I Got My Company into a Nightmare Merger -- and Couldn't Get Out

By Dave Sobel, CEO of Evolve Technologies, Fairfax, Va.
Everyone knows that mergers are always more complicated than they look. Even so, I significantly underestimated the problems that cropped up when we acquired another company.

My company provides IT support to small businesses, and in order to reach a goal of $1.5 million in revenues, I decided we should buy another company. I was so enamored by the notion of growing, and on the surface the fit seemed so right, that, frankly, I failed to do the due diligence I should have. I even missed some warning signs, such as the fact that the owner said he intended to leave immediately after the deal closed. That's not uncommon, I realize, but looking back that should have made me look over the whole deal more closely.

It turned out that the company was very lax with collections -- one client still owed a significant amount of money -- and two of its three major clients had cash flow issues. These were all problems I should have uncovered during due diligence.
The ripple effects from this merger left me doubting our future -- not to mention my own judgment. And it kept us from meeting our revenue goal.

Dealing with a raw deal
I was too optimistic all the way around. While I knew unforeseen issues would come up, I planned for best-case scenarios rather than worst-case ones. But we had some worst-case situations: For instance, I assumed that the employees of the company we were merging with would want to keep working for us. And even if a few didn't, I assumed they wouldn't freak out and start calling customers to badmouth us. Unfortunately, that's exactly what one individual did.

I spent a lot of my time reacting to situations rather than anticipating, and avoiding, them. As a result, many of the decisions I made in the 18 months after the deal turned out poorly. Customer satisfaction went down as I was trying to deal with the aftereffects of merging two staffs together. Of course, we were also in a recession, so it's tough to know how much the merger contributed to the bad feelings. We ended up losing a few clients, one simply because they went bankrupt.

That's when it became clear to me that something needed to change.

Getting an extra pair of eyes (or 12)
I desperately needed to get my company back on track, but I didn't have enough perspective on what I needed to do. Fortunately, shortly before the merger, I'd been invited to join a peer group for IT companies through Heartland Technology Groups. The group brings together the heads of 12 similar companies from different geographic regions -- so there's no competition -- in order to share advice and best practices and help each other solve problems. One of the benefits is that you can call in the other members to do a complete, two-day SWOT analysis -- strengths, weaknesses, opportunities and threats -- that involves poring over everything from time sheets and invoices to product catalogs. I called in the SWOT team in late summer of 2009.

I flew them in and put them up for two days -- they donated their time and I paid their expenses. As part of the deal, I had to adopt all of their recommendations. It's an incredibly humbling experience to have all of your business decisions inspected. I had to check my ego at the door because I knew I was doing this for the good of my company -- it wasn't about me.

The plan the team put together reaffirmed some of the long-term plans I'd already made, such as some post-merger hires and cost-cutting moves. But it also highlighted key issues that I'd missed. In particular, they encouraged me to draft a clear organizational chart. I have eight employees, all of whom wear multiple hats. At times it wasn't all that clear who should handle a given situation, which led to inefficiencies and delays.

The SWOT team also suggested improving internal communication by setting up a schedule for regular management meetings. It seems like a small thing but the schedule helped ensure that everyone was on the same page and had the opportunity to contribute ideas, feedback, and concerns. It set up a clear rhythm -- almost like a heartbeat -- for the company.

Since the SWOT analysis, the company has really turned around. We've had a great year so far and are on track to hit our new revenue target of $1 million for 2010. That will be a 25 percent improvement over last year's numbers, but still short of the $1.1 million we brought in during 2008, before the merger went through.

Finding support
I got into trouble because I thought the deal was going to be great. I didn't really plan for the fact that someone could be hiding information, or any of the thousand other ways something could go wrong. That's largely because, like many entrepreneurs, I didn't have a business background. I'd had plenty of experience in managing people and working with technology, but I was pretty naïve when it came to something as involved as M&A activity.

This experience has pushed me to start thinking of myself as responsible for running a company, not just being part of it. Now that I'm a leader and a boss, I've had to master a different skill set than the one I used when I started. I've also continued to be heavily involved in peer-grouping. I've taken a lot of what the SWOT showed me and paid it forward to other business owners who face similar issues.

I was fortunate enough to be able to call on the SWOT team to get me out of the nightmare of my own creation. If it weren't for them, growing the company probably would have killed it, too.

-- As told to Peter McDougall

Before starting Evolve Technologies, Dave Sobel managed a development team for that quintessential dot-com business, an application service provider. Before that, he was a technology consultant for Fortune 500 companies.
Resources

• Check out the Evolve Technologies website.
• Learn more about overcoming the challenges of starting a small business in E-Myth Revisited by Michael Gerber.
• Read about another business idea that Dave found helpful while navigating his company's post-merger difficulties at The Go Giver.