7 tips to avoid post-acquisition surprises

Some things you can ask for in advance. Others you have little or no influence on. As a new owner, you need to be able to deal with unexpected matters and emotions. This is also part of the takeover process.

More work than expected

When taking over a business, the acquisition process can be very clear-cut. The former owner’s figures are comprehensive and provide thorough insight. You get to know all the ins and outs of the company. Although they were critical at first, the bank is now confident. You have good rapport with the former owner, and they will even be guiding and coaching you for a while. What could possible go wrong?

In the real world things are never that perfect.  André Everts, acquisition specialist at Heerenveen-based company Overname in Bedrijf, can confirm: “The buyers who we assist during a business acquisition often tell us that ‘more work goes into running a business than they had expected.”

All that ‘extra work’ is usually spent on matters that were hard to predict in advance, or might even have come as a complete surprise. Take unexpected sudden emotional flare-ups after the acquisition, for example, either from the former owner, and staff members. Or from your family, because you are never at home anymore.

Also consider outside influences. The seller cannot see a pandemic or war coming, but he may know that the municipality is playing with plans for a residential area in your business area. This will affect the accessibility of the business to be taken over. Ask the seller about planned future developments during the acquisition process, as you will not find them in the company’s financial records. Whatever unexpected surprises come your way: you will have to navigate them all.

Everts concludes: “Often, the process of acquiring a business goes a little different than planned. It tends to be more difficult than anticipated, but problems can usually be solved. We always look if the buyer is a good fit for the company and vice versa. On top of that, the terms and conditions of sale have to be appropriate and beneficial to all involved.”

7 surprises

So, what kinds of surprises can you expect after an acquisition? What did you miss during due diligence? And how can you prevent cats from coming out of the bag after the acquisition?

1. Staff

The company you are looking to acquire has staff. You know how many employees there are, what they earn, what they do, and how long they have been with the company. But does that mean that you know everything there is to know about them? No.

Every company has a corporate culture. How do employees interact and what are the ingrained patterns they have? How will they react to the new owner?

Some staff members might be disgruntled because the former owner had promised them a pay raise but failed to bring it up during the acquisition process> This leaves you with a new hurdle to overcome.

A staff member who wanted to take over the company but could not secure the necessary funding may be very unmotivated. Perhaps the company accountant used to be great mates with the former owner and refuses to do things your way.

Try to get all the information you can about the staff before acquiring a business and remember that your arrival can cause quite a stir. Consider multiple scenarios and draw up plans for dealing with them in advance.

2. Customers

Marketing means understanding the market and knowing how to respond to needs, wishes, and changes. It is more than just collecting industry averages and charting average spend. To get your marketing efforts right, you have to know what is really going on in the company. Take a close look at the company’s customer base before committing to the acquisition. Is the company largely dependent on running long-term contracts? Does it get most of its turnover from incidental sales? Are a small number of regular customers responsible for a relatively large share of overall turnover? What is customer satisfaction like? This knowledge will help you turn your brand-new acquisition around or give it a boost.

In some cases, former customers may come forward with complaints. Complaints that you now have to solve. Fortunately, this can also open up new opportunities. If you figure out why things went wrong in the past and manage to find a solution, you might be able to regain the trust of former customers. Analysing your customer base and the company’s history can translate into a significant turnover boost.

3. Off-balance sheet surprises

The seller's balance sheet shows all the company’s assets and liabilities. Still, certain future liabilities or changes might be missing. For example:

• Is there an old oil tank buried somewhere in the premises that has to be removed?
• Is there asbestos in the building?
• Are you planning to use part of the building for other activities (childcare, for instance) and is the fire department demanding that you install an expensive sprinkler system?
• Is the municipal environmental plan set to change, affecting your accessibility?
• Have locals complained about your business?

If you find out about any of these issues during the acquisition process, you still have time to make adjustments, such as including warranties in the contract, changing the price, or abandoning the acquisition altogether.

The seller has a duty of disclosure, but the buyer also has a duty to ask.

Do any surprises rear their ugly head after you have finalised the acquisition? This can be a source of negative energy. Especially if you have to arrive at a solution through legal proceedings and claims.

4. Differing profit margins

The difference between the sale and purchase price helps determine your profit. You may be forced to rely on the same vendors as the former owner. But what happens to the great discount they managed to negotiate over the years? Will you get the same discount? Or will the vendors use the acquisition to drive up their prices? If you have to pay more for your products, your profits will likely suffer, as will your forecasts.

So, it is important to anticipate this. For instance, you can agree with the former owner to introduce you to suppliers at an early stage. Or you make your own agreements with suppliers. For example, a higher purchase price but a longer payment period of 60 days. You then pay your supplier only when the product is sold by you within this period. This gives you financial leeway. Again; negotiating during the business takeover is better than after the takeover.

You can find key figures for many industries, including gross profit margins. You can get these figures from industry associations or banks. If the company you are looking to buy differs from the industry average,  ask the seller to explain. You might find that part of their stock is outdated and difficult to sell or discover that they sell many products at a discount. Armed with this new knowledge, you can provide clear arguments for lowering the value of the inventory and negotiate a lower acquisition price.

5. Communicating with the seller after the acquisition

Everts shares an oft-heard comment from buyers: “We had agreed that the seller would continue on for a while, but things did not work out and I decided to go at it alone.” Acquiring a company is a business transaction. Buyers and sellers often agree to keep working together for a short period of time after the acquisition, so that the seller can introduce the buyer to the company, customers, and vendors and share valuable knowledge. However, it is not uncommon for such arrangements to chafe after a while. Force of habit may see customers approach the former owner instead of you, the new owner. 

You make the decisions now, that takes some getting used to for the seller. How will they deal with it, can they really let go? During the takeover process, have an open discussion about your future relationship. In an acquisition contract you lay down what the future working arrangements are and when you want to stop them.

6. A breath of fresh air

Fuelled by your enthusiasm, your way of doing business, and leadership style, the business might take off. A nice surprise that you might not have expected beforehand! Often, acquiring a company turns out to be a more successful course of action than starting one yourself.

Perhaps you are more innovative than the previous owner, find new channels to sell your products, or use social media more effectively. You clean up the business, take a close look at outdated processes, or introduce a smarter accounting system. In some cases, the bank will pick up on your energy and enthusiasm and be more willing to help out. Learn more about growing your business and how an independent mentor can help.

7. Hiring an acquisition consultant

Acquiring a business is a remarkable process. It can be very emotional: you want it badly and you see a new future and challenges. At the same time, you have to be objective and analytical. After all, the acquisition has to be feasible and profitable. Guidance from an acquisition specialist is recommended. They will help you streamline the complicated acquisition process and support you in dealing with potential twists and turns. A good acquisition contract with guarantees, resolutive conditions, and clauses are indispensable, especially if the company does not perform quite as well as you thought it would and have to pay off part of the acquisition with future profits.

A study by acquisition platform Brookz  (in Dutch, May 2020) shows that entrepreneurs are not always satisfied with their acquisition advisor. This is rarely due to a lack of expertise and usually comes down to a lack of rapport between the buyer and consultant. Brookz recommends talking to several acquisition specialists before making your choice.