September 25, 2022
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M&A advisory

Business Acquisition Strategy to Avoid

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Over the past few months, we have seen a substantial increase in buyers in the market. All industries are in the game except for industries heavily affected by the pandemic. Much of this increase is caused by companies seeking, through a transaction, to add human resources or production capacity to meet demand. M&A advisory

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This increase in buyers is one of the consequences of the difficulties experienced by many companies in finding and hiring competent resources. I think I can say, without being too wrong, that the lack of human resources is the main obstacle to business growth now. To overcome this situation, many companies are looking at the possibility of adding production capacity and employees through an acquisition. At first glance, theoretically, this strategy may seem like a good idea with the help of an M&A advisor. In practice, it is quite different. The strategy of carrying out an acquisition in order to acquire human resources creates very little value for both the buyer and the seller. Here’s why:  M&A advisory

For the buyer:

For this strategy to work, the acquirer must find a company whose resources are not fully utilized or have a retention strategy and ability to monetize operations that exceeds the industry average.

If a company is having difficulty finding resources to hire, it is likely that the same is the case for other companies in its industry. Customers in each industry who have difficulty obtaining the service or product go to competitors, second and third choices. Because of communicating vessels, in growth sectors, it is difficult to find a company that does not benefit from an increase in demand. M&A advisory

In such a context, it would be surprising for a seller to agree to sell his business without asking for an added value for the existing clientele, a clientele to which the buyer places little value since he has difficulty providing his own. To this required capital gain, the buyer must add integration costs and transaction fees.

Opposite of what is intended, during a transaction, the uncertainty caused by changes increases the risk of employee departures, particularly if there are major changes such as new customers combined with an urgency for results. These employees who leave will swell the ranks of competitors at no cost. In these circumstances, it is often the most talented who leave first.

For this strategy, it would probably be possible to make a profitable acquisition in places where the unemployment rate is much higher. To achieve this strategy from an M&A advisory, it might also be more profitable to simply open a branch there.

For the seller:

What a seller of a business wants is to sell their goodwill. Ie: the difference between the sale price and the value of all net assets at fair market value. This goodwill difference (the accounting term is goodwill) is the value of the clientele. The location of the business, the website, the list of prospects. The mailing list, the of orders and that also includes telephone numbers.

Unfortunately, the buyer who is looking for human resources to meet. The demand of his own customers wants to pay as little as possible for this goodwill. He is not looking for new customers, he has difficulty serving his own. Unless the seller has profitability problems, he will not want to sell his clientele without fair consideration. The alignment between the needs of the buyer and those of the seller is not done. Thereafter, either everyone goes back to their business, or engages in a negotiation that often leads to nothing. M&A advisory

In the end, the seller will have revealed a lot of information. Created uncertainty in his organization, for a transaction that, from the start, had little chance of happening.

The transaction is concluded:

With perseverance, the acquirer will eventually find a company that is not doing too well. Which will seem like a godsend for his needs. It risks falling into a process of acquisition and turnaround. As we described in “The hunt for companies is on” with all the challenges that entails. M&A advisory

It may be that of all the deals that close in a year, there are a few that. With a human resource acquisition strategy, will have succeeded in creating value for shareholders. If so, I think it’s more luck than science.

If the acquisition makes it possible to obtain new knowledge, new technologies or new know-how. These transactions can create value for shareholders. If it is simply to add arms or brains, the returns on investment may be slow.

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