit on our lines of credit.
Our expectation was that one of the senior managers would take over and allow us to get back to Britain to run the operation there. Due to the internal turmoil and the work on the litigation, I ended up moving to the US for two years. While we had done the right thing in getting a professional due diligence undertaken, the lesson is that they don’t always find everything.
Not all acquisitions have this outcome. I undertook another acquisition several years after that had not a single hiccup in the process. However, you simply can’t depend on such luck. You do need to have a worst case game plan.
We make lots of assumptions about a target business during the evaluation. Try relaxing some of those assumptions and test how you would handle a change in circumstances.
What if you lost some key employees, important customers or critical suppliers? How would you fund the acquisition if the newly acquired business got into trouble and was not generating excess cash? Which of your current management team would you be able to spare to step in to manage the operation if there was a crisis?
When you take on an acquisition, you need to have spare capacity to deal with unforeseen problems. It is worth spending some time before you make the commitment to ensure you can deal with things that could go wrong.
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.
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