Credit Matters Blog

The New Business Acquisition

Kim Radok 18 March 2013


Once the contracts have been signed and the money paid, it is at this point, the real work of amalgamating two businesses in to one commences. Unfortunately the work and resources required to accomplish this process is usually underestimated.

Instead of a seamless process, all sorts of problems arise and you usually find problems occur which causes your cashflow to decrease and expenses to increase.

So what type of problems are you likely to expect?

1 The first problem is coming to grips with the pre-existing payment patterns and arrangements of your newly acquired customers. Their payment conditions and payment patterns may be vastly different from those of your pre-existing customer group. 

This then causes problems in your cashflow forecasting.

2  The lack of resources to service your expanded group of new and old customers on a day to day basis. This may occur  because of unexpected complexities in supply or the expectations of the new customers coupled with the usual expectations of your pre-existing customers.

3  Mutually acceptable terms of trade need to be negotiated with the new customer group.

4  Almost certainly, there will be "hidden surprises" in the acquired Debtor's Ledger.  For example it is not unusual to find large numbers of unprocessed credit claims, there may be "dead accounts" waiting for bad debt write off, unresolved customer disputes not yet recorded for review and processing etc.

All these issues will require additional resources to fix.

5  Disputes increase as your sales team sell at different rates, different quantities, or on delivery terms at variance to that expected by your new customers.

6  Suddenly cosy sales agreements not previously recorded or approved come to light which causes more problems for sales and accounts.

7  The expense in training the new employees in your business systems and to the level of expertise expected by your management.

8  The new employees come from a different business culture which may be vastly different from the organisational structure of the pre-existing business. This may cause complications if the new employees have high expectations which the new business cannot offer.

9  Key personnel leave after finding they do not like the way you do business and take their expertise with them. Furthermore, if you did not negotiate the payment of their accumulated entitlements properly when you took over the other business, they take your cash as well.

10  Management gets in to conflict as it is realised they do not have the cashflow and resources to resolve all the issues identified during the merger process. Large write-offs need to occur to pacify the new customers, or rid the business of liabilities of invoices which will never be paid.

However these write offs cause further conflicts as the business owners and managers do not see the write off of liabilities. They only see the loss of perceived assets. This further complicates the amalgamation of the two businesses.

There is no simple solution to any of these issues. However there are two simple decisions which can be made as part of the take-over process.

1  Acknowledge the merger will never be a simple as you image and always cost more than expected.

2 Be prepared with adequate cashflow and employees to resolve the unexpected issues which will impede the successful merger.

It is not Rhodes Scholar stuff; mergers always reveal unforseen problems not anticipated. Therefore I believe you should spend the dollars upfront to ensure you have the necessary resources to complete the merger as quickly and as efficiently as possible.

The alternative is to be always on the back-foot looking for extra cash and resources to get the work done later. Meanwhile, whilst those problems which could have been resolved the first time, keep re-occurring and causing more costs.

May you be paid today rather than tomorrow

Kim Radok