https://www.thehindubusinessline.com/opinion/small-biz-acquisition/article67947634.ece
Clipped from: https://www.thehindubusinessline.com/opinion/small-biz-acquisition/article67947634.ece
Pre-deal diligence and integration planning are vital
Small businesses make great acquisition targets. An analysis of Indian M&A data for the past three years reveals that small business acquisitions (deal value тВ╣500 crore or less) account for over 60 per cent of majority acquisitions (that is, where acquisition is for 50 per cent or more)
While M&As are popular for business growth, studies suggest that 70-90 per cent of all acquisitions ultimately fail, and the most common reason for this is integration problems. Also, smaller acquisitions have a relatively lower upfront cost, meaning potential failures are less likely to affect the acquirerтАЩs financial performance. This article explores how тАЬsmall, informally run businessesтАЭ with ad hoc policies and practices pose unexpected operational challenges and require thorough pre-deal diligence and integration planning.
Processes and data
Small businesses tend to face lighter scrutiny from stakeholders resulting in their processes being less robust compared with larger businesses. For instance, an acquirer, after obtaining control over a тВ╣150 crore manufacturing company, discovered huge data inconsistencies. Inefficient workflow amongst teams managing orders, production, shipments, and revenue realisation was worsened by unstructured financial processes, paired with manual data entry.
This indicates a lack of control over the business and potential revenue leakage. From the acquirerтАЩs perspective, gradual implementation of centralised, automated solutions such as Enterprise Resource Planning (ERP) becomes key to establish a тАЬsingle source of truthтАЭ.
Small family-run businesses often lack well-defined HR policies, key performance indicators, and incentives. In one case, a promoter-run technology company gave significant increments to certain favoured employees, raising the overall wage bill and increasing the pay gap between bands. As the acquisition revolved around the targetтАЩs specialised talent, rationalising benefits became incredibly challenging.
Small businesses may set employee roles arbitrarily. Another common challenge is centralisation of power with promoters. In an example, a promoter placed his favoured employee in multiple roles, i.e., sales in-charge of one product line, co-head of manufacturing, and head of quality control. This meant that the employee had conflicting responsibilities, posing a risk to product integrity. Such instances can be avoided by careful role-fitment mapping while developing the target operating model.
It is common for promoters to create roles for related individuals. During an integration, it was discovered that the parentтАЩs subsidiaries were owned by the promoterтАЩs family members and ex-colleagues. Due to high reliance on these subsidiaries for sales and operations, the acquirer was forced to continue the relationship on existing, non-competitive terms. Diversifying supply chains and go-to-market channels by leveraging acquirer capabilities can help reduce such dependence.
Such businesses also tend to operate as tight-knit families, leading to increased attrition during promoter exits after acquisition. Deferred acquisition consideration and short-term employment contracts (which maintain promotersтАЩ skin in the game), coupled with retention strategies and change management, can help avoid such scenarios.
Small businesses operate on limited resources, which are devoted to sales and product development. Enabling functions (such as HR, IT, and legal) may be less developed or put on hold, posing major risks during acquisitions.
Early on-ground diligence can help assess the robustness of support functions, preparing the acquirer for necessary interventions or short-term outsourcing.
Small companies, though worth the investment, are often difficult to integrate, and acquirers should expect to invest time, manpower, and technology to ensure smooth integration.
The writer is Partner, Consulting, Deloitte India. Views are personal
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