Over the years, we have acquired several companies in the business technology and IT services field with the purpose of building a lasting and sustainable company for years to come. These acquisitions have helped us to accelerate growth, add additional talent, and offer new services at a rate difficult to achieve organically alone. With M&A deals being an important part of many businesses, we wanted to share some of the common pitfalls and offer our take on how to avoid them.
#1 Cultural Misfit
When the goal of an acquisition is to integrate the existing workforce, we found cultural compatibility to be an essential requirement. If we feel that the new company’s culture is not compatible with ours, we are staying away from the acquisition. It is much harder to follow our vision and maintain our business direction based on our values when bringing in scores of new team members who are not on the same page.
#2 Implementation Quagmire
From onboarding new employees to letting customers know of how to get in touch with the new company, there is a myriad of items to consider when implementing an acquisition. Working with a well thought through checklist helps minimize implementation hiccups and reduce frustration (see addendum).
#3 Paying Too Much in Taxes for the Acquisition
Paying for tangible assets and structuring part of the goodwill as consulting payment can help minimize the tax burden of an acquisition. Very often, the largest portion of the business purchase price is for goodwill. A goodwill payment must be amortized over a 15-year period, therefore taking a long time before it is fully amortized. It’s imperative to consult with your CPA prior to contract term negotiations to understand the tax implications.
#4 Cash Flow Crunch
Informing customers ahead of the acquisition and knowing the accounts payable contacts will have a big impact on avoiding unexpected cash flow delays. If any new customer makes up a large portion of your regular cash flow, we highly recommend speaking with the AR contact directly to confirm that they will continue paying their bills after the acquisition.
#5 Pain in the Fine Print
Customer contracts should be carefully reviewed:
- Renewal/cancellation details (i.e. terms, auto renewals, penalties).
- Assignment limitations. Ensure that there is no limiting language in the agreements precluding the new owner from taking over the ownership of the agreement/contract.
- Any exceptions or special promises made
- Review Scope of Work (SOW) and make sure it is in line with your business objectives and capabilities (i.e. extended hour services or onsite service requirements outside of normal service area)
#6 Old Owner Setting up Shop Again
Adding a well-defined and reasonable non-compete/non-disclosure clause in the business sale agreement can be critical in protecting your business in case the seller decides to set up shop again and starts to compete with you. This is especially important if the new customer base is free to switch to another service provider without restrictions.
#7 Losing Independence and Identity
We made a conscious decision to stay independent from private equity or other outside financing options. It is difficult to maintain full control over operations, decision-making processes, and long-term vision when the funding is provided from an outside source. Without reliance on outside capital, we can maintain our vitality and stability for years to come.
#8 HR Surprises
In our earlier acquisitions, we had new employment agreements executed prior to the start day. Unfortunately, one of the new employees never showed up due to medical reasons and even though he has never worked for us, we were on the hook for his pay and medical benefits. Now, we sign employment agreements once they showed up on their first day. This is just one anecdote of an HR surprise you want to avoid. We have made it a habit to review any HR litigation the previous company might have had and assess the likelihood of ongoing potential issues.
#9 Marrying a Stranger
Acquiring a company is the business equivalent of a marriage and it takes time to build a lasting relationship. We have shied away from “matchmakers” (aka business brokers). Instead, we take the time to learn about a potential acquisition target. Getting to know the owner well and in different settings will reduce the likelihood of being surprised by unmet expectations after the merger.
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About the author: Thomas Fimian is the founder/CEO of Levifi (www.levifi.com), a workplace technology provider headquartered in Charleston, SC offering IT services and office technology such as copiers, printers and VOiP phone systems. Founded in 2002, Levifi has acquired numerous companies in the workplace technology and IT field and its acquisition strategy is an important path to its growth.