There are few quicker or more effective ways in which to expand a business than absorbing another company. Despite this, there are still some disadvantages of mergers and acquisitions that should be considered before action is taken. A well-executed M&A deal can see your business quickly gain market share, expand your trading territories, and extinguish the threat of a competitor in one fell swoop. If it were easy though, every business would be doing it. Take a look through this list of potential drawbacks to ascertain if a merger or acquisition is right for your company.
Disadvantages of mergers and acquisitions
1. Resources are diverted away from your day-to-day operations
Seeing a merger or acquisition through to completion is a huge undertaking. There’s a large amount of research, due diligence, and negotiating to be done before any contracts are signed.
As such, many directors notice how much of a distraction an M&A deal is to their daily operations. Someone has to put in the hours needed to ensure a successful acquisition. This inevitably pulls away from elsewhere in the company. Because of this, it’s strongly recommended to enlist the help of a specialist M&A team such as our own.
Even with outside help though, a merger or acquisition can be a big distraction from other projects. Expect to have any other work plans put on the back burner until any deal is completed.
2. Potential loss of jobs
When two companies merge, it can bring about scenarios in which certain job roles become redundant. A change in company structure, or just a doubling up of positions can mean that certain staff are no longer needed. In many cases, these workers can be retrained and implemented elsewhere. Sadly, this isn’t always the case, however, and job losses can sometimes be unavoidable.
Laying off staff can cause multiple issues with TUPE regulations and redundancy payments, so shouldn’t be considered lightly. From a legal standpoint, such issues can quickly become costly and complex to navigate, and should be avoided if possible.
A bad acquisition can have dire consequences. We can help you avoid that
As you might expect, there’s a multitude of factors to take into account when acquiring another business. Even our free consultation service can dramatically reduce the chances of you getting stung by unforeseen expenses hidden in your business purchase.
Call our team for free, no-obligation advice today on 0800 975 0380 or book a free consultation
3. Loss of key staff
Of course, even if you take great care to ensure that nobody loses their job, you may well find several ‘jumping ship’ voluntarily.
A merger or acquisition can be a time of great uncertainty for staff. Not only will they wonder if their job will be safe, but they’ll also be unsure as to what that job will look like. Organisational changes can transform how the same job role is performed. If the staff in question don’t like the changes, they’re likely to move.
The uncertainty of their job security alone is enough to make many look elsewhere, so if you’re hoping to retain staff, it’s worth having a conversation with them to assure them of their place in the company’s plans.
4. Loss of morale
This is inextricably linked to the reasons that staff might leave listed above. Even if staff are assured of their job security, though, there can still be discontent caused by changes.
If staff were comfortable with their original role and workplace, any changes could be viewed unfavourably. The loss of certain members of staff can affect morale greatly too. This could go either way. While the departure of a harsh supervisor or lazy non-team player can actually boost morale, the loss of a popular member of staff can damage it. If their leaving is attributed to one of the changes your business has put in place, then this can cause resentment, and even stubbornness when accepting further changes in the future.
5. Culture clashes
While this can obviously be an issue for staff being forced to adopt new practices, or accept new colleagues, it can also be a corporate problem.
If your business has positioned itself as a progressive place to work, but it’s merging with a more traditional firm, there can be some initial confusion about how the company will operated. Will the traditional-style firm expect you to take on their way of working, or vice versa?
The best mergers tend to involve companies that share a similar ethos. While talk of company cultures can often be a little nebulous, discount the existence of them at your peril. This can be one of the main disadvantages of mergers and acquisitions, and can be tricky to spot as a potential problem.
6. Messy brand identity
When two or more companies merge, there can understandably be some haziness surrounding the identity of the consolidated business.
Well-run companies work hard to establish a coherent and recognisable brand identity. Unless the other company agrees to be absorbed within yours, that brand identity can be lost within a merger.
Thankfully, this can also present an opportunity to build upon two different established identities. Relaunching your new branding from such a solid base is a much easier proposition than starting out fresh. If there’s anything that you would’ve changed about your previous branding, this is the perfect time.
7. Overpaying
Valuing a business is not an exact science. There are myriad methods to value a business, and each is suited to some industries more than others. On top of this, sellers are likely to overestimate the value of their company by some amount. After spending so long building their business to the point where it is now, it’s understandable that they may have an overinflated idea of its worth.
For this reason, it’s worth having a third-party value the business to check that it’s been listed for a reasonable price. Try our own free valuation calculation tool to get a grasp of your target company’s true value.
8. Unexpected costs
Even the best laid plans can throw up the occasional hiccup, and if your due diligence checks aren’t thorough enough, the purchase of a company can uncover several unforeseen costs.
A full share sale will see you take on everything involved with the company, which includes any debts, liabilities, or legal cases against it. These can make for an unpleasant surprise, but should have been picked up before completing the deal.
Another unexpected cost can come in the shape of repairs to equipment and machinery. Without working knowledge of the bought company’s machinery though, it can be difficult to determine its condition.
9. Competition laws and regulatory problems
Anti-competitive laws in the UK ensure that no one company can monopolise a certain industry. The Competition and Markets Authority (CMA) can even step in to block mergers before they happen. This is more of a concern for larger corporations, but can, in theory, affect any business.
One of the more recent examples of the CMA stepping in to block a merger occurred in 2019, when Sainsbury’s and Asda were prevented from joining forces. Not only was it deemed that customers would suffer from the lack of competition, but also suppliers, who would struggle to negotiate better rates.
10. Integration issues
While culture clashes and branding problems can undoubtedly be an issue, there can also be more practical complications to contend with.
If the two companies have different methods of completing the same task, this can become a problem. Hopefully, your due diligence checks should have highlighted the way that the other business operates. If not, though, you may find that the first few weeks of the merger are littered with operational obstacles to overcome.
Avoid the drawbacks of M&As by enlisting expert help
With so many factors to look out for, navigating a successful M&A deal to completion is practically a full-time job. Unfortunately, the one thing that most business owners don’t have is spare time. Let our specialist team of M&A experts take care of your merger or acquisition while you concentrate on your business.
Call our team for free, no-obligation advice today on 0800 975 0380 or book a free consultation
11. A time-consuming process
In order to avoid many of the issues listed here, you’ll need to ensure that you’ve conducted thorough due diligence checks.
Done properly, however, these checks can take a significant amount of time. Due diligence can involve complex financial and legal checks, and these shouldn’t be rushed.
12. Cost
As you might expect for a growth method that’s highly effective, acquisitions don’t come cheaply. The cost to buy a company can vary wildly depending on the type of business you’re purchasing, but due diligence checks and legal fees will need to be added to any valuation.
The cost of the target company may not necessarily be one of the main disadvantages of mergers and acquisitions, but does need to be factored in. While the cost of a good acquisition may be prohibitive for some businesses, it can often be cheaper than expanding by opening brand new branches. By absorbing a business that already enjoys its own client list, an established reputation, or high street presence, you receive a significant head start on a company built from scratch.
Do the disadvantages of mergers and acquisitions outweigh the advantages?
This is something that you’d have to gauge yourself based on your company’s situation. In general, though, M&As remain one of the best ways to achieve significant growth relatively quickly. While there are a handful of drawbacks, on the whole, a well-planned merger or acquisition should make all of these worthwhile in the long run.
In fact, with enough diligent planning beforehand, many of these issues can be avoided altogether. It’s strongly recommended to hire a specialist M&A team to give you the best possible chance of avoiding any problems during the process and afterwards.
Let us ease the stress of buying a business
We specialise in helping potential buyers to avoid the myriad pitfalls that can turn a business purchase sour. Mergers and acquisitions take a lot of time and effort to do right, and we know that our clients don’t always have enough hours in the day to do everything they’d like. That’s why we help you through every step along the way.
As business sales specialists, we navigate the complexities of company purchases for our clients to ensure that they acquire the right business for them. Call us on 0800 975 0380, or email [email protected] for a free consultation.
