Dr. John Psarouthakis, Executive Editor of www.BusinessThinker.com, Distinguished Visiting Fellow at the Institute of Advanced Studies in the Humanities, University of Edinburgh, Scotland, publisher of www.GavdosPress.com and Founder and former CEO, JP Industries, Inc., a Fortune 500 industrial corporation
Creating an acquisition plan is one of the most important steps you can take to guarantee the success of the acquisition. Most companies probably do not bother with an acquisition plan. Of course you will hear of the person who buys a company during a dinner meeting with a lawyer. But those are often the same people who are pulling their hair out nine months or a year later, wondering why they aren’t making the numbers that they thought they would.
What is the Acquisition Action Plan?
The acquisition action plan is quite simply a description of what you plan to do once you take over ownership of your new company. Ideally, you should begin preparation of the acquisition plan during the formal due diligence phase. That way, you have a plan completed and ready to put into operation the moment closing takes place. To prepare a good plan, first of all, you need to understand that company thoroughly, not just the industry that it operates in. Second, you need to determine whether the way the business currently operates is up-to date and progressive or whether it needs to be changed. If you locate areas of poor performance, you need to identify specifically what causes the low performance so that you can develop an action plan to correct it.
Your overall action plan for change might include a series of shorter action steps in different areas of the company. Once you determine which changes are necessary, then for each change you should specify not only what should be done, but also how long it will take, how much it will cost, and who is going to do it. Also very important are your anticipated results. Since an action plan is implemented as a corrective measure, you should have a very clear idea as to the specific changes that should occur as a result of implementation as well as the financial performance changes, e.g., the amount of increased sales, profits, or other financial improvement you expect.
Objectives and Content of an Acquisition Action Plan
A good acquisition action plan has two objectives. First, it documents the results of the due diligence activities. Thus, much of the acquisition plan is a report that follows the structure of the due diligence. As or more importantly however, it presents the recommended strategies and action plans to make that company into a successful acquisition. The acquisition plan must include who is going to run the company and what is to be done with it.
An acquisition action plan might include the following major sections, a preface, brief history and overview of the acquired company, an overview of the industry, a description of operations and organization at the newly acquired company, strategies and action plans to implement those strategies, and financial statements.
The preface to the acquisition plan may explain its purpose, especially if the report is to be shared within your management team. It might also include some other introductory material, such as the task force members involved in creating the document and a summary of the game plan as well as target dates for completion and who is responsible for each assignment. In the case of one acquisition at JPI, the following major phases were identified:
Phase 1: Assessment of current operations
Phase 2: Development of strategy and action plans
Phase 3: Finalize and sign purchase agreements
Phase 4: JPI assumes control
Review and document first day actions:
physical inventory calculation
fixed asset appraisal
Phase 5: Post acquisition implementation of action plans and follow up
Brief history and overview of the acquired company This section of the acquisition plan includes a company description, history of ownership, reason for divestiture, product descriptions, financial summary and key people.
Overview of the industry and market An overview of the industry includes an overview of the entire industry as well as market segments and the immediate competition. It details the existing and new products and customer information.
Company operations and organization Although the structure of this section might vary depending upon the industry, it is basically a thorough description of the current company operations and organization. For a manufacturing company, typical sections might include sales and marketing, manufacturing, distribution and warehousing, inventory control and purchasing, human resources, management information systems, service, and legal issues.
Strategies and action plans Though a shorter section than the previous one, this section may be the most important. It outlines the issues and action plans for all the major areas of the company. Ideally, one page action plans are created that briefly outline an issue– a description of the current problem, and perhaps a brief history relating to how that problem arose. Then, for each issue, a description is provided of the action to be taken and the person responsible for taking that action. Ideally also, you should include a brief estimate of the budget, the time line in which that action should take place, and the expected results, if applicable, in financial performance terms.
In the case of a manufacturing company, plans might relate to general or administrative issues, including management succession plans, as well as marketing and sales, manufacturing, warehouse and purchasing, human resource, legal, environmental and safety issues. Although it is helpful to consider issues by department or functional issue, do not neglect other issues which might cut across departments or areas, such as the resource allocation system, work flow between departments, corporate culture and employee relations, overall quality issues and the relationship of the company to the broader community.
Financial statements The acquisition plan also should include the historical financial information as well as forecasts and projections. Historical financial schedules should include the income statement, balance sheet, cash flow and accounting policies. Projections should include these same areas. It can also include assumptions and a narrative of the growth plans for the acquired company.
The Acquisition Action Plan and the Company’s Value
Whether you are paying above or below book value, an acquisition action plan is essential to help guarantee the future value of the company. The presence of an action plan does not provide an absolute guarantee of success. However, in our view, the lack of an action plan greatly increases the risk of failure of the new acquisition.
Especially if you buy a company that is performing well, you are likely to pay a price that includes a goodwill payment in addition to the book value of the company. What this really means is that you are paying for the company’s expected future performance. Thus, a certain level of growth in sales and earnings needs to be achieved once you take over in order to justify the price and the return that you get.
On the other hand, if you buy a company that is below book value, you have probably done so because the company is currently not operating at its full potential. However, it is just as critical that you identify specifically, the areas in need of immediate attention or you may find that your “bargain” company is worth even less after you take over ownership.
Leadership in Developing the Acquisition action Plan
Appropriate leadership in development of the acquisition action plan is critical to its success. In the case of a very small company acquisition, the new owner is likely to be involved in both the development and implementation of the plan. However, in a larger company, it is not unusual, though ill-advised, to have one set of executives involved with the acquisition process up to the point of closing. Then the company is handed off to a second set of executives to run the company once it is purchased. This may be one of the major reasons why many acquisitions have a poor performance record. The acquired companies are not necessarily bad companies, but an appropriate takeover plan may b lacking.
Even if an action plan is developed by the acquisition team, if it is turned over to someone else to run, that new person doesn’t own the plan, psychologically, intellectually, or otherwise. Quite likely, the person taking over mid-stream will reject the action plan drawn up by others and start all over again. The transition from the acquisition team to a long term team of executives occurs well after the closing date. In the case of a turnaround, new management is brought in prior to closing to carry out due diligence, develop the acquisition plan and implement the plan after the closing. In companies that are already performing well, existing management may be involved in each of these phases, together with management from corporate headquarters. In either case, the executives involved with the evaluation of the acquisition are the same ones who lead the development and implementation of the acquisition plan after closing. This way, management develops a feeling of ownership and responsibility for the acquisition.
In the case of one company purchased, the owner/manager told us from the beginning that he did not plan to stay on to run the company once it was purchased. Before proceeding too far into the negotiations process, we needed to decide who was going to run the new division. We found a former colleague for the position and brought him in to develop the acquisition action plan and to run the new division.
Sometimes you may buy a company where the former owner would like to stay active with the company. This happens more frequently when the owner does not own the whole company. This can present its own challenge because it is not unlikely that a year or two after the closing, he or she begins to cool to the idea of staying on. You need to decide what to do during that period. Should you hire a new person as an understudy? Do you place the owner in an advisory role? These are issues you need to work out in the action plan as well, so that you are prepared later on.
Even if your company is relatively small, if you plan a second or third acquisition over time, it is very important to have the managers who will run the new division actively involved prior to closing with the evaluation of the company so that they can develop an appropriate action plan, period.
Involvement of Employees in Developing the Acquisition Action Plan
Starting in the formal due diligence phase or at whatever phase you are first allowed to meet with and talk to employees, you are likely to find them a rich source of information about improvements and changes already under way and/or those being considered. Development of action plans should not only involve the top leadership but also employees at the lower or middle levels of the organization. For instance, perhaps they are already aware of management information system problems and have been investigating a new system. You want to find out what they have looked at, and why they have considered or rejected various plans. This would appear to be common sense, and yet, not all companies do not take the time or value the input from this source because they have not taken the time to plan, period.
You can easily get so caught up in the acquisition process itself that you delay proper planning of the takeover until after closing takes place. This would be a big mistake. Successfully executed acquisitions require months of planning prior to closing, to assure a smooth transition. Much of the preliminary work overlaps with a properly done formal due diligence–extensive evaluation of the company and identification of potential problems. The remaining work, some of which may be obvious and some of which might require more problem-solving creativity, involves identifying the necessary changes and improvements that should take place and an assignment of due dates, budgets and people responsible for carrying out these changes. A simple format is to create a short one-page action plan for each topic, identifying the issue, the action required, who is responsible, and when it will occur, along with a budget and expected results.
The acquisition action plan may be the single most important thing you can do to assure the success of your new company. It is viewed as an extremely critical component of the successful acquisitions. The chief (principal) operating person must be involved in the process from the start.
How to Acquire the Right Business: (John Psarouthakis and Lorraine Uhlaner), Xlibris 2010.
From Tuller, Lawrence, Buying In, Liberty Hall Press
How to Aquire the Right Business: (John Psarouthakis and Lorraine Uhlaner), Xlibris 2010.
From Tuller, Lawrence, Buying In, Liberty Hall Press
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