
Written by Foresight’s Business Unit of Jared Tanke and Matt Blackwell
You may have been approached in the past about purchasing a competing funeral home, or maybe you have actively approached some of your competitors about purchasing their firm so you can grow your market share. One way or another, you have probably heard something about Mergers and Acquisitions (M&A). It’s true that acquisitions can be a great way to grow your business, but you should understand the risks associated with them. Alarmingly, studies show that between 70% and 90% of acquisitions fail to deliver the anticipated value. Despite these statistics, M&A activity continues to rise, fueled by the demand for growth amidst sluggish organic expansion. Understanding the inherent risks associated with these transactions is essential for navigating these challenges effectively.
- Overpaying
Overpaying for an acquisition is one of the most critical risks in M&A. The valuation gap between buyers and sellers can be vast, often resulting in inflated purchase prices. Overpayment can jeopardize financial stability and diminish returns on investment.
Mitigation Strategies:
- Conduct Thorough Financial Analysis: Even if a quality of earnings analysis is too expensive and time prohibitive, a solid contract analysis to verify revenue should be a minimum standard.
- Assess Market Position: Evaluate if the target company is losing its competitive edge. Overpaying for a firm on a downward trajectory can compound existing issues.
- Comparable Company Analysis: Investigate trading multiples in the profession to determine a fair purchase price.
- Set a Walk-Away Price: Establish a non-negotiable price threshold to prevent emotional decision-making during negotiations.
- Evaluate Projected Synergies: Will you be able to share staff, or supplies between your locations? Ensure any anticipated synergies are realistic and achievable.
- Integration Challenges
Post-acquisition integration is often cited as the most daunting challenge in business acquisitions. Poor integration can result in lost talent, decreased morale, and ultimately, failure of the acquisition.
Mitigation Strategies:
- Develop a Clear Integration Strategy: Allocate resources for employee onboarding and IT systems integration, addressing concerns proactively.
- Clarify Leadership Roles: Clearly define the future roles of existing leadership to maintain stability and direction post-acquisition.
- Maintain Momentum: Focus on observing and understanding existing operations before implementing major changes in the initial months.
- Engage Key Staff: Create a plan to keep motivated employees engaged and invested in the future.
- Legal Challenges
Legal pitfalls can create significant obstacles, leading to disputes and delays that jeopardize the transaction. Misrepresentation during negotiations can leave buyers with limited recourse.
Mitigation Strategies:
- Hire Experienced Counsel: Engage legal advisors who are knowledgeable about the funeral and cemetery profession and complex transaction nuances.
- Review Representations and Warranties: Scrutinize these agreements to ensure all parties have a clear understanding of obligations and expectations.
- Conduct Thorough Due Diligence: Onsite visits and third-party inspections can help verify the accuracy of seller claims.
- Deal Fatigue
The saying “Time Kills All Deals” rings true in M&A, where prolonged negotiations can lead to deal fatigue, resulting in lost momentum and increased uncertainty.
Mitigation Strategies:
- Identify Potential Pitfalls Early: Anticipate and address challenges upfront to streamline the process.
- Clarify Seller Motives: Understanding the seller’s timeline and incentives can help manage expectations.
- Accelerate Due Diligence: Promptly schedule third-party evaluations and respond quickly to inquiries to maintain pace.
- Weak Due Diligence
Insufficient due diligence can lead to unexpected surprises after the acquisition, underscoring the importance of thorough preparation.
Mitigation Strategies:
- Use a Due Diligence Checklist: Develop a comprehensive checklist reviewed by external advisors to cover all bases.
- Document Review: Scrutinize all documentation to minimize potential risks post-acquisition.
- Market Risks
External factors such as economic conditions can significantly impact M&A decisions.
Mitigation Strategies:
- Analyze Economic Indicators: Most transactions are going to be financed through a bank which means you should be monitoring interest rates and other economic variables that could influence debt pricing.
- Assess Resource Allocation: Evaluate whether the acquisition will stretch resources too thin, jeopardizing overall operational effectiveness.
While the risks associated with M&A are considerable, it should not steer you away from pursuing one. With careful planning, thorough due diligence, and ongoing vigilance, you can effectively navigate these challenges and in turn have a new addition to your business that continues to thrive.
At Foresight, we leverage over 100 years of combined experience in the funeral and cemetery profession to guide our clients through the complexities of M&A processes, ensuring they achieve exceptional value and lasting success.