I’m often asked what are the keys to a successful acquisition? I have one simple answer: Have a process.
You can compare the mergers and acquisitions (M&A) process to the hiring process. Before we even begin interviewing candidates, we develop a job description, whom the employee will report to when they will start, and performance metrics, and how much and when they will get paid. After, we create a plan for finding candidates to interview and how we will convince them to join our organization. When the employee starts, we typically have an onboarding and training process to "integrate" the new employee with the company. Generally, we expect to see results from employees within 4-6 months, and if it doesn't work out, we can let them go.
We have detailed HR manuals for hiring employees, from whom we expect immediate results, but can fire if it's not a good fit. In contrast, "hiring" a company (executing an acquisition) costs millions, tens of millions or hundreds of millions of dollars, takes a long time to integrate and to realize success, and if the acquisition goes wrong, is very difficult to "fire" the company through a divestiture.
Using the foundation of HR is an excellent place to begin thinking about building your M&A roadmap. Over the years, I have developed three primary phases: build the foundations, build the relationships, and build the deal.
The first phase is all about getting the internal part of an acquisition right as you build your acquisition strategy, clarify your goals, and gather your team. In this phase, you build the "job" description for the company you are trying to acquire.
A critical component during this phase is developing your acquisition rationale. Often with acquisitions, people come up with a long list of reasons for acquiring another company, but this laundry list often becomes a way to justify any deal, rather than one that is truly strategic. Instead, it’s much better to develop your “one reason for acquisition,” the primary motivator for partnering with another company through a deal.
Think back to the HR example, when you are hiring an engineer, would you also expect them to be helping out in accounts payable or HR? In most cases, no. In the same way, having one reason is a way to stay focused and increase your chances for success.
After developing your acquisition strategy, you will need to identify companies to acquire and persuade the owners to sell to you. By default, most limit their search to for-sale companies, those that are actively seeking a buyer, because it can be a much easier starting point. Acquiring a for-sale company is like hiring a person who is unemployed while acquiring a not-for-sale company is like hiring a person who is already working at a job they love with good pay.
Convincing an employed person to join your organization and potentially move their family is a much more difficult undertaking, but it can be worthwhile if the candidate has the skills you need to make an impact. While persuading an owner of a high-quality, not-for-sale company may require more upfront work, it can be the best way to acquire a business that fits in with your criteria and long-term growth goals. Considering both for-sale and not-for-sale companies allows you to remain focused on accomplishing your goals.
Building your relationship with an owner is an iterative process starting from an initial call, to a first meeting, to a second meeting, and then eventually to a letter of intent or term sheet. The relationship capital you build in this stage is essential for when you move into the transactional portion of the process: building the deal.
After getting a signed letter of intent (LOI) or term sheet you will move into conducting formal due diligence and drafting the purchase agreement. During this stage, you also conduct a final valuation and evaluation of the business to make sure it is still the right fit, financially and otherwise. Once the ink is signed the deal culminates with integration, combining the two organizations into one. Much like the first day of a new employee, you want to build a path for making the new company feel “welcome” and set it up for success at your organization.
With so many moving pieces in an acquisition, following a systematic process will help increase your likelihood for success. An acquisition is a significant undertaking but done right by following a process, you can accelerate the growth of your company.
David Braun is the founder and CEO of Capstone Strategic, Inc., an advisory firm specializing in privately held, not-for-sale acquisitions and strategic growth initiatives. He is also the author of Successful Acquisitions: A Proven Plan for Strategic Growth (AMACOM April 2013), which lays out a detailed “Roadmap to Acquisition” based on over 20 years’ first-hand experience in steering dozens of transactions to completion. Since 1993, David has educated over 40,000 senior executives on the subject of M&A through organizations including Vistage International. His expert insights can be found on Fox Business News, CBS MoneyWatch, the Financial Times and CNNMoney. Find out more at www.CapstoneStrategic.com and www.SuccessfulAcquisitions.net.