Missed Expectations and The Eighty Percent Acquisition Rule

Eighty percent of all businesses purchased by another company or by a new investor-operator fail to meet the stated expectations of the buyer after one year.

As with the fifty percent rule discussed last week (fifty percent of startups fail within two years), this rule is hard to find an author willing to be quoted as the source.  But it is within the range of experience by many of us professional investors, and with those who have acted as brokers, serial purchasers or consultants for acquisitions.

Why would anyone acquire a company?

With this rate of disappointment, why would anyone or any company purchase another?  The answer is that the most sophisticated buyers have experience in integrating an acquisition successfully into an enterprise and those successes are the most visible models for others to follow.  I worked with one two years ago that was exemplary in its ability to understand and integrate our selling business into its significant number of subsidiaries, and quickly create uniform dashboards and supply integration talent.

How about those less-experienced buyers?

[Email readers, continue here…]  As we move down the chain of experienced buyers, the problems of underestimation of capital, customers who drifted away from the acquired company, key employees who found the new enterprise a culture too different to endure and left, and other difficult-to-plan-for events overwhelm the majority of acquired companies, resulting in less revenue, less profit, and far less growth than forecast during the buyer’s due diligence.

Lessons to learn from the best

There are great lessons to learn from Cisco and other companies that have grown wonderfully by acquisition, understanding the need to maintain elements of the acquired company’s culture, while offering the employees retained new and attractive reasons to stay and build the combined enterprise.

And the lesson?

So, this insight is simple.  Study the literature about companies that have succeeded in their acquisitions, finding how and why such successes rose to the top twenty percent of all acquisitions when measured by the acquiring company CEO satisfaction ratings after a year. Emulate those actions that are appropriate.  Plan for surprises by keeping enough capital available to restart or re- align the acquired company after an initial problem period.

Over all, know the eighty percent rule and act carefully to protect both the acquirer and the entity acquired against failed expectations.

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5 Responses to Missed Expectations and The Eighty Percent Acquisition Rule

  1. This part of your email intrigued me, because this hits my sandbox:
    “Especially for selling entrepreneurs or senior managers, this one probably hits home. The buyer quickly moves to combine accounting, senior management and sales to obtain cost savings and uniformity, usually to the consternation of executives remaining with the seller. Here is one rule to help you set expectations…”
    Couldn’t find the “rule.” If that was a reference to your 80% rule, the connection escaped me.

  2. Dave Berkus says:

    Gene,
    Yes, the email intro referred to the headline below, the “80% rule” as you guessed. Sorry if it was not clear in the email intro paragraph.

    Dave

  3. Michael O'Daniel says:

    Any time there’s a merger or an acquisition, change management comes into play. Unless you have extremely strong change management capability in-house — or even if you do — that’s a good time to bring in a third-party change management resource to help smooth out the transition. And bring them on well in advance of the integration, not after it’s already begun and the red flags are popping up.

  4. John Harbison says:

    Back when I was a consultant, we did a lot of benchmarking on outcomes and best practices in alliances and acquisition, as well as post merger integration. Cisco was one of the companies that excelled at acquisitions. One curious finding was that the companies that were best at alliance (Corning and HP) were terrible at acquisitions. The reverse was also true.i never encountered any company that was good at both.

  5. Russ Gartner says:

    I have another objective point here as I am currently trying to penetrate other markets and require physical locations. Just recently my team cancelled a land contract due to “impact fees” which were going to set our project over budget by $80,000. We’ve been subject to (seemingly) random “use tax” and “personal property tax” bills that arrive in the mailbox. My first endeavor to get my facility up and running took 11 months in the permit process (all the while paying debt service), and over $186,000 of un-fanciable expenses…banks don’t loan money on $7,000 fire extinguishers! One very valid reason to buy existing structures and/or businesses in my opinion is that these facilities are grandfathered in. Having some certainty on closing day when dealing with the uncertainty of local and state governments saves a lot of money and grey hair. Thank you Mr Berkus!

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