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June 23, 2011


Those that have had a chance to experience the power of synergies when businesses are combined know what it means to the financial success of the new entity.  As one looks at an opportunity to grow their business either through acquisition or with the merger of two or more businesses you must determine early on in the process what synergies you are going to capture.  The ability to know what needs to be done and how to structure a new organization is critical if one is going to effectively own and manage a consolidated effort.  The art of creating synergies in any deal is not only critical to the future of the business but essential in determining the value of any acquisition.    While sellers in a transaction often want to capture all of the synergies in their selling price it is improbable to think that they should get all of what the buyer will have to work hard to develop.  As those who have acquired other businesses know, it is stressful and demanding work to create meaningful synergies in a consolidated organization.

Capturing synergies by eliminating warehouses, trucks, forklifts, and hard assets are the easy decisions.  The more challenging decisions come in deciding who and how many employees you will need in the new venture.  I believe you need to start with a clean slate each time you combine any businesses and pick the best of the best when you fill out your new organizational chart.  It is a mistake by any acquiring distributor to assume all of their employees are the best at what they do.  In assuming no one is better than your employees you do not build a new organization you just retool the old one.  Taking advantage of building an entirely new organization allows you to be creative not only in the structure but allows you to build on each employee’s strengths.  One should take full advantage of this change in the organizational structure and build the most effective sales, warehouse and delivery teams possible.  Are you utilizing the latest sales technologies?  What about delivery routing systems?  Can you fit all of the newly acquired volume in your current warehouse?  All of these questions are ones you need to ask yourself before you decide what synergies you will be capturing.  Taking advantage of new technology and systems should allow you to build a much leaner organization by improving each employee’s efficiency.

Realizing that any synergies created in a new organization will have a direct impact on your operating profit you must do a thorough analysis of each department.  It is not as easy as just putting the other guy’s beer on your truck and delivering it.  Proper planning should allow you to reduce the combined operating expenses by as much as 25%.  While the reduction of operating expenses is the result of combining two businesses with overlapping tasks, it should not drive all of your decisions.  Any new entity should be built on the solid business practices you have had in the past. Reducing expenses that directly impact service to your customers can also affect your operating profit by negatively impacting sales.  

While trying to build a more efficient organization you have to be careful about trying to do too much too soon.  Change is good but change always creates concern with your employees.  Despite what employees share with management they are going to be concerned with one thing and that is “what’s in it for me?”   It’s important to understand that what you start with on day one of any new organization will change.  Change in the organization creates questions with employees and will add a certain amount of stress to their jobs.  This stress along with added responsibilities will result in frustration with many of the employees and within the first 60 days you should expect to lose 5-10% of your frontline employees.  Through my experience I have felt it is always better to be over staffed to start any new venture.  In the first 60-90 days attrition will bring you back to your targeted number of employees and it will be those employees you can depend on.

The health of any organization, old or new, is the culture that the employees are a part of.  While capturing synergies will drive the operating profit, doing so at the expense of a positive work environment will eventually lead to a decline in your business model.  Culture in itself could be a topic for future blogs but it is worth mentioning here as I have seen great work environments destroyed in order to achieve synergy goals.  The loss of peers in synergy moves along with the reduction of support to enable employees to do their job can have lasting effects on the employee’s job commitment. Culture is something that is not manufactured but grows from positive leadership and support over time.     

A well thought out and tested business plan is crucial in capturing the synergies you need to make any combined effort more profitable.  Having a well-documented timetable prior to and after closing of any transaction will allow you to systematically execute the synergies you want to capture.  Maximizing your savings through the elimination of duplication is essential and will allow you to be successful in your new venture.

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