{"id":2760,"date":"2014-03-30T13:00:40","date_gmt":"2014-03-30T20:00:40","guid":{"rendered":"https:\/\/masonmyers.com\/?p=2760"},"modified":"2015-01-28T12:58:37","modified_gmt":"2015-01-28T20:58:37","slug":"avoid-failed-business-acquisitions","status":"publish","type":"post","link":"https:\/\/masonmyers.com\/avoid-failed-business-acquisitions\/","title":{"rendered":"Nine Secrets for Avoiding Failed Business Acquisitions"},"content":{"rendered":"<p>Failed businesses always have both myth and logic around the reasons for their failure.\u00a0 This is even more true for a failed business acquisition because there are the elements of the transaction added onto the elements of the business itself.\u00a0 The reality is always complicated, never one thing, and sometimes unavoidable.\u00a0 My friend Ben Kessler put together an analysis of failed business acquisitions purchased by search funds &#8212; in an effort to help himself do a better job with his search for a new business acquisition.\u00a0\u00a0 Ben is an entrepreneur from Janesville, Wisconsin, looking to acquire a privately held enterprise in the Midwest.\u00a0 <a title=\"Braxos Capital\" href=\"http:\/\/www.BRAXOSCAPITAL.com\" target=\"_blank\">His website is here<\/a>.\u00a0 <a title=\"Search Funds:  Death &amp; the Afterlife\" href=\"http:\/\/www.gsb.stanford.edu\/sites\/default\/files\/documents\/Search%20Funds%20Death%20and%20the%20Afterlife.pdf\" target=\"_blank\">His paper on this topic is located here on the Stanford Graduate School of Business website<\/a>.<img decoding=\"async\" loading=\"lazy\" class=\"alignright size-medium wp-image-2776\" title=\"Search funds and business acquisition\" alt=\"Identifiable traits that can help you prevent a failed business acquisition.\" src=\"https:\/\/masonmyers.com\/wp-content\/uploads\/2014\/03\/searchfund-160x300.jpg\" width=\"160\" height=\"300\" srcset=\"https:\/\/masonmyers.com\/wp-content\/uploads\/2014\/03\/searchfund-160x300.jpg 160w, https:\/\/masonmyers.com\/wp-content\/uploads\/2014\/03\/searchfund-80x150.jpg 80w, https:\/\/masonmyers.com\/wp-content\/uploads\/2014\/03\/searchfund.jpg 164w\" sizes=\"(max-width: 160px) 100vw, 160px\" \/><\/p>\n<h2>Nine Themes Identified by Ben Kessler in Failed Search Fund Business Acquisitions<\/h2>\n<p>Ben worked with a Stanford professor, Jim Ellis, who is a frequent investor in search funds, including some investments in amazingly successful companies.\u00a0 They identified nine common themes in failed search funds and the themes are listed in order of frequency found in unsuccessful searches.\u00a0 In my opinion, the themes resonate to all business acquisitions &#8212; beyond just search funds.<\/p>\n<ul>\n<li><strong>Low or negative industry growth.\u00a0<\/strong> This was defined as a growth rate of less than 5%.\u00a0 It is hard to earn good returns on an investment when the growth is so low.\u00a0 Growth is best in the middle &#8212; not too slow, and not too rocket fast.\u00a0 With low growth, it leaves little margin for error by the management.<\/li>\n<li><strong>Complex operations.\u00a0<\/strong> In business, there are no extra style points for degree of difficulty.\u00a0 Simple is better.\u00a0 Ben identified a few examples of what he meant by complex operations.\u00a0 These included: a) the complexity of combining multiple organizations in a roll-up strategy, b) complexity of acquiring and maintaining retail spaces, c) geographic distance between important sites, and d) specific technical expertise required for a manufacturing or business service companies.<\/li>\n<li><strong>Troubled dynamics between searcher and board of directors.<\/strong>\u00a0 Drama is to be avoided whenever possible. \u00a0High conflict doesn&#8217;t help anyone.\u00a0 Having people around you that you trust and working constantly to strengthen those relationships are both important.<\/li>\n<li><strong>Low gross margin.\u00a0<\/strong> This was defined as a gross margin below 20% in any industry, or a gross margin below average for the industry.\u00a0 The corollary of this is true as well: it is so much easier to be successful in a business that has a high gross margin.\u00a0 This is because you can often adjust the other expenses if necessary, and a high gross margin gives you the ability to invest in sales and marketing which can often be a key lever for smaller businesses.<\/li>\n<li><strong>Execution failure.\u00a0<\/strong> Ben said this often went hand-in-hand with complex operations.\u00a0 In many cases, the new manager did not master the operations of the business quickly enough.<\/li>\n<li><strong>Customer concentration.<\/strong>\u00a0 This is defined as one customer being more than 25% of revenue.\u00a0 In my opinion, this is the classic situation to avoid for all investors in private companies.\u00a0 It is simply inevitable that large customers will modify their strategy, and this often happens at the most inopportune time for your business.\u00a0 There is a time to take these risks, but investors need to have their eyes wide open to this and know that they are gambling when they do so.<\/li>\n<li><strong>Restrictive capital structure.\u00a0<\/strong> In the research, the companies that had debt at more than 60% of their total capital ran into more problems.\u00a0 Leverage is a great tool to be used sparingly, but it has also been described as &#8220;a knife attached to the steering wheel&#8221; so that any slight bump in the road can be deadly.<\/li>\n<li><strong>Conflict with previous owner.\u00a0<\/strong> With smaller businesses, it is easier to see how previous owners can meddle (even with good intentions) or command influence beyond what is healthy.<\/li>\n<li><strong>Inability to retain or hire adequate talent.\u00a0<\/strong> For young search fund buyers, I can see how they may not have the ability and experience to retain middle management or to recruit new talent.<\/li>\n<\/ul>\n<p>Independent sponsors (acquirers with informal funding commitments) and search funds (please see <a title=\"Changing Search Fund Model\" href=\"http:\/\/www.axial.net\/blog\/changing-search-fund-model\/\" target=\"_blank\">Axial.net recent post on search funds<\/a> and <a title=\"Financing And Funding, Search Funds | Buying a Business | Mason Myers Business Blog for Owners, Investors\" href=\"https:\/\/masonmyers.com\/business-buying-search-fund\/\">my prior post on search funds<\/a>) are becoming more common in the lower middle market for business acquisitions.\u00a0 This is a good thing.\u00a0 There are many business acquisitions to be done, and many of them will be done by independent sponsors and search funds.\u00a0 For sellers, this trend provides them many more buyer candidates.\u00a0 As Kessler wrote, &#8220;The Search Fund concept was first conceived in 1984 when Professor Irving Grousbeck and searcher Jim Southern formed the first Search Fund. This model, in which an entrepreneur raises capital from a group of investor to cover expenses related to searching for a business to acquire, has gained popularity at many top MBA programs since its inception.&#8221;<\/p>\n<h3>Related Posts<\/h3>\n<ul>\n<li><a title=\"Accounting &amp; Reporting Pays Off | Why Understanding Accounting Pays Off\" href=\"https:\/\/masonmyers.com\/accounting-reporting-pays-off\/\">Accounting and reporting pay off when buying and\/or selling<\/a><\/li>\n<li><a title=\"Investment Returns Are Not Greener by Changing Industries | Better ROI\" href=\"https:\/\/masonmyers.com\/investment-returns-do-not-improve-with-industry-change\/\">Investment returns are not greener by changing industries<\/a><\/li>\n<li><a title=\"Business Owners, Investment Philosophy | Warren Buffet, Berkshire Hathaway | Business Blog\" href=\"https:\/\/masonmyers.com\/warren-buffet-investment-philosophy-balances-discipline-with-flexibility\/\">Investments need to balance discipline and flexibility<\/a><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<div class=\"postmeta_wrapper\">\n<div class=\"postmeta classifications small\"><span class=\"post_categories\">Categories:<a href=\"https:\/\/masonmyers.com\/category\/financing-funding\/\" rel=\"category tag\">Business Financing &amp; Funding<\/a>, <a href=\"https:\/\/masonmyers.com\/category\/business-growth-and-business-opportunities\/\" rel=\"category tag\">Business Growth &amp; Opportunities<\/a>, <a href=\"https:\/\/masonmyers.com\/category\/sell-a-business-or-buy-a-business\/business-purchase-sale-agreements\/\" rel=\"category tag\">Business Purchase &amp; Sale Agreements<\/a>, <a href=\"https:\/\/masonmyers.com\/category\/execution\/\" rel=\"category tag\">Execution<\/a>, <a href=\"https:\/\/masonmyers.com\/category\/financing-funding\/search-funds\/\" rel=\"category tag\">Search Funds<\/a>, <a href=\"https:\/\/masonmyers.com\/category\/sell-a-business-or-buy-a-business\/\" rel=\"category tag\">Sell or Buy a Business<\/a><\/span><br \/><span class=\"post_tags\">Tags:<a href=\"https:\/\/masonmyers.com\/tag\/ben-kessler\/\" rel=\"tag\">Ben Kessler<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/braxos-capital\/\" rel=\"tag\">Braxos Capital<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/business-acquisition\/\" rel=\"tag\">Business Acquisition<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/buy-a-business\/\" rel=\"tag\">Buy a Business<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/buying-a-business\/\" rel=\"tag\">Buying a Business<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/customer-concentration\/\" rel=\"tag\">Customer Concentration<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/gross-margin\/\" rel=\"tag\">Gross Margin<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/growth-rate\/\" rel=\"tag\">Growth Rate<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/growth-rates\/\" rel=\"tag\">Growth Rates<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/jim-ellis\/\" rel=\"tag\">Jim Ellis<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/search-fund\/\" rel=\"tag\">Search Fund<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/sell-a-business\/\" rel=\"tag\">Sell a Business<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/selling-your-business\/\" rel=\"tag\">Selling your business<\/a>, <a href=\"https:\/\/masonmyers.com\/tag\/stanford-graduate-school-of-business\/\" rel=\"tag\">Stanford Graduate School of Business<\/a><br \/><\/span><\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Failed businesses always have both myth and logic around the reasons for their failure.\u00a0 This is even more true for a failed business acquisition because there are the elements of the transaction added onto the elements of the business itself.\u00a0 The reality is always complicated,&hellip; <a class=\"more-link\" href=\"https:\/\/masonmyers.com\/avoid-failed-business-acquisitions\/\">Continue reading <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6,7,117,19,55,11],"tags":[322,324,318,131,57,319,320,71,34,323,56,87,25,321],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>9 Secrets to Avoid Failed Business Acquisitions | Business Investing<\/title>\n<meta name=\"description\" content=\"Find out how to identify the traits in a company that will help you avoid a failed business acquisition. 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