5 reasons why acquisitions fail and how to avoid them

Research consistently shows that M&A transactions fail at a rate of 50% to 80%. As one observer succinctly noted, the odds of being successful are not much better than tossing a coin. This is bad enough for large corporations with sufficient resources to weather the storm, but it can be devastating for small to mid-size firms where a failed deal could bankrupt the company.

To help you overcome these odds, this article describes five common reasons why acquisitions fail and then tells you how to avoid each pitfall.

1.) Wrong target or poor strategic fit

A surprising number of companies end up buying a business for no better reason than the fact that it was available or “it seemed like a good idea at the time.” To understand this phenomenon, you must appreciate that most acquisitions are by their very nature opportunistic. Transactions originate from a multitude of sources, ranging from contacts with merchant bankers to senior executives having a casual conversation with a buddy on the golf course. However – and this is important to note – once a transaction starts, it quickly gains momentum and can be difficult to stop. External advisors may be eager to push the transaction through in order to collect their fee, or senior executives may be reluctant to lose face by walking away from a transaction.

The key to avoiding a poor choice is to do your homework long before you begin evaluating potential targets. This entails developing a 3- to 5-year strategic plan that outlines the industries and markets you want to be present in, your revenue and profit goals, and so on. Preparing this plan should help you determine which of these goals can be met via organic growth and which will require M&A activity. Once you understand the role that M&A needs to play, the next step is to establish a list of “essential criteria” that a potential target company must possess in order to be considered. The criteria chosen will vary greatly but may include items such as minimum revenue or profitability thresholds, market leadership positions, or strong R&D capability in a field you wish to enter. Once the list of criteria has been developed, you can use it to screen potential acquisition targets. It’s important to note that targets may not meet all the criteria on your list but they should certainly meet most of them. If they don’t, the odds of a successful transaction will not be in your favor.

2.) Paying too high a price

This is a very common problem that unfortunately cannot be overcome after the purchase, no matter how good a business you just bought. Most often, this error stems from inadequate business involvement in developing the valuation model. Given the sensitive nature of M&As, it’s quite common for transactions to be handled at a corporate level with little or no field input or involvement. When this happens, teams of analysts end up producing spreadsheet models to justify the acquisition price with very little understanding of whether the assumptions they are building into the model can be delivered in reality. Such modeling exercises lead to aggressive assumptions in key areas like sales growth and synergy savings that the local management team is going to have to deliver against when the transaction is completed.

To avoid overpaying for an acquisition, use the following strategies:

  1. In developing the valuation model, ensure you have the active involvement of the management team who will be responsible for the acquisition. Not only will this lead to more realistic assumptions but it will also ensure that the managers have a sense of ownership for delivering against the acquisition plan.
  2. Make sure sufficient margin of error is built into the valuation model to allow for unanticipated circumstances. Avoid the temptation to price for perfection.

3.) Inadequate due diligence

Failure to perform adequate due diligence may be understandable given the time pressure involved in most acquisitions. However, I have found that the biggest mistake made by most companies is to essentially outsource the due diligence work to external advisors. I’m by no means suggesting that these firms are not technically competent to do the job, but without your input they are unlikely to fully understand what it takes to run your business successfully. Often these firms produce detailed reports that focus on what I term the “confirmatory” aspects of the deal, such as confirming that the company has clear title to the land and buildings, has the necessary certificates to operate in a country, has filed all of its tax returns on time, and so on. Although the above requirements are absolutely necessary, they are by no means sufficient and must be supplemented by a high level of focus on the reasons you are interested in the acquisition in the first place.

The key is to put together a business team that has a clear understanding of the valuation model and its key assumptions so they can verify that the desired outcomes can be delivered. This needs to be a senior-level multi-functional team who can assure that no major red flags exist. They should focus on answering key questions that are critical if the business plan valuation model is to be delivered. This will include items such as the following:

  • If the plan calls for a major increase in sales, does sufficient spare capacity currently exist or will the current facilities need to be expanded? If expansion will be needed, is sufficient space available?
  • Are the current manufacturing standards and processes acceptable, and is the end product something that your company would be happy to be associated with?
  • Do current labor practices and pay scales meet your company’s standards or will there need to be a major overhaul after the acquisition that may dramatically impact current profitability levels?
  • Does the company employ certain sales practices that your corporation could not be associated with?

The questions that need to be answered will differ for each acquisition, but the key is always to get some of your experienced people involved to “kick the tires” and get comfortable with the business and its operations before you move on to the next phase. Above all, remember that the external advisors can be relied upon to do a good job in regard to compliance aspects of the due diligence exercise but ultimately are unfamiliar with what it takes to successfully run your business. Failure to recognize this can lead to nasty surprises after the deal has closed.

4.) Post-acquisition integration issues

In the rush to get the transaction completed, potential challenges related to integration are often overlooked. Making matters more complicated, you are often dealing primarily with soft issues such as the culture of the company being acquired, the reactions of key employees, and so on. However, failure to anticipate and address potential issues in this area can have serious consequences. Typically, three key items need to be addressed:

  1. You must develop a detailed integration plan that has been signed off on at the highest levels of the company, and it must be prepared very early in the acquisition process. This plan needs to be written with care and ideally be prepared and endorsed by the leadership team that will be responsible for running the business once the transaction is closed.
  2. You will need to organize a capable management team that is going to be tasked with delivering the business plan following the acquisition. This team needs to have the support of senior management, and they must be fully conversant with the key assumptions made in the valuation model and feel comfortable that they can deliver against it. Ideally this management team should have many years of experience working for the acquiring company and be regarded as subject matter experts in their respective fields. Successfully integrating an acquisition will place a lot of pressure on the new management team, and they must be up to the job. If you find yourself contemplating an acquisition but are unsure whether you have the management team to run it post-acquisition, then you are most likely better off walking away from the transaction.

(c) You need to communicate, communicate, and then communicate some more. It’s often cited that the biggest issue faced by employees of an acquired company is a lack of communication that leads them to feel alienated. The period following an acquisition can be a very nerve-wracking time for employees of the acquired company as they wonder what life in the new world will be like and whether they will be able to keep their jobs. The only way to handle this uncertainty is via an open communication process, especially with key employees whom you want to retain. Your messages must be clear and straightforward and above all they must be well thought through and agreed upon before the acquisition takes place. Making this up as you go along is invariably asking for trouble.

5.) Lack of experience

Research shows that companies with a lot of experience in managing M&A transactions (for example, General Electric) have a much higher success rate than the norm. This should come as no surprise as such companies generally have a very clear view of what areas they need to focus on, what their acquisition criteria are, and how much they are prepared to pay. And above all else, they are not afraid to walk away from a transaction if they can’t get what they want.

For companies who lack experience in this area, the M&A process can be very stressful and time-consuming. Invariably the transaction will involve senior management and a range of external advisors, and as said earlier once a transaction begins generating momentum it can be quite difficult to stop. Senior management’s time gets increasingly taken up by the transaction and it distracts their attention from running the core business. This time pressure, combined with reluctance to be seen as failing in a transaction, causes many companies to push ahead with an acquisition even though they are having second thoughts about it. If you find yourself in this situation, I would offer the following advice:

  1. If you do not have the in-house expertise to manage an M&A transaction, then find a good advisor that you feel comfortable dealing with. This advisor’s role should be to provide comfort that you are not missing something important and to free up your time so you can concentrate on running your core business. It’s also important to ensure that there are no inherent conflicts of interest with the advisor, such as their fee being dependent upon the acquisition actually taking place. Remember that what you need is experience and advice, and whatever fee you end up paying is likely to be small in comparison with the cost of a failed acquisition.

Finally, understand that if you are in doubt about the acquisition’s attractiveness, its price, or your ability to manage it post acquisition, then there is a very good chance that you’d be better off simply walking away.


If you would like more information on executing M&A transactions successfully, please contact Donal by clicking here or call +662-6511-164

How to Develop Effective Acquisition Criteria

As I mentioned in a previous article, the failure rate for M&A transactions ranges from 50 to 80 percent. However, you can greatly increase your chances for success by targeting your efforts. Before you begin negotiating for a potential acquisition, be sure to figure out what you want to buy and why you want to buy it.

Determining your acquisition criteria ahead of time will allow you to achieve the following outcomes:

  • Reduce your risk of buying a company with poor strategic fit
  • Proactively search for target companies instead of reacting to opportunities that arise
  • Pre-align senior management or shareholders on potential acquisitions and investments

Given these advantages, what is the best way to establish appropriate acquisition criteria?

Your first step should be to develop a strategic plan that projects what your company will look like in three to five years. This is essentially a high-level plan setting out your desired revenues and profits, products sold, and sales territories. For example, your strategic plan might predict that your business will double in size over the next five years, and in order to do so you will need to add two new product lines and expand operations into three new markets.

Putting your plan together should help you distinguish between goals that can be achieved via organic growth and those that will require M&A activity. Some of your goals may be achievable either organically or through M&A, and in such cases you will need to compare the potential outcomes of both approaches. Generally M&A will bring faster results than organic growth, but it will also likely require a larger investment.

Once you have determined which of your goals will require M&A activity, your next step should be to make a list of the criteria you want to see in a target company. Obviously your list will be customized to reflect your strategic plan, but the following items should be considered.

Type of Transaction:

What type of transaction would you prefer? Broadly speaking, there are three types of acquisitions: (a) straightforward acquisition where you buy out a target company; (b) joint venture where you partner with an existing player; and (c) franchise where you seek existing companies that are eager to sell your product in their markets. Each model has distinct advantages and drawbacks, and you will need to spend some time deciding which model is right for you. Some companies such as FritoLay have a strong preference for outright acquisitions, whereas others such as Coke have a strong preference for the franchise model.


Another important decision involves the geographical areas or markets you want to pursue. If you are new to international expansion, you may feel you are open to any and all opportunities, but this would be casting your net a little too wide. It’s better to come up with a ranking of proposed countries/markets and concentrate on the most attractive ones initially. Another aspect to consider is whether you would prefer to do deals market by market or whether you would be open to a larger acquisition that might have a presence in multiple markets. Obviously the advantage of a larger deal is a more rapid expansion, but this could mean you end up with a presence in some markets that are not on the top of your list or have weaker share positions than you prefer. Other key questions to consider before pursuing a large acquisition are (a) whether you have the management team to handle it, and (b) how you will finance it.


Are you interested in acquiring a particular size of company? Many corporations set a minimum threshold in terms of revenues or market share because they realize that they are not adept at providing the nurturing environment that small organizations require to grow, so they need to find a larger business that they can simply fold into their existing organization. Additionally, the size of the target company is a key issue for many large corporations because today’s reporting and regulatory requirements often mean that a small acquisition is simply not viable.


Do you intend to acquire brands that complement your existing portfolio, or are you looking to acquire scale and re-brand the newly acquired brands under your name? Some companies are very comfortable acquiring scale businesses in a market and simply leaving the brands alone, whereas other insists on re-branding. This is an important aspect to consider upfront, because many familyowned businesses want to see their brand name survive any acquisition and it can become a major deal breaker if you are not in a position to guarantee this outcome. In addition, branding decisions can have a major impact on acquisition accounting, not to mention the potential risks associated with changing the name of a successful brand.

Turnaround Opportunity:

Are you prepared to take the risk of buying a struggling business with the goal of executing a turnaround? Although everyone would prefer to buy the current market leader with a great business model, such opportunities are rare and expensive. Often the only potential acquisition in one of your key markets will be a turnaround opportunity. If this is the case, do you have the necessary resources in terms of money and human resources to execute a turnaround? It may be that you already have scale in a particular market and an opportunity arises to buy out a weak competitor. This type of deal may be looked at as a “tuck-in” acquisition whereby the synergy savings resulting from folding the target company into your organization justifies the price and you have the added advantage of ensuring that a competitor can’t acquire it.

Manufacturing/S&D Capability:

Do you want to add manufacturing capacity or gain access to a target company’s selling and distribution model? If your goal is to increase your manufacturing capacity, then the acquisition can be looked at essentially as an asset deal in which you are acquiring the physical assets of the target company as opposed to building the capacity internally. Or perhaps your goal is to acquire brands that you can manufacture using your existing facilities, as this provides opportunities for scale leverage. In the case of S&D it may be that your goal is to gain access to the target’s distribution model either because of its superior coverage or because it possesses characteristics that your company does not have, such as cold chain distribution that may be necessary to support the launch of a new line of products.

R&D Capability:

This consideration is closely tied to manufacturing and/or brands, as a transaction may be justified on the basis of acquiring the necessary skill set to enter an attractive category. Examples of this type of transaction include PepsiCo’s joint venture with Almarai that provided it with expertise in the dairy segment, or its acquisition of a small potato chip company to allow it to compete more effectively with Pringles in the fabricated potato chip segment. In cases where R&D capability is a key criterion for a potential acquisition, it’s imperative to ensure that the target company actually possesses the skill set you desire and that this expertise will not be lost as the result of key staff leaving the company post acquisition.

Management and Local Contacts:

This aspect may be of critical importance if you are entering an emerging market where you have no existing infrastructure to leverage. Although the need for a capable team who can run the existing business may be obvious, there are ancillary benefits that add even more value. For example, the target company may possess a deep understanding of the local consumer that may allow the parent company to design new products specifically for this market. Or by leveraging the contacts of the existing management team, you may be able to obtain the necessary approvals to launch some of your products in a heretofore restricted market.

Business Practices:

This characteristic of a potential acquisition often is overlooked when people focus on revenue scale and market share. It’s important to realize that many successful companies in developing economies engage in business practices that are simply not acceptable to multinational corporations. Problematic areas may range from tax compliance to manufacturing processes and standards, and these practices are often deeply embedded in the culture of the target company. Converting such practices to Western standards will invariably be difficult and have a negative impact on operating performance. Indeed, many companies exclude from their acquisition lists companies that derive a high percentage of their sales from government contracts in developing markets, as the difficulty of achieving compliance with the Foreign Corrupt Practices Act makes this type of acquisition too onerous.

Price Parameters:

This is an area where it pays big dividends to be totally honest with yourself. Based on past experience and knowledge, you should be able to establish valuation ranges that you feel are appropriate for acquisitions. These can take the form of “Times Sales,” “Times EBITDA,” “Price– Earnings Ratio,” or some other standard that you feel is the most appropriate for your industry. Once you understand what your range is, then use this criterion as an effective filter on potential deals. Put simply, if your company typically pays between 8 and 10 times EBITDA for acquisitions, then there is little point in negotiating with a target company that is looking for a price that is 25 times EBITDA. Not only are you unlikely to be able to negotiate their price expectation down to your range, but you are also unlikely to obtain board approval for such a high multiple transaction. So do your homework and be aware that many companies put themselves on the market simply to find out what they are worth, even though they have no real intention of ever concluding a transaction. If someone comes along who is willing to pay a ridiculous price, they may sell. But if their asking price is unrealistic, you would simply be wasting your time and resources pursuing such a transaction.


If you would like more information on structuring successful joint ventures, please contact Donal by clicking here or call +662-6511-164

How to Conduct Effective Due Diligence

Conducting due diligence on a potential acquisition target has two main goals:

  • Confirm that the proposed acquisition is indeed the right company to buy and that the price you are offering is appropriate.
  • Ensure that there are no issues that would cause you to abandon the proposed transaction, such as disputes over ownership of key assets or undeclared liabilities arising from ongoing legal disputes.

Even though the first goal is critically important, most companies spend the bulk of their time pursuing the second one. In addition, many companies seem eager to engage in due diligence as early as possible, which can be a mistake. Ideally you should start due diligence only after you are sure there is a strong possibility of concluding a transaction, which implies that you have agreed upon the key deal terms and that both parties are within the ballpark as far as price is concerned. Conducting a thorough due diligence exercise is a costly and time-consuming affair for both the buyer and seller, so it should be engaged in only after both parties are sure a deal can be done.

The level of due diligence to be carried out is critically important and will be dictated by factors such as the following:

  • Transaction structure, with a simple asset purchase requiring much less due diligence than a stock sale in which you are acquiring a going concern complete with all its assets and liabilities
  • Your familiarity with the industry, business model, and the company involved
  • The level of representations and warranties you are going to receive from the seller and the reputation and financial standing of the seller
  • The presence or absence of a competitive bidding situation

Normal practice is for the purchaser to provide the seller with a due diligence data request list. This list is normally quite exhaustive and its content is beyond the scope of this article; however, sample due diligence data requests can be found here or here. No matter what level of due diligence is planned, it’s imperative to ensure that the seller has the data room ready and the content is verified before you start the due diligence process. There is nothing worse than assembling a due diligence team only to discover that the requested information has not been provided or the level of detail is insufficient. Another point to consider is that the seller will place restrictions on the length of time available for due diligence, so you should try to avoid wasting precious time waiting for the data room to be furnished with the requested information.

The due diligence will normally be conducted by a combination of internal and external resources, and it is quite common to outsource aspects such as accounting, pensions, environmental, and legal. If you are engaging in a cross-border transaction where language is an issue, then it may be necessary to outsource a larger section of the work than normal. However, it is best to let the external resources concentrate on compliance issues so that you can devote internal resources to the key task of verifying the quality of the business and the assumptions that underpin the valuation model. The composition and nature of work to be carried out will vary greatly, but there are several key points to bear in mind:

  • The composition of the due diligence team should include senior representatives of all key functions. Not only will this provide the team with credibility from the seller’s perspective, but it will also ensure that your internal organization will accept their sign-off on the transaction. The team should also include the manager who will be responsible for integrating the acquisition as the due diligence process may reveal items that require a change to the proposed integration plan.
  • In addition to having access to the data room, it’s also necessary to obtain physical access to key assets such as manufacturing facilities and also have the ability to speak to key managers and members of staff. This can be a very sensitive topic from the seller’s perspective, but you need to be highly suspicious of situations where no access is provided.
  • Ensure that all members of the due diligence team have been briefed on the logic behind the proposed acquisition and are familiar with the key assumptions underpinning the valuation model. It’s vitally important that the exercise be forward-looking and that key assumptions such as sales growth, synergy savings, and integration plans be verified and pressure tested during the due diligence process. Too many people focus on historic data when in reality they are buying the company for its future potential and not its past performance.
  • Despite the rush to complete the process within the allotted time, you will need to be attentive to “soft” issues that only become apparent via observation or questioning. Examples of this may include the company culture and how it compares with your own. What are current human resources practices, and what is the potential impact if you need to standardize to your existing policies? If there are staff members who play key roles, how comfortable are you that they can be retained post acquisition?
  • Each of the external service providers will likely have a standard due diligence list they wish to complete, and these lists can be very extensive. It’s important to look at the standard list and remove any items that you feel are unnecessary. Not only will this reduce cost and time but it will also minimize friction with the seller’s team, as they are likely to become upset when asked to produce data that they view as being irrelevant.
  • The due diligence team should appreciate that they are engaged in a fact-finding mission rather than a “Spanish Inquisition.” Their interactions with the seller’s staff must be respectful, and they should attempt to minimize any business disruptions associated with fulfilling their requests.
  • Ensure that a Confidentiality Agreement has been executed before any members of the due diligence team commence work so as to protect all parties involved.

Typically due diligence processes last for several weeks (sometime longer) and numerous work streams will be underway simultaneously. It’s imperative to hold regular meetings of the team to share updates on progress and findings. The due diligence process often requires recalibration, and it may be necessary to devote more resources to investigate areas that appear problematic while other areas with no issues are closed out early. In particular, obtain regular updates from external advisors so that there are no surprises when their final reports are issued.

The due diligence exercise will invariably uncover items for further investigation, and the team is responsible for keeping management up to date on developments and for making recommendations on how findings should be handled as part of the overall deal process. Broadly speaking, findings will be either insignificant or significant:

  • Insignificant items by definition have little or no bearing on the quality of the business or valuation model. Examples of these might include using an incorrect depreciation rate for a certain asset class or failing to obtain certain regulatory certificates.
  • Significant items are important and require that specific actions must be taken in response to the new information. Broadly speaking, three alternatives are available:
    • Adjustment to Price: This may be appropriate for items where you are comfortable that you can accurately quantify the financial impact. Examples of this would be items such as an underfunded pension liability or incorrect calculation of a sales tax liability.
    • Representations and Warranties: This action may be appropriate for items that are uncertain as to outcome or difficult to quantify. Examples of this might include pending litigation or a trademark dispute. In such cases you may require the seller to indemnify you for any financial loss arising in the future. Note that your willingness to accept representations and warranties will depend upon the reputation and financial standing of the selling organization. If you are uncomfortable doing this, then placing a portion of the purchase price in an escrow account may be more appropriate.
    • On rare occasions your due diligence will uncover problems so serious that you determine there is no point in pursuing the transaction. Examples might include discovery of unsupportable sales practices involving government agencies, serious flaws in the manufacturing process, and so on. In such cases, your only viable option is to cancel the due diligence process and walk away.


If you would like more information on structuring successful joint ventures, please contact Donal by clicking here or call +662-6511-164

Keys to Effective Negotiations

Over the past 20 years I have witnessed a wide range of negotiation tactics. At one end of the spectrum are the business people who are so desperate to get a deal done that they will agree to almost anything, and at the other end are the ones whose overriding motive is to drive the harshest deal possible. When it comes to choosing the most effective negotiation strategy to employ, there are no hard and fast rules. Much depends upon the situation and the individuals involved; however, the following points are universal.

Before you engage in any form of negotiation, you need to be very clear about what you want from the transaction. What you want will likely cover a wide variety of items, but your real task is to distill this down to a clear list of “must haves” versus “nice to haves.” For example, if you are looking at a potential joint venture, you may insist on having majority control and the right to appoint the senior management team, but you may be willing to maintain certain local brands and to guarantee senior positions for longtime staff members. If the other side is unwilling to agree to your “must haves,” then the deal is unlikely to be worth doing no matter what the price might be. Willingness to walk away from a potential deal is one of the main elements that separate companies who are successful at M&A from those who are not.

Next comes research on the company you will be dealing with and the individuals with whom you will be negotiating. This preparation is vitally important, especially on cross-border deals. It’s a great icebreaker in the initial meetings if you can compliment the other side on the successes they have achieved in building their business or mention a significant family event such as a son’s recent wedding or the birth of a grandchild. It’s relatively simple to do this research, but it pays huge dividends in helping to establish a positive relationship. I was involved in a transaction in Japan where the key to getting the deal done (after many years of failed attempts) was to understand the internal dynamics of the founding family and then to craft a structure that addressed their various needs and concerns. It was by no means easy to do this, but ultimately it was the key to success whereas merely offering a higher price would have gotten us nowhere.

When you enter negotiations, avoid becoming so confrontational that you cause the other side to lose face. Transaction negotiations always involve a conflict of interest with both sides looking to get the best possible deal for their company. However, you should strive for a win-win situation or at least an amicable outcome. This point is critically important, particularly in Asia where saving face is crucial. Local businessmen and entrepreneurs want to be treated as equals and are highly unlikely to agree to a deal that would involve a loss of face. You may surmise that they need the deal desperately and have nowhere else to go, but you’ll likely find that saving face is more important to them than making the deal.

This brings up another topic—the need to manage one’s external advisors. This is especially important in situations where an international firm is negotiating with a smaller local firm. Unfortunately it’s not uncommon to see advisory firms trying to score points against their competition, no doubt in an attempt to justify their fees. This approach sours the negotiation environment. If you see it happening you should discreetly step in, as left unchecked the local advisor is likely to attempt to dissuade his client from doing the deal. Remember that while you may be experienced and comfortable in the negotiation environment, the other party may not have this background and as a consequence may rely too heavily on their advisor’s inputs.

Price will invariably be one of the main points of negotiation, but looking at the price in isolation is a mistake. Negotiating a transaction that fails to deliver on the “must haves” is no good, no matter what price you’ve negotiated. This is why establishing the want list is a necessary first step that will guide you through the negotiation process. As said previously, this list will contain items that are viewed as being crucial to the success of the business, such as management control, non-compete clauses, right of first refusal on future share sales, and so on. When you reach agreement on these points, then the price negotiations will invariably take care of themselves…assuming that both parties are prepared to be reasonable.

During the negotiations it’s imperative that you listen to what the other side is saying. This advice may sound obvious, but many Western firms are poor listeners who focus mainly on telling the local company what they want. This not only creates a loss of face but also can lead to situations where you are making false assumptions about what the other side wants. Had you listened attentively, you would invariably have uncovered this information. It’s been my experience that at some stage during the negotiations people will come clean as to what they really want, but if you are not actively listening then you may miss it entirely. It can be difficult to understand what is being said, especially when different languages, cultures, and translators are involved. In these situations it pays dividends to be patient and constantly clarify your understanding of their requests and comments.

Another common mistake is to assume that something fundamental to the other side that they bring up early in the discussions can simply be negotiated away or compensated for via a higher price. If something appears to be vitally important to the other side, then you need to be clear about where you stand on the issue. If you can’t live with their stipulations, then it’s best to be totally upfront about this and terminate negotiations early if need be. For example, if the owner of the target company is only interested in selling a minority stake in their business because they want a son to inherit the company, simply paying a higher price will be unlikely to sway things your way. In these situations the focus should be on searching for workaround solutions such as offering the son a senior role in your company with a view to his coming back as general manager at some point in the future.

During any negotiation process you will invariably find yourself in a position where you need to offer concessions to move the transaction along. In doing so, you must make sure that (a) the other side recognizes you are making a concession, and (b) you are also attempting to negotiate something in return. Above all, try to make sure that concessions are reciprocal. Don’t put yourself in a situation where you are the only one offering up anything, because when this happens there is a good chance the other side will continue pushing until they demand something you simply can’t give.

Try to prevent competitive situations by signing an exclusivity agreement early in the negotiation process. It may not always be possible to do this (as in the case of an auction), but you should aim for exclusivity because negotiating with a gun to your head in the form of a competitor acquiring the asset can lead to overpayment or poor due diligence as the process becomes rushed. Also make sure non-disclosure agreements are in place before detailed negotiations get underway.

Having an empowered deal team is vitally important if the negotiations are to run smoothly. This should be relatively easy if you are clear about your “must haves.” There is nothing worse than sitting at a negotiation table with people who can’t agree on anything or who agree but then come back days later saying the real decision maker is not in agreement, which brings you back to square one. I’m not suggesting that very senior management can’t play a valuable role in negotiations, but it can be helpful to keep them in reserve for the final push because this allows you to say, “If we can agree on everything else, then I’ll go back to HQ and see if I can get them aligned on this.” The deal team needs to have credibility in order to be effective.

The composition of the deal team depends on the organization and the situation involved; however, the key players on the team should have some prior M&A experience. This is especially important in regard to legal and accounting professionals because these functions frequently are outsourced. There’s nothing worse than having a deal fall through because an inexperienced lawyer can’t identify a solution to some regulatory issue or find a way to protect you from some potential risk. Equally, although accounting considerations are important, they can’t be allowed to drive the process.

Engaging in negotiations can be a protracted process, and for long periods of time it may appear that you are taking one step forward and two steps back. This is especially true of deals in Asia. Remember that the company you are negotiating with will most likely have a different time horizon that does not necessarily align with your corporate schedule, and forcing the pace may not yield the best results. Be patient, and avoid throwing around the warning “This is a deal killer.” True deal killers are generally few and far between. Ask yourself, “If they call me on it, am I really prepared to walk away?” If not, then you run the risk of damaging your credibility when you issue ultimatums that have no weight behind them.



If you would like more information on structuring successful joint ventures, please contact Donal by clicking here or call +662-6511-164


International Joint Ventures: How to Avoid the Pitfalls and Reap the Rewards

Having established a strong and vibrant brand in your home market, you’ve been exploring the possibility of international expansion. Although you lack the resources to enter a promising foreign market on your own, an opportunity to do a joint venture (JV) with a strong local company entices you to explore further. The local company is enthusiastic about your business model and brands, and your initial meetings are both positive and cordial. The potential joint venture appears to be a match made in heaven.

The attractions of an international joint venture are obvious:

  • Ability to establish operations much more quickly than going greenfield
  • Reduced financial risk because the local partner shares the setup costs
  • Comfort from working with a strong local company adept at navigating the local marketplace

Given these advantages, why do so many international JVs end in fractious breakups? Extensive research shows that common pitfalls include lack of alignment on business plans, failure to commit adequate resources, and seemingly insurmountable cultural differences. However, perhaps the greatest pitfall of all is failing to appreciate that a joint venture is by its very nature a relationship and like any relationship it will change over time. Nearly every JV will at some point experience friction or outright conflict between the partners. Such problems arise for all sorts of reasons, but the most common source is one partner questioning the value the other partner brings to the table or both partners blaming each other for a failed project.

So given the above considerations and understanding that issues are going to arise, how can you give your JV the greatest likelihood of success?

The solution lies in meticulously thinking through all the potential issues before the JV commences business.. The first and most important step is to ensure that there is a viable business plan in place and that both parties are prepared to commit the physical and financial resources necessary to make the JV a success. The next step is to draft a Joint Venture Agreement (JVA) that will govern the relationship between the two partners. Each JV is unique, but below are some useful guidelines to follow in drafting a JVA:

  • Pay scrupulous attention when drafting the JVA instead of delegating the task to a legal firm that lacks inside knowledge of what it takes to run your business. You need to have senior business ownership of this document, and it must include all the provisions that have been verbally agreed upon with the local partner. All too often, items that were verbally resolved suddenly become major issues when the partner sees them written down and is required to formally sign off on them.
  • Understand that even with the best of intentions, verbal agreements count for very little. Over time the people who negotiated the original agreement will move on and the new team may be unaware of prior verbal agreements or may believe the context for these agreements no longer exists. Unless something has been specifically documented in the JVA, it will be next to impossible to enforce.
  • Be careful to protect your intellectual property by avoiding conflicts with the local partner’s brands. The best way to handle potential conflicts of interest is to prevent them from happening in the first place. For example, if you are bringing the technology and brand to produce “Product A,” then the local partner simply can’t be allowed to produce any product that will compete with it. I use the word compete in the broadest possible sense, because you need to avoid a situation where you bifurcate the market and your brand is viewed as an expensive Western brand while the local partner’s brand caters to the lower end of the market. Although this type of bifurcation may seem viable in principle, it will invariably lead to major conflicts.
  • Ensure that your JVA includes the following provisions:
    • Dispute resolution and escalation provisions to handle various levels of conflict. Conflicts are certain to occur, so you will need a mechanism to resolve them. Ideally there should be some form of escalation provision where smaller issues are resolved at the local level and more serious issues work their way to the top of both organizations.
    • Future funding and dilution provisions in the event that one partner fails to contribute. You want to incentivize people to contribute the necessary funds, but you also want to avoid being forced to fund projects that you don’t support, simply to avoid facing draconian dilution provisions.
    • Depending on the shareholding structure, you will need to have effective veto rights over key decisions such as changing the nature of the business, selling key assets, or incurring capex above a certain dollar threshold. You don’t want to find out at a board meeting that a major change in direction is underway and you are powerless to prevent it.
    • Termination provisions that clearly set forth the circumstances and procedures by which the JV may be terminated. At a minimum, these provisions must state how the business will be valued, who has a Put or Call option, and what will happen to the brands and intellectual property upon termination.
    • If the JV is operating in a country with a questionably legal system then have disputes settled offshore or via arbitration in an internationally recognized location such as Hong Kong, Singapore or London.
  • Make sure there is a senior presence in the JV operation who is unquestionably aligned with your company (e.g., CFO or Head of Operations). The best way to keep track of what is happening on the ground is to have your own person there.
  • Attend all board meetings and appoint suitably qualified people to the JV’s board of directors. Board members must be senior enough to engage in meaningful discussions instead of merely rubber stamping proposals.
  • Push for explanation of business performance issues and refuse to be fobbed off by a disgruntled local partner. Having your own contact in the JV will greatly facilitate your understanding of what items need to be discussed at the formal JV board meetings.
  • Ensure your JVA contains provisions for payment of dividends and that excess cash is actually paid out via an annual dividend.
  • Beware of unusual items that are described as “local business practices.” Such arrangements have the potential to run afoul of various Foreign Corrupt Practices Acts, placing the parent company in peril.

The preceding guidelines include some of the key items to consider when embarking on an international joint venture. For additional information, consult the excellent JVA checklist on the American Bar Association website http://apps.americanbar.org/buslaw/newsletter/0049/materials/book.pdf. Although the ABA list is so comprehensive that some of its terms will not apply to your JV, it can serve as a good reference point to ensure you are not overlooking something important.

If you would like more information on structuring successful joint ventures, please contact Donal by clicking here or call +662-6511-164

How to prepare an effective business plan

Preparing a business plan can be a challenging and time-consuming process. However, it is worth the effort because when done correctly it achieves three key objectives:

  • It forces you to confront some hard and perhaps uncomfortable facts about your business.
  • It aligns the senior management team regarding actions that must be taken to reach the desired outcomes.
  • When done correctly, it can serve as a sales document for your company.

Keep in mind that your business plan must be tailored to a specific audience. Broadly speaking, there are three main audiences for business plans: (a) employees, (b) business partners/senior management, and (c) potential investors. Each group is looking for something specific from the plan.

Employees generally want an update on how the business is doing so they can get a sense of their prospects for ongoing employment, promotions, bonuses, and so on. Your goal is essentially to share information and paint a picture of the future of your company, and you’re not looking for any approvals from this group.

When you are preparing a business plan for business partners or senior management, you are normally trying to achieve two goals: (a) give an account of your stewardship, and (b) seek their alignment and approvals on future plans and investments.

Preparing a business plan for potential investors is more challenging, because not only do you need to share your future plans but you must also explain what your business does, what competitive advantages you enjoy, and why your company would be a good investment. The rest of this article will focus on the key aspects of preparing a business plan for potential investors.

First of all, you must strive for clarity and brevity. Venture capitalists and other investors are inundated with investment proposals, and they don’t have the time or patience to work their way through 100 pages of rambling data points and comments in an attempt to understand what your business proposal is all about. The plan you present must be well thought out, concise, logical, and easy to understand. Remember that you probably will not be present to walk them through the initial presentation, so your plan will have to do all the talking for you.

This brings us to the single most important section of the business plan: the Executive Summary. In many cases this is the only section that gets read. If people don’t find the executive summary interesting and compelling, then there is a high probability they will read no further.

What should you include in the executive summary?

The executive summary should contain a brief description of what your company does, who your key customers are, what your value proposition is, and how you make money. Because your business plan is targeted to investors, you also need to be very clear about what you are asking for and how you plan to spend the money. Because this section is so important, you should wait until you have completed all the other sections before preparing it, as you’ll find it easier to summarize the key points at that stage. Length is also important, and you should try to limit the executive summary to anywhere between a half-page and one full page.

Because each company is different, each business plan will have unique elements. However, a good business plan should contain most of the following elements:

  • It should explain in simple terms your business proposition. A good way to do this is to explain what problem your business solves. This may sound a little strange, but if you didn’t solve a problem then why would anyone need your product or service? As part of this section you should explain who your key customers are and why your product or service has an advantage over the offerings of your competitors. If you do a good job on this section the reader should be thinking “Who would ever have thought this was such a big problem, and why hasn’t anyone come up with a solution until now?”
  • It should quantify the potential size of the market. Here you should talk about the current market, how you see it growing, and the current state of your competition. It’s important that you be realistic, and above all don’t simply dismiss the competition as being irrelevant. It’s perfectly acceptable to talk about risks and opportunities and the impact of competitors; indeed, if you fail to do this you run the risk of being considered naive. Remember, especially if you are a startup, that most small businesses fail not because they have a poor product offering but because they encounter problems that they did not anticipate.
  • The plan should paint a long-term picture of what the business will look like in five years, and it should also specify short-term deliverables that will be executed in the next two to three years.
  • Your business plan should contain a finance section with a P&L, Cash Flow Statement, and ideally a Balance Sheet. I normally recommend limiting the forecast period to three to five years, as anything beyond that is of questionable value. The cash flow statement not only shows how the investors’ funds will be spent but also addresses the issue of working capital, which is a major problem for many startups. If you are an existing business, then it’s also necessary to show historic data, but again I’d limit this to two to three years.
  • The plan should include a section describing the management team that is going to execute the plan and their relevant background and experience. Many investors view the strength of the management team as a key indicator of whether the business will succeed. Remember that it’s one thing to have a good idea but another thing entirely to be able to bring it to fruition, especially if you are dealing in an emerging market.

Finally, here are some pitfalls to watch out for when preparing your business plan:

  • Avoid being overly focused on the technology behind your product. Many plans I’ve seen are virtually devoted to explaining how wonderful the product is and why it’s so much better than the competitors’ products. Keep in mind that the analyst reading your plan is unlikely to be an expert in your area, so devoting the plan to a technology discussion is a mistake. Focus instead on what problem you solve and why the customer will be attracted to your product versus the competition’s.
  • Beware of what I call the “Colgate Plan,” where a company thought that when they entered China all they needed to do was sell just one toothbrush to a small portion of the population and they’d make a killing. It’s easy to identify a huge market, but it’s much more challenging to devise and execute a business plan to capture that opportunity
  • Avoid P&L projections that essentially take a “hockey stick” approach, forecasting heavy losses for the first two to three years and then miraculously predicting substantial profits in Year 4. In my experience such predictions never materialize, and people are unable to articulate precisely what will happen in Year 4 to drive the turnaround. Remember that your plan must be “believable,” and if there is a major swing from year to year you must be able to explain what drives it.
  • Lastly, avoid overselling the expertise of the management team. Many plans devote so much time to explaining the qualifications and research experience of the team that they seem to be adopting the view that with such a team how could the company fail? Unfortunately, technical qualifications are no guarantee of success, so it’s much better to explain the critical success factors that are necessary to succeed in your business and then describe how you plan to deliver against them.


If you would like more information on structuring successful joint ventures, please contact Donal by clicking here or call +662-6511-164

Key Questions for Project Evaluation

For anyone who has ever worked for a large multinational corporation, the following scenario will be all too familiar. A project requiring substantial investment is presented for review. The project team turns up with a 100-page presentation plus supporting spreadsheet models to justify their proposal. The presentation includes sections covering Sales, Marketing, Operations, Finance, and so on. During the review process as each department strives to justify its own positions, it can be easy to lose track of the overall goal. Although there is invariably an executive summary, it rarely does more than summarize key points from the presentation. How do you decide whether or not to move ahead? In reviewing such projects, I’ve learned to ask two simple but nonetheless critical questions.

Question 1: Am I going to be happy with the outcome?

Step away from the project itself and think about it as a journey you’re about to embark on. Ask yourself if you will be happy when you reach the proposed destination. For example, if you live in London and someone suggests heading off for a long weekend in Southern France, you may indeed find this destination appealing. On the other hand if the proposed trip involves a weekend to a seaside resort in Northern Scotland in the depths of winter, this may very well be a trip you have no desire to take.

Apply the same logic to the business proposal at hand and ask yourself “What’s the intended destination, and do I want to go there?”

Examples of good justifications:

  • The project allows the company to enter an attractive new market and establish a clear first mover advantage ahead of the competition.
  • The project facilitates the diversification of the product portfolio into a fast-growing segment not currently covered, and it should deliver a market leadership position.
  • The project facilitates the rapid growth of an existing business with attractive margins that would otherwise go to the competition due to existing capacity constraints.

Examples of poor justifications:

  • The project’s goal is to enter a category that is already highly competitive and has unattractive margins.
  • The project involves entering a new category or business simply because it’s the latest trend, even though the company has no expertise or competitive advantage in this area.
  • The project is essentially a political exercise to demonstrate regional expansion, and the company is already struggling to effectively manage its existing operations across the region.

Question 2: What do I need to believe in order to get there?

When you are sure that you will be happy at the end of your proposed journey, the next question to ask is what you need to believe in order to reach the destination.

Returning to the example of the proposed weekend trip, let’s say you’ve decided that Southern France is a good destination and now you must figure out how to get there. If someone has arranged attractive fares on a direct flight, then this may clinch the deal. If, however, the proposed journey involves being waitlisted on flights during a busy bank-holiday weekend, then you may decide not to go so as to avoid the risk of spending the entire weekend sitting at the airport.

Again applying this simple analogy to the business proposal, the goal is to identify the key assumptions that must hold true in order to deliver the expected outcome. Even though no two projects are alike and invariably projects of this nature are highly complex, most projects hinge on two or three key assumptions. Your goal is to identify these assumptions and decide whether they are reasonable.

Examples of believable assumptions:

  • Birth rates in the Western world will continue to decline, leading to an aging population.
  • Consumers will continue to migrate to product offerings that are perceived to be healthier and more natural.
  • Mobile devices will become increasingly essential as a means of accessing the Internet

Examples of dubious assumptions:

  • The project assumes entry into a highly competitive market, and the existing well-funded competitors are not expected to defend their position aggressively.
  • The project calls for aggressive pricing during the early years to drive sales, followed by premium pricing in later years with no negative impact on sales.
  • The presence of an international brand will deter local competitors from entering the market with cheaper product offerings.

To sum up, evaluating a proposed project can be straightforward if you think of it as a journey and ask yourself two simple questions:

  • Am I going to be happy when I reach the final destination?
  • What do I need to believe in order to get there?

Your answers to these questions will tell you whether to accept the proposal, modify it, or abandon it altogether


If you would like more information on structuring successful joint ventures, please contact Donal by clicking here or call +662-6511-164