Pursuing acquisitions to fuel growth is an attractive way to grow a company. But business acquisitions can appear risky, especially if you have never completed one before. Acquisitions often require a business owner to take on substantial debt. An acquisition-based business strategy also requires a higher level of financial discipline. For unaccustomed businesses this can appear very risky. Be sure to avoid these four common business acquisition mistakes.
Over-Optimistic Growth Scenarios
Overoptimistic growth scenarios can torpedo an acquisition’s likelihood of success. The reality is that both a buyer and a seller want to get a deal done. Sometimes in the zeal to get a deal done good numbers are created to fit a poor acquisition. Overoptimistic projections, or “hockey stick” growth scenarios, often results in buyers overpaying for deals. To avoid overoptimistic growth projections it is important to consider the following:
Worst Case Scenario. Look at multiple scenarios to ensure that you are analyzing both the good and the bad of an acquisition. Be sure to specifically develop a worst case scenario as well as other scenarios. Then develop a financial and operational strategy to mitigate that risk.
Cash Flow vs Profit. Understand how cash and profit flow through your financials. Remember that the cash required to get the deal done is separate from the cash required to operate the business post transaction. Even very profitable deals can be a drain on your cash post close, so prepare accordingly.
Working Capital Needs: Working capital is a significant driver of cash flow. So it is important understand your cash conversion cycle, or how many days the existing business will have to finance the day to day expenses of the new business. Well thought out projections will help you to be proactive in determining your total capital needs and ensure that you are not underfunded post close.