What to Know Before Pursuing an Acquisition or Being Acquired

For small business owners, growth often involves looking for strategic opportunities—sometimes in the form of acquisitions. Whether you’re on the acquiring side, aiming to grow your company through another business, or on the selling side, faced with a potential buyout or investment, acquisitions can seem like an exciting path forward. However, they’re complex and require careful planning and due diligence to ensure you’re making the right move.

You may not have a step-by-step guide for navigating the intricacies of mergers and acquisitions (M&As), but being proactive and understanding the key areas to assess can make all the difference. The goal is not to rush into a deal based on excitement or an enticing offer, but to protect your business by thoroughly vetting every aspect.

1. Don’t Rush Into Deals: If It Sounds Too Good to Be True, It Probably Is

One of the most common pitfalls in acquisitions is getting swept up by the excitement or promise of quick growth. If an acquisition deal feels too good to be true, take a step back and assess the situation. It’s easy to be blinded by what may seem like a golden opportunity, but rushing into a deal without proper due diligence can set you back more than it propels you forward.

Slow down, ask questions, and do your own research. A legitimate deal takes time to evaluate. Don’t let the pressure of “sealing the deal” cloud your judgment. When considering either side of an acquisition, be cautious about high-pressure tactics or unrealistic projections that might be presented to you.

2. Do Your Homework: Due Diligence is Non-Negotiable

Due diligence is the process of carefully investigating the details of the acquisition, whether you are the buyer or the seller. It’s not just about reviewing financials—it involves a thorough investigation into several key areas to ensure the business you’re acquiring or selling is in the right shape to meet your expectations.

Here are several key due diligence items to ask about or look for:

• Financials:
  • For Buyers: Look for red flags in balance sheets, profit-and-loss statements, and tax filings. What liabilities or debts are tied to the business? How does the company’s cash flow look over the past few years? Understand the real value beyond just revenue figures.
  • For Sellers: Make sure your financial records are up to date and transparent. Disorganized financials can discourage serious buyers or lead to a reduced sale price.
• Legal Issues:
  • For Buyers: Understand any potential legal concerns, including pending litigation, unresolved disputes, or any non-compete clauses tied to the business. Are there any unresolved tax issues or licensing violations?
  • For Sellers: Ensure all intellectual property rights, contracts with customers, and employee agreements are in order. Legal gaps can complicate a sale or result in costly delays.
• Regulatory Compliance (Critical for Regulated Industries):
  • For Buyers and Sellers: If the business operates in a regulated industry—such as healthcare, finance, construction, or food services—it’s essential to verify that the company is in compliance with industry-specific regulations. This includes licenses, certifications, and adherence to government standards. Failing to meet regulatory requirements can lead to costly fines, legal action, or even a loss of business operations.
  • For Buyers: Before moving forward, ask about the business’s compliance history. Are there any violations, expired licenses, or pending regulatory investigations? You don’t want to inherit an expensive compliance headache.
  • For Sellers: Ensure that all necessary certifications, licenses, and regulatory filings are in order. This includes employee certifications or qualifications in regulated fields. It’s also important to have a clear understanding of any operational or compliance challenges that might affect the sale.
• Employee & Culture:
  • For Buyers: Understand the existing workforce and company culture. Are there any key employees you need to retain to ensure the business continues running smoothly post-acquisition? Is the company culture a good fit with your own business values?
  • For Sellers: Be prepared to handle employee transitions with care. How will employees be impacted by the sale, and what measures will you take to ensure retention?
• Customer Contracts & Relationships:
  • For Buyers: Assess the customer base and contracts in place. Do existing customer contracts contain favorable terms, or are there significant risks? Will customers stay loyal post-acquisition, or is there a risk of losing them?
  • For Sellers: Ensure strong customer relationships are maintained during the transition. A smooth handover of client accounts can keep revenue steady and ensure a smooth sale.
• Technology and Systems:
  • For Buyers: Evaluate the technology infrastructure of the business. Is it scalable, or will you face costly upgrades and system migrations?
  • For Sellers: Ensure your technology and systems are well-documented to facilitate an easier handover and integration with the buyer’s existing systems.

3. Lean on the Experts: Attorneys, Financial Advisors, and Consultants Matter

You may be an expert in running your own business, but when it comes to acquisitions, it’s crucial to rely on experts who specialize in the M&A process. An experienced M&A attorney or legal team can help you navigate the complex legal aspects of the deal, ensuring that all contracts, terms, and agreements are sound. Similarly, financial advisors and accountants can guide you through the numbers, helping you assess the true value of the acquisition.

Don’t skip the research. Whether you’re the buyer or the seller, having a team of experienced advisors by your side will ensure that you don’t miss critical details and that you don’t get swayed by promises that sound too good to be true.

At firms like Evolved HRX, we can guide you through the process with tailored advice and support, helping you identify potential risks and avoid common pitfalls.

4. The People Factor: Culture and Talent Matter More Than You Think

You can’t overlook the human side of acquisitions. Whether you’re acquiring another company or being acquired, the culture and the people involved are often what determines whether the deal will succeed or fail.

For Buyers: When acquiring a business, you’ll want to understand how the employees interact, how customer service is managed, and how the company culture fits with yours. Acquisitions are as much about retaining the right talent as they are about financials. If the company’s culture clashes with yours, or if key employees leave post-acquisition, you may face challenges in maintaining momentum.

For Sellers: Ensure that your employees are well-informed about what’s happening and what to expect post-acquisition. A clear communication plan can help mitigate fear and confusion, helping to retain talent during the transition. Additionally, creating a smooth transition for customers can help maintain relationships and reduce churn.

5. Don’t Get Distracted by the “Carrot”

There are a lot of enticing offers out there that can distract you during an acquisition process, whether it’s a promise of an inflated sale price or the allure of rapid growth through an acquisition. It’s important to remain focused on the big picture, not just short-term gains.

Don’t be swayed by excitement or what seems like an easy path forward. Instead, take the time to thoroughly vet the business, understand the risks, and make sure you’re entering into an acquisition that fits within your overall strategy. If something seems too good to be true, it probably is.

Acquisition Success Starts with Preparation

Acquisitions are a powerful tool for growth, but they require a level of due diligence and caution to make sure you’re entering into a deal that makes sense for your business. Whether you’re buying or selling, remember to slow down, lean on experts, and thoroughly research all aspects of the transaction before moving forward.

Taking the time to assess financials, legal matters, regulatory compliance, cultural fit, and potential risks will not only protect your business but also help set you up for long-term success post-acquisition. By focusing on the right due diligence, you can navigate the process with confidence, ensuring that the deal truly aligns with your long-term vision for growth.

Acquisitions are a journey, and with the right preparation, you can make them a strategic part of your company’s future.