Care to Take a Drive Down M+A Avenue?

by: Smith and Howard

June 26, 2014

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Mergers and acquisitions (M+As) are an ambitious way to gain traction in today’s competitive construction marketplace. With so many baby boomers approaching retirement age, market analysts expect that there will be plenty of bargains for small to midsize businesses in the coming years. In fact, $10 trillion worth of baby-boomer-owned companies are expected to soon change hands, according to the Exit Planning Institute.

But M+As can be fraught with peril. Deals go bad, new co-workers don’t get along, goodwill evaporates and profits suffer. Between 70% and 90% of deals fail annually, according to the Harvard Business Review. Smith and Howard’s M+A and Due Diligence professionals can help steer you in the right direction and guide you as your deal moves forward. If you’re considering a drive down M+A Avenue, here are four ways to steer clear of trouble.

1. Stay in your lane

When buying a competitor, perhaps the biggest mistake construction owners make is acquiring targets that lack synergies with their own companies. For example, while a commercial roofing contractor and a residential roofing contractor would seem to have much in common, the two specialties are actually quite different. They require different skills, equipment and employee training. The two types of businesses also vary dramatically in terms of financial structure.

The best way to avoid “swerving into the other lane” — and, possibly, disaster — is to specifically define your core competencies. In other words, what do you do best? Then identify an opportunity for growth that’s not going to stretch you too thin or take you too far afield from your areas of strength.

2. Don’t crash cultures

Every company has its own culture. Some organizations are “top-down” (the boss gives the orders), strict and methodical. Others have a more free-wheeling, collaborative feel. Often, a business is a blend of both — reflecting the will of leadership and the ideas of its workforce.

Ultimately, there’s no single “right way” to establish a company’s culture. But two businesses with vastly different organizational structures, accountability measures, schedules and employee expectations can crash into each other when trying to form a new, combined entity.

For example, commercial plumbing contractor A acquires commercial plumbing contractor B. Company A has, for years, required all of its project managers to submit daily logs detailing exactly what was completed at each job site. Company B has never had such a requirement. As one might imagine, it may take some persuading on the part of management to get project managers from the former Company B to comply with the more rigorous reporting rules.

So what can be done? One strategy is to reinforce that all employees are being judged by the same measures. Merging companies must have one set of expectations for everyone from managers to laborers, and these rules must be clearly defined and communicated to everyone. A post-transaction consultant can help with this process.

Rebranding is another strategy for bringing together a combined workforce after a merger. Establishing a new company name, logo, branding guidelines, mission statement and color scheme can go a long way toward unifying a newly formed team.

3. Avoid sticker shock

Owners who focus only on getting “a great deal” often underestimate the full financial implications of an M+A transaction beyond the initial purchase price. One way to understand what a merger’s full costs may be is to hire a private investigation firm to vet the company you’re interested in buying. Although businesses have a legal obligation to disclose financial information and outstanding liabilities, intangibles such as bad management and a disgruntled workforce may not be captured in the sales proposal.

In addition, you’ll need to work with your financial advisors to come up with reasonable projections regarding, among various factors, debt load, cash flow and tax liability. Getting bigger may not immediately translate to profitability.

4. Remember your passengers

During and after an M+A transaction, it’s easy to focus on assimilating the two companies. But don’t forget about the important people who are along for the ride: your customers.

For contracts already signed and jobs in progress, clear communication is vital. Notify them of company name changes and new personnel coming on board as soon as possible. For future work, maximize the marketing opportunity. You’re not just a bigger construction company, you’re a better one. Tell people about the change.

Setting your GPS

Even the simplest merger or acquisition is a journey. It will start with an idea, climb a hill of due diligence and likely run into some unexpected twists and turns. Set your GPS accordingly — and don’t be afraid to pull off the road to call your Smith and Howard advisor for help when necessary.

How can we help?

If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.