Microsoft's 2023 acquisition of Activision Blizzard is an example of how even large businesses are not immune to the pitfalls of business acquisitions.
Microsoft ran into delays and legal complications, especially from the British competition watchdog, which led to additional costs and uncertainty. Similarly, the Jumbo Group's acquisition of La Place proved much more difficult than expected due to financial and legal obstacles, so that an integration with HEMA failed and La Place was eventually spun off within the group.
These recent examples show how even large businesses face the complex financial and legal pitfalls of business acquisitions. DGAs and SME businesses may also face such obstacles, and it is crucial to be well prepared both financially and legally. In this article, we discuss three key financial and legal pitfalls in business acquisitions and provide practical advice for avoiding them.
Financial pitfalls
Incomplete or misleading financial information
A common mistake in business acquisitions is relying on incomplete or misleading financial data. This can lead to unexpected costs or hidden debts that only come to light after the acquisition. To avoid this, a thorough accounting review ("due diligence") is essential. This helps identify risks such as future liabilities or flattered forecasts.
Underestimating dependence on shareholder(s)
Many businesses rely heavily on their shareholders because of their operational knowledge, customer relationships and influence on business culture. After an acquisition, the loss of factors can lead to inefficiencies or loss of customers. A careful transfer of at least 6 to 12 months can help mitigate this risk.
Inadequate integration planning
Without a good integration plan, operational problems arise and value can be lost. It is important to secure financing not only for the acquisition itself, but also for the subsequent growth phase. In addition, cultural differences between buyer and seller must be recognized and proactively addressed to ensure a smooth integration.
Legal pitfalls
Letter of intent: binding or not?
Letters of intent record agreements and intentions, but if they are too non-committal, important elements may prove unenforceable. At the same time, a poorly drafted agreement can lead to legal complications or a premature acquisition. Make sure binding and nonbinding parts are clearly specified.
Withholding information
Sellers are required to share all relevant information that may affect the acquisition decision. Withholding crucial information can lead to legal liability. Buyer and seller should work together on a well-documented process, such as by using a data room.
Ignoring contractual obligations
Many contracts contain clauses that take effect in the event of an acquisition, such as "change of control" provisions. These can lead to unexpected terminations of important agreements or additional costs. During due diligence, all contracts should be reviewed for their impact to avoid post-acquisition surprises.
Business acquisitions are complex processes in which both financial and legal aspects must be carefully managed. Although the pitfalls discussed often occur in large businesses such as Microsoft and Jumbo, they are also relevant to SMEs.
By identifying these risks early and engaging experienced advisers, you increase the chances of a successful acquisition and avoid unnecessary problems.
