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Acquisition Pitfalls

Watching all the recent supplier and bank mergers, you may decide to grow your business through acquisitions. Before your leap into your next deal, however, check out these pitfalls that could make your next acquisition a nightmare! You may think price is your biggest concern, but it’s control and people issues that will make or break your next big deal.

Management control – First, who will run the company? Petroleum businesses are typically characterized by strong-willed, strong ego, entrepreneurial types. If you don’t work out who has control of what up front, you may end up in a daily dog fight.

Next, who really runs a company can be totally different from who says they run the company. Don’t ever assume an owner has total control! A strong sales manager or CFO can wield tremendous power and authority. As a potential new owner, this power can begin to unknowingly fly in your face and undermine your authority.

To avoid the hidden control pitfall, do a little sleuthing through mutual contacts such as competitors, suppliers, or other vendors to discover the power players within the prospective company. Then, make an assessment about their personality and management style compatibility with you and your company. If there is not a fit, determine what would happen to employee morale and the customer base if you decide to terminate that individual. Will you start a mass exodus? Consider the implications before you acquire or merge.

Conflicting cultures – The second biggest deal killer today is conflicting cultures — including but not limited to attitudes about employees, customers, assets, growth, and risk. Determine how compatible the new company’s culture is with your own company’s present culture. What beliefs and ideals do the new company’s people have that could create major negative consequences to your operations?

Look carefully into compensation rates, methods, and raise procedures.   Are there any inequities between your company and the prospective company? Do a side-by-side analysis of your company’s positions, pay scales, and promotional criteria compared with that of the new company. Compensation is near and dear to employee’s hearts and can make or break a merger or acquisition.

It’s more than pay inequities you are looking for here, however. It’s also how people think and feel about their work — how they make normal daily decisions. How much fun does each company have at work? Are they accustomed to dictatorial or participatory decision-making? Are your people and philosophies compatible?

Pricing – Paying too high a price for an acquisition or merger can strain a previously successful company. If you over-pay for the business up front, and must borrow cash to fund your deal, you can find yourself in serious cash flow pain if the acquisition does not perform as planned.

Cash flow multiples are the most commonly used pricing benchmarks in this industry. However, cash flow can dry up quickly with control and people problems in a new acquisition, making it nearly impossible to meet debt payments.

Before you begin to worry about a correct price (that’s where Meridian helps), deal with the control, people and culture issues first. Get those pieces right, and the price right, and you’ll be well on your way to a successful acquisition.

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