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Mergers & Acquisitions: 5 red flags and how to navigate around them

It is no secret that M&As can be quite risky. If any of these red flags are turning up during your due diligence, it is imperative to dig deeper and determine whether you should pursue the path, or cut your losses.

Am image of the Ortus M&A Red Flag

While there may be a variety of specific reasons for a firm to merge or acquire, the ultimate goal is to secure an advantageous and lucrative future for those involved. Whether it is to build on synergies, grow market share, financial stability or to diminish sector competition, there are a variety of strong reasons why firms should consider to buy, sell or merge

There is no doubt that M&As come with their fair share of risks. In fact, a recent study from Aoris Investment Management found that 41% out of the 1,000 largest deals over the last 50 years were successful. With this doom and gloom narrative, it is not surprising that firms find M&As to be intimidating. However, the key takeaway from this is to remember that while there is no guarantee that every M&A will be successful, there are red flags that firms should be mindful of to help identify potential issues that hamper success.

Overinflation of experience and expertise

Often, M&As take place with the intention to acquire the experience, expertise and clients of another firm. What is their experience and standing within the sector? Does what they say about how well they do things stand up to what their clients are saying? Have they completed past projects in a way that is congruent with your expectations? Does anything seem too good to be true?

Having a clear idea of the kind of experience and expertise that you are after allows you to build a series of specific questions that will uncover if the firm that you are acquiring stands true to their capabilities or if they have inflated them to meet expectations. 

Disillusioned and disengaged team 

Talent is one of the most important assets of a firm, especially in legal practice. Ultimately, it is the people who make or break a successful M&A so it is important to be in touch with the realities of the team, their dynamics and mindset. 

One strong litmus test is how good the employee communication is within the firm. It is not unusual to hear of mergers that complete without the full knowledge of the wider partnership where all but the full equity partners have been left in the dark when an M&A is in progress. The uncertainty and speculation that emerge as a result of being blindsided can lead to an exodus of partners who take key clients and team members with them, diminishing the true value of the M&A. 

Clash of the (leadership) titans 

A culture clash is something that most firms need to brace for during an M&A. To lead by example is imperative in this case. If leadership teams are not aligned with the common objectives and their roles towards the strategic vision of the future together, it will likely create tears in the fabric of the new organisation. 

The leadership teams of both firms should be working together from the outset. If key differences are irreconcilable from the beginning, it is highly likely that the M&A will suffer a failure in the future. 

Oversmitten by the potential and vision 

It is good to go into an M&A with optimism for its future potential and have a desire to work through any areas that don’t quite hit the mark. However, in the interest of a successful M&A, it is important to draw the line between desire and strategy. One may desire to go ahead with an M&A despite financial impracticalities with the hope to defeat the odds, but true strategy recognises the red flags, the likelihood of remediating them, and the feasibility of the M&A.

Insurance and compliance risk

The expensive premiums that larger firms tend to have give them the ability to consider absorbing the risk and associated costs of becoming the successor practice where smaller firms may struggle with this or the alternative of invoking run-off which could make any potential deal too expensive to be feasible. Aside from engaging the brokers early to gain their insight into the risk and cost profile, looking at compliance procedures and staff operation will quickly indicate the real risk profile as well as likely training requirements. 

Ortus Group – experts in mergers and acquisitions

Ortus Group has more than 18 years of experience in the legal sector with mergers, acquisitions and executive search. The team is trained to provide systematic guidance in what can be a fraught process to ensure smooth transitions for all parties involved and has advised on more than 50 completed mergers.

For more information on how the team can help, please do not hesitate to reach out to us.


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