There is no doubt that acquiring another company can be a boon to a business. Most large companies have an entire department devoted to nothing but creating and executing mergers and acquisitions. However, this is because mergers and acquisitions need to be entered into carefully. After all, the wrong match can tank a profitable company. While the benefits of acquiring another company are fairly obvious, there are also some associated risks. Here are three risks of acquiring another company.
Failure to Understand What Makes a Company Profitable
It is easy to look at a balance sheet to determine whether or not a company is profitable, but understanding why it is profitable is very different. There are many cases when what makes a company profitable are intangibles that you can’t see on paper. These can include things like zealous brand loyalty or even employee loyalty. For instance, a business owner may be able to keep overhead low because employees love their jobs. This means they may not ask for regular raises or competitive salaries or have been there for so long that each employee is doing the work of two or three people. When big corporations move in and take over, they may alienate what turns out to be their most valuable asset.
Failure to do Due Diligence
When a company starts losing money, there are many ways they can cut corners to improve their balance sheet in the short term to show profitability and make themselves attractive to potential buyers. However, just like with any investment, you don’t want to move too quickly without doing your due diligence. While being too cautious or moving too slowly can also cost you, moving too quickly on what looks like a great opportunity on paper can be catastrophic.
Spreading Yourself too Thin Financially
Like any other major purchase, the first few months after a new acquisition can leave you financially vulnerable. Buying a business or company requires a pretty severe outlay of cash. Before purchase, that cash provided a nice financial cushion. Once you buy the new company, however, that cushion is gone. While smart investors will always keep at least a small cushion of cash, it’s inevitably going to be a lot smaller once you’ve made a major purchase.