Buying a business? Success depends on a well-planned integration

Why do so many mergers and acquisitions (M&As) fail?

Most business owners buy a company to get more clients, expand their team and drive sales. It seems like simple math:

One business plus another business equals more value and growth.

But what typically happens is that one plus one equals something else—your problems multiplied by their problems and a new set of problems.

Two companies, with their own cultures, processes and systems, can easily collide and clash. The risk of bringing them together without proper planning and mitigation is that one plus one may equal less than two.

There are different ways this can play out:

• Your newly acquired customers do not want to do business with you. They may see you as some evil corporation that steamrolled the little guy, believe that quality has dropped since you entered the picture or feel more loyalty to the other company as it was.
• Many of your employees are quitting. They may find navigating new processes and systems difficult, not see any career development potential within your new company structure or discover clashing cultures that make the new work environment toxic.
• Procurement is becoming a nightmare. What you thought would be simpler for contracting out supplies and services is now inefficient and difficult to manage. There may be duplications in the supply chain, conflicting processes or suppliers not knowing how to now work with you.

Think ahead to ensure a smooth post-merger integration

Significant changes generate questions. If those questions go unanswered, insecurity and frustration ensue. Anticipate what people may ask and then communicate it before they have a chance to wonder and worry.

Specific questions from stakeholders are often brought up after a merger or acquisition announcement:

Employees

• Will I lose my job?
• Is my pay going to change?
• Are my benefits going to change?
• Am I getting a new boss?
• Am I going to have a different title?
• Will I be relocated?

Suppliers

• Am I going to lose this account?
• How will the new company handle purchasing?
• Will processes change?
• Will the new company renegotiate costs since they have more purchasing power now?
• Who will I be dealing with?

Customers

• Will quality go down?
• Will prices go up?
• Will my account manager change?
• Will I need to place orders differently?
• Will my needs be met?

Since these questions are likely to arise, addressing them early on is crucial.

And that’s not where the list ends. Your investors, lenders, industry peers, the media and competing businesses are all stakeholders, and this is a significant change for them. For example, competing businesses may see an opportunity to capture your market share while you’re distracted with buying and integrating. They might even spread rumors about your acquisition to cause you reputational loss.

The day you announce the merger or acquisition, all your stakeholders should already know your plans and how those plans will affect them. If you don’t pre-empt concerns and wait until after the announcement, you will spend time in reaction mode.

A comprehensive change management and communication plan is therefore essential and will help you identify the following:

• who needs to be informed (including the media, if applicable)
• when they need to be informed
• what information they need to know

4 steps toward a successful post-merger integration

The following steps are critical to both your messaging and the overall success of your merger or acquisition.

1. Understand the rationale behind buying the business

To begin with, develop a deal rationale that outlines the strategic reasons behind the transaction. Here are key components to consider:

• Strategic fit: Clearly articulate how the acquisition aligns with the acquiring company’s overall strategy. Is it about expanding into new markets, diversifying product offerings or gaining a competitive edge?
• Synergies: Identify potential synergies that will create value. These can be cost synergies (e.g., operational efficiencies, shared resources) or revenue synergies (e.g., cross-selling, market access).
• Financial impact: Quantify the expected financial impact. Assess how the deal will impact revenue growth, margins and profitability. Consider factors like increased scale, reduced costs and improved capital allocation.
• Risk assessment: Evaluate the risks associated with the deal. Are there integration challenges, cultural differences or regulatory hurdles? A thorough risk assessment is crucial.
• Integration plan: Begin outlining the integration plan. How will the two organizations come together seamlessly? What steps are needed to capture synergies effectively?

Remember, the deal rationale sets the foundation for the entire M&A process. It guides due diligence, negotiation, and post-merger integration. Building a compelling deal rationale enhances the chances of a successful outcome.

2. Build your target operating model (TOM)

Once you have a clear deal rationale for the acquisition, you should develop a thorough integration strategy. It is called a target operating model (TOM) and lays out integration objectives and the plans to achieve them.

These are some of the questions amongst hundreds that you need to answer as you develop the TOM:

• Are we going to merge the brands, leave them both as is, retire one or create a new one for the merged company?
• How will we integrate our technology? Which technologies need to be replaced or migrated?
• Will everyone receive the same benefits? How do we harmonize benefits, compensation and other work conditions across teams?
• How will our digital systems work together?
• Do we need to merge processes?
• How will we address and mitigate the risks we identify?

3. Communicate, communicate, communicate

Now that you have a solid rationale and a plan for achieving it, you need to equip yourself with tangible information before making any significant announcements:

• Develop a narrative that captures the M&A’s benefits, expected challenges and plans for overcoming them.
• Communicate to your stakeholders the more targeted details that will concern them.

4. Execute the plan and measure performance

Strong project management is essential as you begin to implement your plan.

• Ensure you have clearly defined key performance indicators (KPIs). If one of your goals is to, say, gain more customers, then quantify that. For example, you could describe your KPI as 80% retention of the target’s customers by the end of the first year. 
• To maintain accountability, identify those responsible and accountable for each action.
• Monitor your progress. If you don’t achieve certain KPIs, find out what went wrong and adjust your plan. Before doing so, consider whether you first need to address a skill or bandwidth gap in the team or resistance to change.

While acquiring a company and then merging it with yours involves entering into every nook and cranny of both businesses, the exercise is worth it. The cost of investing early in an advisory team consisting of a strategy consultant, lawyer, investment banker and/or tax accountant will pay off in assurances that the two or more companies are a good fit and add up to a growing profitable business.

Next step

To help you ensure the long-term success of your merger or acquisition, download BDC’s Post-merger integration checklist.