Embarking upon an M&A deal is stressful, complicated and fraught with danger; but, those who plan appropriately can reap the rewards.
The UK M&A market has experienced periods of turbulence over the last few years. In 2022, the total deal value reached £97.44 billion, down from the £153 billion posted in 2021. Opportunities however, remain, and if a deal makes sense, it’s worth pursuing.
All M&A deals must be pursued with the pitfalls in mind. This guide discusses the most common mistakes businesses make in mergers and acquisitions.
Why do mergers and acquisitions fail?
Did you know that up to 90% of all M&A deals fail? It’s a regularly touted statistic and illustrates how much people underestimate the work of pulling off one of these transactions.
Why do so many fail? That’s a question researchers have been trying to answer for years, but here are the leading reasons:
- Lack of Resources – Companies need tremendous resources to maintain their day-to-day operations and carry out each step in the M&A process. So, it should come as no surprise that just 10% of M&As featuring large companies fail.
- Lack of Expertise – The chances are you don’t know the fiscal, operational, and legal ins and outs of M&A deals, and that’s okay. You must have a specialist like Hilton Smythe by your side to support and advise you along the way.
- Misvaluation – Putting a pound value on a business is challenging, which is why many companies overestimate or underestimate the value of the business they’re trying to purchase.
- Limited Owner Input – While delegating may be tempting, the owner is vital to an M&A deal as the big-picture expert. Every successful M&A has a firm long-term strategy and an owner-led roadmap for how to get there.
- Poor Integration Planning – Closing the deal is not the definition of success. How you maximise the value of that deal is. Poor integration planning can result in M&As costing money instead of generating it.
Of course, not every failed M&A is necessarily your fault. For example, economic crashes, such as in 2008, can lead to companies abandoning expansion and switching to a consolidation doctrine.
8 common mistakes in mergers and acquisitions
Everything is a learning process, including M&As, but by learning from the mistakes others have made in the past, you can streamline your own learning process and close that deal.
So, whether you’re looking to grow your market share or acquire a coveted piece of intellectual property, here are the most common mistakes that could derail your M&A deal.
1. Having no plan
All M&A transactions have a goal in mind, but to achieve that goal, there must be a comprehensive strategy to enable you to get there. Buying a company isn’t like buying a car. You must ask questions like:
- What is the reason for this deal?
- How will I finance this deal?
- Who will be responsible for making this deal happen?
In other words, know what your goal is but also know how you’re going to get there. If you don’t know what success looks like, you’re not ready for an M&A deal.
2. Paying too much
It’s your job to determine the value of the thing you want to buy. Unfortunately, if you close the deal and pay too much, caveat emptor or let the buyer beware.
Valuation errors aren’t uncommon because there are so many potential models and processes you can pursue when deciding on a company’s true value.
It underlines the importance of getting an independent valuation for a company – or even multiple. For this reason, hiring a third-party M&A specialist is critical to getting an objective number.
3. Excessive financing
Most managing directors don’t have the cash reserves to throw a bag of money at a seller. Instead, most M&A deals will be financed in part or in full by some form of financing.
Although this is a valid M&A strategy, you must pursue it with care. For example, the Bank of England’s current interest rate is 5.25% in September 2023. Look back 18 months ago, and that rate was nearly zero.
Even if interest rates are in your favour, never borrow more than you can afford. Calculate based on higher-than-current interest rates so that you’re ready for anything.
4. Overestimating value
Pound figures aren’t the only thing entrepreneurs have a bad habit of misvaluing. Many companies see their M&A deals fail because they overestimate the potential of the company they want to acquire.
Whether poor planning, ego, or emotion drove that growth model, cloudy judgments leave you out of pocket.
Again, this is why hiring a specialist who can provide objective advice is vital to making this type of transaction successful.
5. Rushing due diligence
Due diligence will always be the longest part of the M&A process because it’s also the most complex. With so many moving parts to consider, it’s easy to find yourself in a scenario where you find yourself rushing.
Rushing means potentially missing important factors that could change the profile of the deal.
As someone unfamiliar with the intricacies of due diligence, it cannot be understated how vital an M&A team is to guide you through due diligence.
6. Not evaluating the balance sheet
Profit and loss sheets and tax filings are important, but they’re not the be-all and end-all of a company’s financials.
Instead, look to the balance sheet and use this as your guiding light. It’s the document that tells you about operating expenses, which can tell you how much capital you’ll need to run it.
After all, a company may have incredible revenue numbers, but if you’ve glossed over the expenses, you could miss out on the true picture of the company you want to acquire.
7. Poor integration
Integration is where the real work begins. Closing a deal is one thing, but ensuring that your projections come to fruition is quite another.
Formulating an integration plan requires a separate team, each with assigned responsibilities. These areas should cover:
- Employees
- Operations
- Culture
- Communication
Too often, M&A deals don’t turn out as intended because the integration part of the process is considered an afterthought.
8. Going it alone
The reality is the average managing director isn’t equipped to negotiate the legal and regulatory hurdles of UK M&A law. Likewise, they don’t have the skill or expertise to value another business and develop an integration plan geared for success.
Surrounding yourself with specialists is critical during the delicate phases of an M&A. Some of the people you should have on your team include:
- Solicitors
- Valuation agents
- Accountants
- HR professionals
These professionals, including the various departmental heads, are in addition to your internal team, not instead of them.
Turning to third-party professionals doesn’t just provide you with the know-how to complete an M&A deal but also provides objective, unbiased advice you can act upon.
At Hilton Smythe, we understand the complexities of mergers and acquisitions. Our team comprises professionals with decades of experience, making us the ideal support platform for your next deal. To find out more about what we can do for you, speak to the team now.
