How to Survive the M&A Minefield

Would you risk your family’s life on a walk through a minefield? Of course you wouldn’t. But owners and leaders of companies will risk their business in the same irresponsible manner, by making disastrous acquisitions if they are not identified, managed and executed in the correct way.

Most research indicates that M&A activity has an overall success rate of about 50% – a minefield if not managed correctly. Business owners and leaders of small and mid-sized companies (£1m-£10m revenue) should keep those odds in mind, as many more deals will be offered to them over the next 12 months. At DropJaw, we have seen an increased level of activity especially around the technology, media and telecoms space and we expect this to continue as the markets regain confidence and vendors begin looking for growth.

The consequences of a bad deal are far greater for small and mid-sized companies than for a big organisation.  Large companies usually have enough managers and resources to patch things up. Most smaller companies lack the finances or bandwidth to absorb a bad deal and can often be the downfall of the entire business if not managed correctly.

The upside of a good deal, however, can be huge with potential benefits such as access to a wider set of resources, strong product offering and client base, entry to new markets, reduced costs and increased profitability. Successes, however, do not come easily and need to be planned. The hard work starts post-completion with the integration of the two companies.

Why is M&A success such a mine field?  The sad fact is that most deals look great on paper, but few organisations pay proper attention to the post-transaction integration process; that is, how the deal will actually work once all the paperwork is signed.

Based on over 30 transactions over the past seven years at DropJaw, we developed a list of key considerations you and your management team need to review and reflect upon ahead of trying to navigate the M&A minefield:

  1. Do you have sufficient management bandwidth to undertake a detailed due diligence (DD) process whilst at the same time continuing to run your current business? You still need to maintain sales targets, customer delivery and all those other never ending daily tasks.

TIP: Appoint a three-person part-time team to focus on the key areas such as finance, HR, operations, sales and market dynamics. Really take the time to look at the cultural aspects of the two companies and ensure that there will be a good fit. The talented people within the companies will make the deal successful; the disruptive staff will kill it, so identify them early and have a plan to deal with them. Have your three-person team produce a detailed deal recommendation, and have an external firm check it over and challenge some of the assumptions, as the team could be making what appear to be logical recommendations for emotional reasons.

  1. Do you have sufficient management capacity to take on the post-transaction integration process, or are you already stretching to run your business? You need to take control from the get-go, and ensure you have a clear execution plan with clear communications. Remember, a £1m company plus another £1m company rarely make a £2m company on day one, as sales and focus always suffer.

TIP: Appoint the same three-person part-time team to focus on the same key areas such as finance, HR, operations, sales and market dynamics as in the DD process. Get around the staff and communicate the new organisational chart, speak with all the customers and suppliers and adopt a proactive approach to PR to really get a strong message of growth and the drivers for the transaction. What does the deal mean to the market, and what additional value does the deal create for shareholders and customers? Make it easy to understand why you have completed the deal.

  1. Is the deal in line with your corporate strategy and direction? A deal that enhances or accelerates your strategy could offset the cost of a difficult integration or the cost and delays in pure organic growth. This is a critical factor in a fast-growing market, where the land grab for clients creates a recurring revenue stream, which drives increased exit valuations.

TIP: Developing a 6-12 month business plan is fine for focusing on the current tactical day-to-day business and managing cash flow. However, it falls short of a real strategic plan. Develop and agree at a board level a 2-5 year plan of what you are looking to achieve. What is the real vision? What, if any, aspirational plans do you have for an exit? This will help you determine if you can achieve your plan via organic growth, M&A or a hybrid of the two. You should also gain an understanding of what physical and momentary resources you will need to achieve the plan and your potential exit valuation.

  1. Why are the owners of the business you are looking to acquire selling? What haven’t they explained? There are always bodies in the ground that have not been discovered. Are they short on cash or the appetite to continue? Have they hit a glass ceiling? Is their market share eroding? You really need to take the time to understand the motivation surrounding the potential transaction.

TIP: In addition to the due diligence process discussed previously, speak with key members of staff (not just owners and shareholders) and ask them how they feel the business is performing. Try to do the same with clients and the company accountants. Above all, have the following two external advisors look at the translation and take care of your interests:

1. An advisory firm to qualify your team’s DD (they could have even brought the potential transaction to your attention in the first place). Having a fresh unbiased set of eyes look at a deal is key.

2. A trusted lawyer who can draft the subscription/shareholder agreement, etc. and ensure that everything you wish the seller to warrant is included, such as customer contracts. They can also ensure there are no pending litigations, hidden debts, etc.

In summary, there are no secrets to getting M&A right, it either works or it doesn’t. Getting the right advice and protection in place is essential for both parties. At DropJaw, we have found if you follow the above, it then comes down to two things:

1. The attitude of the people involved and their commitment to making it work.

2. Your gut feeling. If it doesn’t feel right- no matter how good the deal looks – don’t do it. Trust your intuition. Let’s face it; it got you where you are today.

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