Discuss the Main Disadvantages of an Acquisition

question 78

Essay

Discuss the main disadvantages of an acquisition.
A.Marginal success record.Most ventures that are for sale have an erratic,marginally successful,or even unprofitable track record.It is important to review the records and meet with important constituents to assess that record in terms of the business's future potential.
B.Overconfidence in ability.Sometimes an entrepreneur may assume that he or she can succeed where others have failed.This is why a self-evaluation is so important before entering into any purchase agreement.Even though the entrepreneur brings new ideas and management qualities,the venture may never be successful for reasons that are not possible to correct.Often managers are overconfident in their ability to overcome cultural differences between their current business and the one being acquired.
C.Key employee loss.Often,when a business changes hands,key employees also leave.Key employee loss can be devastating to an entrepreneur who is acquiring a business since the value of the business is often a reflection of the efforts of the employees.This is particularly evident in a service business,where it is difficult to separate the actual service from the person who performs it.In the acquisition negotiations,it is helpful for the entrepreneur to speak to all employees individually to obtain some assurance of their intentions as well as to inform them of how important they will be to the future of the business.Incentives can sometimes be used to ensure that key employees will remain with the business.
D.Overvaluation.It is possible that the actual purchase price is inflated due to the established image,customer base,channel members,or suppliers.If the entrepreneur has to pay too much for a business,it is possible that the return on investment will be unacceptable.It is important to look at the investment required in purchasing a business and at the potential profit and establish a reasonable payback to justify the investment.

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Definitions:

Corporation Act

refers to legislation that governs the formation, operation, and dissolution of corporations.

Foreign Corporation

A company that is incorporated in one country but does business in another under the laws of the latter.

Incorporated

A legal process used to form a corporate entity or company. It is recognized by law as a separate legal entity from its owners.

Doing Business

The activities and actions involved in managing and operating a company or engaging in commerce.