With the UK remaining in an ongoing state of economic turmoil, small businesses may find it hard to deliver on their growth potential through organic means. With budgets likely to be tight, acquisitions may not be the most obvious choice for small and medium-sized firms seeking to grow, but, providing companies have a coherent acquisitive growth strategy and can access the requisite financing, M&A can be one of the most reliable means of attaining growth.
With that being said, however, economic uncertainty means that any buyer will have to be doubly cautious about avoiding acquisitions that might not succeed and this is particularly true for smaller (perhaps first-time) buyers, who would be hit far harder financially by a failed deal.
Avoiding bad acquisitions is one thing, but smaller buyers should also be keen to optimise their time and resources when conducting deals, to ensure that they don’t get dragged into long, time-consuming due diligence processes for deals they ultimately don’t go ahead with.
While it would take a far longer piece to examine all the potential warning signs of a bad acquisition that might pop up during a due diligence process, here are four clear signs that are likely to become apparent early on that could signal that a deal may not be worth pursuing.
Gaps in a company’s accounts are an immediate red flag that will come up very quickly in any due diligence process. Incomplete accounts can indicate several problems, such as poor record-keeping or mistakes in their filing practices, or even that there may be something amiss that they’re seeking to conceal.
While it is understandable that mistakes can be made even at well-run businesses, if there are problems with a company’s accounts then potential buyers should exercise the maximum amount of caution. Getting to the bottom of what the issue is will be absolutely vital before proceeding any further and buyers should be prepared to seek external guidance from a professional advisor.
Poor communication and difficulty getting information
During early M&A negotiations, it is understandable that both parties will play their cards relatively close to their chests and not become totally open until negotiations are at an advanced stage. That being said, there is still expected to be a degree of openness between two parties from the beginning and a lack of transparency can be an early warning sign.
If the company’s owners or directors are unwilling to reveal information or evasive in their communications, then this could indicate something being amiss. Buyers should be clear about what information they require at each stage of due diligence and prepared to ask questions and potentially walk away if they feel that this is being wilfully kept from them.
During a business sale, company owners will naturally be keen to paint as positive a picture of the business as possible to make it more attractive to buyers and help to strengthen its value. But this may not always be the actual state of things and the real indicator of the mood of the company will be among its staff.
Employee feedback is becoming an increasingly important part of due diligence and buyers should be keen to hear how staff at a business they are considering acquiring feel about the company. If morale is low, then buyers will need to investigate and factor this into their decision making.
In the case of a distressed acquisition, or if a company is up for sale because it is struggling in some other way, then it may simply be natural that the mood among workers will be tense and negative. If the acquisition succeeds and the company is turned around, then this problem could be solved in the process.
However, staff discontent could also indicate something deeper, such as a poor working culture where employees feel stressed, overworked or undervalued in some way. These problems are by no means insurmountable post-acquisition, but they could mean that a buyer needs to put in significantly more work in order to turn the acquisition around, something that might not be ideal for a buyer with limited resources and looking to reap the rewards of a deal quickly.
A bad reputation
There are also warning signs that may only be visible externally. If a company has a poor reputation (whether among customers, clients, suppliers and other partners), then this is something that, again, will take considerable amounts of time to set right post-acquisition.
As important as it is to find out about the internal operations of the company, getting a comprehensive view of how it deals externally and its broader reputation will also be vital to gauging the scale of the task. This is something that the existence of internet reviews can make more straightforward, but potential buyers should also seek to consult customers, clients and other partners before proceeding with an acquisition.