Houser Firm

2 big risks you must avoid when acquiring another company

On Behalf of | Jun 2, 2022 | Business Law

Whether you intend to buy a startup with promising technology or merge with a company that used to be a competitor, acquiring a new business can be an excellent business strategy. It can grow your company a substantial amount in a short period of time and minimize the risks and expenses involved in that significant expansion.

Unfortunately, acquisitions and mergers come with their own set of risks, some of which are more significant than others. Some companies notice shrinking profits after acquiring another business. A merger or acquisition could even push a company into the red and render it insolvent.

Both of the risks below could lead to your merger or acquisition failing or possibly damaging your company.

Failing to retain the top talent at both companies

One of the benefits of buying or merging with an existing company is to connect with the talent they have on staff. Those workers become part of your team, regardless of whether you operate both businesses separately or combine their operations.

Your staff and the employees at the other company may worry about being redundant or losing their positions. Proactively identifying the employees that are your priority for retention can help you negotiate agreements with those workers that will reduce the amount of talent you lose in the month immediately after the merger or acquisition.

Offering incentives for staying with the company that increase the longer someone stays can be a way to prevent the talent loss often associated with major mergers and acquisitions.

Overpaying for the other business

The price you pay for a business should be an amount you will recoup through future profits and acquired assets. While technological advances, copyrighted materials and the best employees may prompt you to make a competitive offer, it’s important that you recognize the liabilities and financial obligations that the company has as well.

Failing to perform a thorough financial review and market analysis might mean that you pay several times more than what the business is actually worth. Nothing sets up a recent acquisition for failure quite like paying a price that you cannot hope to recoup. Carefully planning as you prepare for a major business transaction can help you avoid the pitfalls that would lead to failure.