There are many articles and volumes of content written about how acquisitions fail and what can go wrong in the process of buying a company. And a lot of these articles are correct… doing deals and realizing value is tough, but it can be done. In our work as advisors with strategic buyers and in running the acquisition process, we find and have experienced our greatest successes when we get solid alignment of three key phases –
- A clearly defined acquisition strategy
- Efficient and articulated transaction process
- Robust 100 day integration plan
If we can get the team and process focused and in-sync, in and between each of these areas, we have the best chance of creating value with the acquisition, and not making the obvious mistakes. The single biggest issue we confront is leaving post-closing and integration planning last, as an afterthought. In fact, it should be the opposite… that is, begin with the objectives defined in the acquisition strategy and overall strategic plan, and hone-in on what is critical to assure that the acquisition works. Then assign a business leader to own each critical outcome and modify their compensation to align with that metric or objective. Deals tend to have a rhythm and momentum, and the greatest organizational change can take place in the first 100 days post-closing, building on that momentum. This is usually the ideal time to implement initiatives and organizational changes to put the integration process on a strong footing and to eliminate the natural uncertainty and fears. In today’s market, people are one of the greatest assets of many businesses, and having clarity of roles and commitment to them and their job will mitigate fall-out that naturally happens when a deal is announced. Another key aspect to define up-front, or at least to have identified as a preference, is the desired integration approach. In other words, are we seeking to acquire a target that will be absorbed or merged into our business or possibly one that will operate independently as part of the corporate family? This facet of the end-game is tough to answer without a strategic plan.
Now let’s back-up to the big picture. Having an acquisition strategy assumes that you have a strategic plan to grow and position the company. The acquisition strategy allows us to create a “filter” or list of criteria to test the fit of a particular acquisition target as a candidate to buy. Creating a filter also forces the conversation and begins the education and buy-in process for those involved – – this includes the board of directors, management, advisors, investors and lenders. We find that creating and vetting the filter is a powerful exercise in itself to engage and form the team that will eventually own the process and expected results. It also becomes a communication tool and basis for quickly identifying a good target vs. one to skip. For example, typical criteria in the filter include items from these (and many others that are specific to your particular plan):
- A specific product, service, capability, technology, offering, etc.
- Cultural fit (yes, culture does trump strategy most of the time!)
- Financial metrics (revenues, EBITDA, gross margins, growth rates, etc.)
- Key operating metrics
- Major risk drivers: e.g. customer concentration
- Target valuation
Sandwiched between the acquisition strategy and the first 100 day integration plan is the actual transaction. This topic is the typical driver for investment banking or M&A advisor engagements. However, we find that without addressing strategy and the corresponding integration plan, we are guessing as to the best deal and financing structure. We use the filter and integration plan to guide the strategic due diligence work. Most of the time in our work, the first focus of due diligence is validation of earnings and cash flow coupled with confirmation of our strategic rationale and making sure that the compelling reasons to do the deal still hold post-diligence. Then we proceed to more traditional due diligence that includes legal, accounting, HR, IT, etc. Much of the transaction process is about confirmation of the targets ability to meet a strategic goal AND negotiation of deal points that impact cash and the allocation of risk.
I realize that this post is a high-level overview; my intent is to share some of our experiences and prompt you to think about your acquisition process. If you want more to read, I’ve written about this in our book “Middle Market M&A: Handbook for Investment Banking and Business Consulting” published under the John Wiley Finance series.