Taking
an honest and unbiased assessment of both the financial numbers and
nonfinancial fit is critical. With that in mind, consider these 10 best
practices for assessing M&A deals to help optimize your return.
1. Build a due-diligence team before starting to explore deals.
Successful deals don’t just happen; they require meticulous planning and execution. At a minimum, include your accounting firm, attorney and insurance and benefits providers. And don’t forget IT and cybersecurity. Lean on your team to provide an impartial assessment of your readiness to grow and the strengths and risks of potential acquisitions. This is not an area to skimp on. Thorough due diligence will save time, money and heartburn by helping to ensure that you are informed and protected.
2. Define what you want to achieve—know your “why.”
Most buyers recognize that M&A deals need to support long-term growth plans. Yet it’s easy to lose sight of this when M&A activity is hot or an exciting opportunity pops up. Regardless of your growth and expansion plan, build a strategy to achieve it and let that guide your pursuit. If you can’t answer why you want to acquire a business, then the business likely doesn’t align with your strategy.
3.
Assess the workforce.
Acquiring a business could create an opportunity to add capabilities along with a built-in workforce, but only works if the seller isn’t stretched for talent. And, finding talent isn’t your only concern; you also need to ensure that the seller’s employees can pass a background check and have proper I-9 documentation. Otherwise, you could be staring down potential legal problems in addition to a labor shortage.
4.
Evaluate growth potential.
Has the seller been in growth mode, or has it been serving the same customers for the past 20 yr.? Stagnant growth doesn’t necessarily indicate a lack of potential, but long-term clients may be eyeing retirement themselves.
If the seller has been running on autopilot for years, you’ll need to quickly and cost-effectively build up your customer base to cushion against drift. Likewise, if the seller has been operating with a growth mindset, ensure that you have the capabilities and resources to support that trajectory.
5.
Dig deep behind the numbers.
The
recent inflationary environment has put a dent not only in family budgets but also
in corporate budgets. Owners and management teams have tried to combat higher
costs by charging more, adding fees and surcharges, and in some cases even
deploying shrinkflation tactics, offering less for the same pricing.
Vet these fundamental changes in the way companies currently drive revenue, how this differs from historical periods and what their impact may be in the future. Don’t just look at what is happening on the income statement; also consider what is sitting in inventory and work-in-process, which can turn higher gains or deeper losses in the future.
Trends
in net working capital are a tell-tale sign of business continuity. Erratic and
inconsistent net working capital indicates less-than-stellar generally accepted
accounting discipline, and poor management of the business cash-conversion
cycle. Keep your guard up and continue to ask questions.
6.
Consider the payback period.
Henry Kravis, co-founder of KKR & Co., Inc., once said, “Don’t congratulate us when we buy a company; congratulate us when we sell it, because any fool can overpay and buy a company.” Think of an acquisition as something to monetize rather than something you’ll keep forever; this will put your expected return into perspective.
How much you pay over EBITDA correlates directly with how long it will take to realize a return. If that payback period is too high, it’s time to reevaluate the deal. Remember, a 5x deal estimates a 5-yr. ROI. Determine if you have synergies to shorten that payback period.
7. Determine whether it’s a good cultural fit.
Shared values are important, but there’s more to determining cultural fit. Take a hard look at what the seller does that you don’t, and vice versa. How do they market their services—or do they at all? How do they interact with their top customers, and are you prepared to treat them the same way? How digitally mature are their operations? What nontraditional perks do they offer employees? Do they have a management team and a governance structure in place, or does the owner run everything by gut instinct and cash in the bank?
Blaming
too much on the prior owner makes finalizing deals difficult, and it definitely
muddies the water during post-transaction integration with all of the employees
who work for you now, versus the prior owner. Protect yourself within your
purchase agreement, and in their post-closing employment agreement.
8.
Set the terms for working capital early.
Working
capital is one of the top sources of angst. Naturally, sellers and buyers look
at working capital differently. This is further complicated when the seller lacks
proper inventory cost or WIP reporting. As a buyer, you must clearly define
expectations for working capital and have the framework and calculation sample
exhibited in the purchase agreement so it can be replicated at closing and in
the true-up period.
9.
Appoint a project manager for integration.
Integration goes hand in hand with cultural fit, and it’s where buyers most often stumble. Integrations don’t just happen; they take time and resources. How well you integrate an acquisition will determine the success of the deal. One way to help ensure the investment pays off: Hire or appoint a project manager to focus on integration from the moment you decide to buy the business.
10.
Do some diligence on yourself.
Do
you have a good handle on your own operations? Is your shop floor running at
capacity, or are bottlenecks and snags hindering productivity? Are you ready to
buy, or would you be better served by investing in a build strategy?
Conducting upfront diligence will help you prepare for questions that sellers, investors and funding sources may ask of you. It’s also a good exercise to help ensure your operations are running optimally before you take on another company. Do not compound your current operational problems with M&A.
M&A
deals always come with an element of risk. Good due diligence will protect your
interests. Working with a partner who can help you interpret what the findings
mean to your future is invaluable.
See also: Wipfli LLC
Technologies: Management
