When contemplating an acquisition, it can be easy to imagine synergies. These notions are often vague, like “our product range and their distribution channels.” Vague ideas are guaranteed not to live up to expectations. Other times, it can be easy to think the numbers are the story — such as a large customer overlap. On a spreadsheet, you might convince yourself that this will enable the sales forces of the two companies to be combined and streamlined, producing a large cost savings with no loss of sales. Unfortunately, this perspective presumes that the elements and people in the companies can be combined as readily as the rows in a spreadsheet. This never works as well as imagined.

Don’t break it. It’s critical to realize that a great company is a living organism; it has a culture that is driven by a consistent set of values, often articulated as guiding principles. These are considered important enough that they are heavily weighted in reviews and recruiting, and they are practiced intentionally by executives. And even if key values at two great companies appear to be similar, they may differ substantially in application. If you imagine combining those lists, it’s easy to see how the culture can fall apart following an acquisition with synergistic drivers. Culture is a little like Humpty Dumpty: when you have a great one, it’s really important not to break it.

Beware the “incomplete.” Another way to fail is to look for a company that “needs” something. A company that is “incomplete” — whether due to a management failure, a crisis or simply not having had enough time to find its way to maturity — might be acquirable at a bargain price but it won’t suddenly become whole. The idea that you will be able to fix a broken company just by acquiring it is a vain one, and you’ll have a low probability of succeeding.

Let’s look at success. How do you make a great acquisition? I think in terms of these things:

  1. Accretion. Make your plan based on accretion rather than synergies. This means that the business you are thinking of acquiring can stand next to yours and continue to operate, while benefiting from the resources you bring to it and returning value to your company as the owner. Where there are overlaps, seek ways to benefit from them that don’t involve combining the spreadsheet rows, and be willing to move slowly.
  2. Functional. Seek out firms that are well run. Look for firms that are highly functional, that don’t “need” anything. Being highly functional will also increase its ability to make big gains from the things you can bring the company, like growth capital or faster access to new market segments.
  3. Culture. Look for a strong, principle-based culture. This is one of the key clues that you’re looking at a great company, one that can thrive in the challenges of evolving markets and changing customer needs. When you’re lucky enough to acquire a firm with such a culture, do everything you can to keep it intact.
  4. Adding up. The numbers have to work for everyone. It’s possible for either side to bring unrealistic expectations.

Acquisitions are challenging. My successes always involve great management teams that are running healthy companies. I am surrounded by a superb team who contribute their expertise during due diligence. Finally, I recognize that every deal has limits. However appealing it might be, becoming emotionally attached leads to bad decisions. If something we’re considering falls down on any of the four principles I listed, we simply don’t do the deal. There will always be other opportunities.