Growth through mergers and acquisitions (M&A) can seem appealing if you run a small business. Who wouldn't want to expand their company, increase profits, and beat the competition? But don't let dollar signs blind you! M&A deals come with major hurdles that leave many small business owners crying over spilt milk (or ink, in this case).
To make your next acquisition or merger smooth, here are the top 10 challenges small business owners face in M&A Deals and what you can do about them.
Lack of Financial Resources
Spending much on mergers or acquisitions can drain your company's piggy bank. Small businesses often need more deep pockets and credit to finance these expensive deals.
Solution: Seek creative financing options like seller financing, crowdfunding, partnerships, and small business loans or lines of credit. And most importantly, know your budget limitations and avoid overextending resources.
Valuation Misestimates
Overpaying is a considerable risk, mainly if you rely on inaccurate or incomplete data. But lowballing the offer could also mean losing out on a significant expansion opportunity. Estimating the fair valuation of a target company is a tricky business.
Solution: Work with an experienced M&A advisory firm like Kick Advisory to determine valuations through proven methods like discounted cash flow analysis and comparable company models.
Lack of Planning and Strategy
Many small business owners pursue M&A for unclear reasons like "growth" or "value creation". But without clearly defined objectives and integration plans, these deals can fail anytime, leaving you in regrets.
Solution: Develop a clear strategy and vision for how the target company fits your growth goals, resources, timelines, culture, etc. And remember to plan the post-merger integration details before signing any deals.
Overestimating Synergies
Now, let's talk about one of the significant challenges small business owners face in M&A deals. It's tempting to focus on best-case scenarios and overestimate the synergies of merging two companies. There is a chance that organizational clashes, unaligned priorities, and other issues may diminish potential benefits.
Solution: Take an objective view of expected costs and benefits. Seek professional guidance on estimating realistic synergies from increased market share, cost savings through economies of scale, etc.
In this case, you can also contact one of the experienced financial advisory firms, Kick Advisory. We have been guiding our clients with the best possible strategies to navigate successful M&A deals.
Cultural Clashes
Mashing up the unique identities, values, and workflows of two previously separate companies can get messy. Employees may resist changes to the organizational culture they are used to.
Solution: Prioritize cultural alignment when selecting an M&A target. Slowly integrate departments in phases, frequently survey employee feedback, and get leadership buy-in on changes.
Communication Blunders
Failed or delayed communication of changes associated with the deal can result in confusion, redundancy, drops in productivity and even talent loss. Employees deserve to be kept in the loop.
Solution: Create a clear communications plan for timely announcements on organizational changes, new roles, responsibilities, etc. You can even seek inputs from staff on integration issues.
Loss of Focus on Core Business
Getting caught up in the madness of merger deals, small business owners often lose sight of tending to existing operations and stretch themselves too thin.
Solution: You can establish a team to handle the acquisition while you continue directing resources toward your core business strengths and priorities.
Hidden Liabilities
Hidden financial burdens or legal issues of the target company may rear their ugly heads after the merger, leaving you with unexpected baggage. This may include toxic contracts, IP infringements, pending lawsuits, etc.
Solution: Conduct thorough due diligence on the target's finances, debt obligations, legal compliance, etc., before inking the M&A. Just in case, it would be best to insert clauses to protect yourself.
Clashing Leadership Dynamics
It's tough to share the steering wheel, especially if the leaders of both merging companies have big egos and rigid mindsets. Power struggles can derail decision-making and growth potential.
Solution: Clear definitions of responsibilities pre-merger help. So does developing mutual respect, a shared vision for the combined entity, and open communications between the leadership.
Overcoming Regulatory Hurdles
Managing complex regulatory requirements around competition laws, foreign investments, taxes, etc., can be challenging for small companies with limited legal resources. And seeking approvals from multiple agencies also delays closing deals, which can negatively impact valuations.
Solution: Hire experienced M&A lawyers and accountants to ensure compliance across regulations. Be proactive in engaging with regulatory bodies well in advance and factor in additional time for approvals while planning deals.
Incompatible Technologies or Systems
Integrating two merging companies' tools, technologies, and systems requires great effort, especially if they operate on entirely different platforms. Such technical complexities may hamper coordination and cause temporary disruptions.
Solution: Prioritize evaluation of technological compatibility while searching for M&A targets. Investing in solid IT infrastructure and tech expertise would be best to enable a smooth transition post-merger.
Loss of Agility and Flexibility
An unintended consequence of mergers is an increased bureaucracy and rigid processes that encourage status quo rather than innovation. What gave small companies an edge - agility and nimble decision-making - often needs to be more balanced in larger organizations.
Solution: Decentralize decision authorities through autonomous working groups. You can promote entrepreneurial spirit by funding new ideas and initiatives. Moreover, keep staff motivated through incentives for intrapreneurship even as the company scales up.
Conflicts of Interest
The personal priorities and biases of leaders involved in merger deals sometimes override business sense, resulting in lopsided agreements that benefit only certain stakeholders.
Solution: Involve neutral external consultants and advisors in evaluation and negotiations. Implement checks and balances to ensure transparency of dealings. And most importantly, share gains and control equitably with partners to align interests.
The Reality of Wearing Multiple Hats
Already overloaded small business owners can burn out trying to juggle the myriad complex responsibilities of M&As - valuations, due diligence, financial modelling, regulatory compliance, and many more.
Solution: Start building a skilled M&A team early with experienced lawyers, accountants, and valuators. You can hire an M&A integration manager to coordinate pre and post-merger planning. Take time-outs to prevent stress from impacting rational decision-making.
Wrap Up
Mergers and acquisitions indeed come with some risks and challenges for small businesses. But with careful strategies and expert guidance from top financial advisory firms like Kick Advisory, you can maximize the odds of success.
