Acquisition Strategy

When you think growing your business in 2017, you probably picture hiring more sales people, opening a new branch, developing additional products or acquiring state-of-the-art technology. Today I want to introduce a new concept for consideration: growing by exiting a business. Before you immediately dismiss the idea, take a moment to challenge your assumptions about company growth and allow yourself to be open to a new perspective. The reality is in some cases exiting may be the best path for growing your company.

Here are three ways exiting can help you grow.

  1. Get Focused – By exiting non-core business lines you can be focus on what you’re really good at. Take P&G for example. Over the last few years the company has adopted a strategic focus and shed over 105 brands in order to focus on 10 fast-growing categories. Shedding these non-core business lines will help P&G become more profitable. You may have some business lines you want to divest so that you can refocus your strategy and resources on what you truly excel at.
  2. Avoid Losses – If a part of your business is no longer profitable, you should evaluate whether or not you should keep going. Maintaining a business simply because you’ve always done so is not a good reason. The world changes and it may be that your customers no longer have a need for this product. For example, it would be crazy to continue manufacturing VCRs in today’s world.
  3. Grow Your Bottom Line – While overall sales or number of customers may shrink if you exit a market, your overall profit may grow. We once worked with an American manufacturer who made millions of die-casting products for various industrial customers. Unfortunately, many of their customers were purchasing cheaper products from China. Faced with this competition, our client decided to reinvent themselves into a maker of specialty components for the aerospace industry. They sold their old equipment and purchased the latest technology. As a result, their customer base shrunk tremendously, but profit rose.

When we hear the word “growth,” we automatically think about “more,” “bigger,” “expanding” not “less,” “smaller” or “shrinking.” While many would never consider exiting a business in order to grow, I encourage you to consider it as you develop your strategic growth plan.

Learn more about growing your business in our webinar 5 Options for Growth.

Photo credit: Maxime Guilbot via Flickr cc

Are you exploring all your options for growth? When you think about a growing your credit union or CUSO through a “merger” strategy, you may be tempted to focus on consolidation alone. While combining two credit unions can be a pathway to growth, it is important to recognize it is just one of a number of options available to you. Consolidation may not be the best solution for your organization and may not help you add the value you had hope for.

In a CU Insight article, Kirk Drake, CEO of Ongoing Operations, a credit union service organization, and John Dearing, Managing Director of Capstone, discuss the growth options available to credit unions and CUSOs and how to use strategic mergers and acquisitions to maximize your growth potential.

Read the article on CU Insight.

The demand for “healthy” or “better for you” food and beverages continues as consumers become more health conscious. Following this trend, Dr. Pepper Snapple (DPS) has agreed to acquire Bai brands, the maker of antioxidant and other “all natural” drinks for $1.7 billion. Founded in 2009, Bai has about $300 million in revenue and 373 employees. The acquisition is one of the biggest for DPS and the first major one since it spun off Cadbury Schweppes in 2008.

Demand for Soda Shrinking

Soda companies are faced with shrinking demand for their traditional products and increased competition from new healthy products both from large food manufacturers and startup brands.

Many recognize the need to expand their portfolios in order to continue to grow. Recently Coca-Cola acquired Unilever’s Soy drink business and PepsiCo agreed to acquire KeVita, a probiotic drink maker. Both companies also own a number of “healthy” brands. Coca-Cola owns Dasani water, Honest Tea, PowerAde and Vitamin Water and Pepsi owns Gatorade, Tropicana, Lipton Teas, and Aquafina.

While the multiple for this transaction is on the higher end, DPS is acquiring the potential growth opportunities Bai presents.

Thinking strategically, this acquisition will add breadth to DPS’s product line. DPS hopes to grow the business by filling its existing pipeline and distribution expertise with Bai’s products. By going healthy, DPS may be able to grow despite the declining popularity of soda.

From Strategic Alliance to Acquisition

Sometimes business leaders and owners shy away from acquisition because they are overwhelmed by buying an entire company. It is important to remember that there are many options and tools available to you when it comes to external growth, from strategic alliance to joint ventures to minority interest to a majority stake to 100% acquisition. All of these options should be considered to determine which path is right for your business.

The DPS – Bai transaction did not begin at 100% acquisition. Instead, DPS began with a strategic partnership, then later acquired a minority stake for $15 million in 2014. With minority interest DPS could gain some of the upsides of Bai’s growth, while also mitigating the risks associated with a new relatively and unknown product. Once Bai continued to grow and proved its profitability, DPS decided to acquire the entire business.

Minority investment is often used as a foothold to get your toes wet with an option to acquire the entire company later, depending on what makes the most sense for your business.

When you acquire a company, the biggest risk you face in the unknown. You put a potentially large sum of money down for results that are not guaranteed. Whether you are acquiring a company for a new technological capability, to expand your geographic footprint, or for its complementary product line – there’s always the possibility that the transaction won’t yield the desired results or that it will cause problems and even hurt your company.

In the news we hear about bad acquisitions and there is an entire book, Deals from Hell, that recounts exactly what went wrong in many of these high profile transactions. Acquisitions are inherently more risky than hiring a new employee that you could fire if you find it is not working out. Once you acquire a company, it is yours, and you’re not going to be able to “fire” it.

If Acquisitions Are Risky, Why Acquire?

If acquisitions are so risky, then why do companies do them? If done right, acquisitions can bring about great rewards and next level growth to your company. M&A is inherently a high risk, high reward tactic, but you can take steps to reduce your level of risk by using a proven M&A process. A proven process will help you identify the right acquisition so you can maximize your opportunity for success.

The Roadmap to Acquisitions

Think back to the example of hiring a new employee. Your HR department probably has a manual with a process for job posting, interviewing, and onboarding employees in order to ensure they are a good fit at your company. As we mentioned earlier, although you expect results from your new employee, if you find it’s not working out, you can always let them go. Why wouldn’t you have a process for acquisitions as well?

The process we use is the Roadmap to Acquisitions, which we developed from over 20 years’ experience helping clients grow through acquisition. The Roadmap takes a holistic perspective on the acquisition process, beginning and initial strategy all the way through deal execution and integration planning. I highly suggest using an M&A process or having a strategic plan before you begin pursuing acquisitions. This will help your reap the rewards of M&A while reducing your exposure to risk.

Photo credit: Derek Gavey via Flickr cc

We generally recommend taking between 30 and 60 days to complete due diligence. We find this is enough time to complete a thorough evaluation of the business without letting the process drag on.

Due diligence will include onsite visits with your internal team and your external team of lawyers, accountants, and your third party M&A advisor. Your internal team should include more than just your CFO; we recommend involving your functional leaders from sales, marketing, and operations in this process because they will be in charge of running those functional areas once you complete the acquisition. Involve these functional leaders as early as possible so they can start learning about the business that’s being acquired and not only look for issues but also identify opportunities where you can realize the value of the acquisition.

In addition to onsite visits, you also have data requests that are sent out the acquisition prospect, asking for information about the company. We try to make this process a bit more interactive than a simple checklist by having a conversation around what is important to the business. Information is typically shared in a virtual data room which keeps the files secure and ensures only approved viewers access the documents.

One important thing to remember is that you can never completely eliminate risk, no matter how thorough you are during due diligence. We have a saying “Due diligence will go on forever…if you let it!” At some point you have to call the question and decide if you’ll pursue the deal or not. You’ll never uncover 100% of the issues during due diligence, but that’s why you have attorneys draft reps and warranties that can protect you if there are things found out after the deal. On the other hand, you’ll never uncover 100% (or any) of the opportunities by just evaluating the company. You will have to execute the acquisition in order to realize the benefits.

Photo credit: Craig Sunter via Flickr cc

Are you thinking about growing your business? In any business endeavor, having the right questions is often half the battle.

Join us for a new webinar on “7 Strategic Questions to Ask Before Pursuing Mergers & Acquisitions” on Wednesday, December 7. We will cover 7 powerful questions that have been tried and tested with dozens of clients at the outset of their growth programs:

  1. What business are we in?
  2. What is our core competency?
  3. What are we not?
  4. Where is our pain?
  5. What are our dreams?
  6. What is our risk tolerance?
  7. What is our company DNA?

Explore each question in depth and learn how they have immediate applications and a direct impact on your growth strategy.

After attending you will be able to:

  • Establish a firm foundation for pursuing strategic M&A and external growth
  • Use tools to examine your current business situation
  • Begin to develop an action plan for growth

Date: Wednesday, December 7, 2016

Time: 1:00 PM EST – 2:00 PM EST

CPE credit is available.

Photo credit: Ryan Milani via Flickr cc

How many companies do you need to look at to do a deal? This is a common question we get from clients. Experience tells us you need to look at about 100 companies in order to execute one deal. That doesn’t mean you go through formal due diligence with 100 companies, but you do need to identify and do at least basic level research on them.

The Prospect Funnel

We look at this process of researching and selecting acquisition prospects like a funnel that narrows from 100 companies at the top to one deal at the bottom. In the beginning, you do basic research on 100 companies and measure them against your acquisition criteria. At this stage about half of the options are eliminated, so we’re left with 50 companies to do in-depth research on. Again you measure your findings against your criteria and about 25 companies pass the test. You call up the owners of these 25 companies, and about half of them will meet with you. Then you get maybe six second meetings, and you can agree to terms with at least one, maybe a couple, and out of that you negotiate a deal.

The Prospect Funnel

The prospect funnel is used to research and select the best companies for acquisition.

Have Many Options

Many are shocked when they hear about our approach because it seems like a lot of companies to get to one deal. People will say it takes too much time or resources to research all of the companies. However, as I noted above, you don’t need to do in-depth research and meet with the owners of 100 companies. At each stage of the process as you proceed down the funnel more and more companies get eliminated either because you find they don’t meet your criteria or because the owner doesn’t take your phone call or meeting.

Taking a broad approach at the beginning ensures you take the time to evaluate the marketplace and all of your options and that you have many options for acquisition. We do not recommend only considering one company for acquisition at a time because the deal could fall apart for a number of reasons. The owner could get cold feet or you could discover something during due diligence, and then you’ll have to start the acquisition search all over again.

Not-for-sale Companies

Another common objection we hear is that there are not that many companies for sale in the marketplace, I want to make sure you understand that we’re talking about looking at not-for-sale companies as well as for-sale deals.

We have lots of experience in not-for-sale acquisitions and when we work for a strategic buyer, we’re approaching companies whether they have a for-sale sign in front of their business or not. If it’s the right strategic fit, we’ll call them up and talk to the owner about selling their company or bringing in another company to own all or part of it.

Photo Credit: Feature Photo by Cydcor via Flickr cc, The Prospect Funnel by Capstone

Expanding your business into a new market, especially an international one, is an exciting, yet tricky undertaking. There are many benefits to growing your business globally including reaching a new set of customers and a new geographic market. At the same time, success does not come easily. You must grapple with regulatory challenges, cultural differences, and country-specific dynamics. One wrong step and your time, energy and resources may all be wasted.

How can you ensure your success?  Matt Craft, Vice President of Capstone addressed these issues in a workshop hosted by the International Trade division of the Virginia Economic Development Partnership (VEDP) in Charlottesville, Virginia.

In his presentation, Matt explained that success begins by considering which customers you want to reach and what markets they will be in. Next, you select the right market for your business by looking at those that have a healthy, stable demand for your products and services now and in the future. A careful analysis of future demand is important to growth. You don’t want to spend lots of effort entering a market only to find that it is shrinking. Your new international market should support your company’s long-term growth goals.

Learn more about market entry strategy in our special report: “Markets First – M&A the New Way.”

Photo Credit: Kevin Gill via Flickr cc

Middle market M&A rose in October and dealmakers expect robust activity for the remainder of 2016, according to a survey by Mergers & Acquisitions. Survey participants expect more companies will be inclined to execute deals once the uncertainty of the U.S. presidential election has passed.

Overall M&A in 2016 has dropped significantly when compared to 2015 activity. US M&A value for the first nine months dropped from $1.53 trillion in 2015 to $1.07 trillion in 2016 (-30%) and the number of deals dropped from 9,028 to 8,103 (-10%), according to Thomson Reuters.

However, middle market M&A has remained relatively stable. For the first nine months of 2016 US middle market M&A value decreased just 3.5% from $155 billion to $145 billion and the number of deals decreased from 7,565 in 2015 to 6,935 in 2016 (-8.3%), according to Thomson Reuters.

As I previously discussed on this blog, now may be an ideal time for middle market companies to execute strategic mergers and acquisitions. While mega-deals are slowing down and large corporations shedding non-core business lines, there are many opportunities for middle market companies to take action. External growth, which includes joint venture, minority interest, majority interest and 100% acquisition may help your company grow for years to come.

Are you ready for M&A? Take the Acquisition Readiness Assessment now for free.

Fill out the form below to access take the assessment online.

 

Photo Credit: Barn Images

Are you keeping up with industry changes fast enough? Or are you being left behind? It’s no secret that technology is disrupting industries from manufacturing to telecommunications to retail.

“…The risk of being left behind because of technological disruption and change is driving companies to make acquisitions faster,” Steven Davidoff Solomon writes in Dealbook.

For many firms, acquisitions are the only way to obtain a new technology or product and remain a competitive player in the marketplace.

Technology firms are notorious for acquiring startups or smaller firms to gain the latest talent and cutting-edge products. For example, Facebook acquired new technology when it bought potential rivals Instagram and WhatsApp. At the same time it bolstered its position against Google.

Another sector that’s facing great disruption is the financial industry. Most think of traditional brick and mortar banks, suits and ties, credit cards, debit cards, etc. The reality is FinTech (financial technology) is reshaping the industry. PayPal, Venmo and Apple Pay are growing in popularity and traditional banks need to keep up or risk losing consumers. Traditional big banks are acquiring, rather than building, FinTech capabilities. JPMorgan Chase has formed a joint venture with On Deck, an online lending platform for small businesses.

The advantage of acquisitions, especially in a swiftly changing environment, is the ability to gain a new technology or product rapidly and in some cases immediately. A well-executed acquisition brings you a “ready-made” solution where once the deal closes you have access to new technology, new technology that your customers need. On the other hand, building your own solution can take more time, but in today’s fast-paced environment, by the time you develop your own solution, the market may have moved on. In addition, you’ll likely face some teething problems or setbacks as you begin to develop a solution.

If there’s a technology or product that your company needs to stay relevant today or in the next five to ten years, I recommend you consider acquisition as an option. A carefully planned, strategic acquisition can help you stay up-to-date and relevant in your industry.

Photo Credit: Barn Images

Private equity firms are increasingly acquiring minority interests in public companies in order to grow, according to the Wall Street Journal. The landscape for PE is changing. Firms are facing tough competition from strategic acquirers who have cash on their balance sheets and are typically willing to spend more on an acquisition. At the same time, fewer banks are lending to private equity firms because of regulations that restrict the amount of debt allowed in acquisitions, making funding leveraged buyouts difficult.

In this challenging environment, minority interest may prove to be a path to growth. For PE firms, acquiring small stakes in public companies can pave the way to a 100% acquisition.

There are a number of advantages to minority interest for financial and strategic buyers.

1. Save Money

You have the opportunity to pursue external growth with a company that may be too expensive or too big for you to acquire in its entirety. For PE firms that are struggling to find financing, acquiring minority stakes allows them to pursue acquisitions despite limited funding.

2. Spread Risk

If you, like most business leaders, have limited financial resources to invest in acquisition, you can acquire several minority interest to spread your risk, while remaining within your budget.

3. Retain Key Management

It’s unlikely that the entire management team will leave when you acquire a minority stake. These experienced team members may stay on and continue adding value to the company for years to come.

4. Open Doors

Minority interest allows you to pursue opportunities that may not be open to 100% acquisition. It would be much more difficult for a PE firm to outright acquire a publicly traded company than it is slowly acquire minority stakes. For strategic acquirers, there may be not-for-sale owners who are not interested in giving up their entire company, but may be open to selling a piece of it.

5. Execute Your Strategy

Minority investment can be used to eventually acquire a majority stake on even the entire company. It’s common to build in options for the buyer to acquire additional stakes as time passes. For example, Disney acquired a 33% stake in video streaming company BAMTech and has the option to acquire a majority stake in the future.

Photo Credit: Joan Campderrós-i-Canas via Flickr cc

 

While it’s an important milestone, a signed letter of intent does not guarantee a successful acquisition. Just ask Pfizer who withdrew its $150 billion bid to acquire Allergan after signing a LOI. Pfizer ended up paying a breakup fee of $150 million.

After the LOI is signed, you still have a few major steps to take before the acquisition closes including due diligence, final valuation drafting the purchase agreement, and integration planning. In this final stage of the M&A process, consulting with external advisors such as lawyers and valuation experts is important, however you must remain actively involved in the process and continue leading the acquisition. At the end of the day you, not the lawyers – will own the company and have to live with the decision.

It is important to take a thorough look at these technical issues and consult experts while maintaining your leadership and guiding the acquisition. Don’t let some mistakes you make during this final phase derail the months or even years of hard work you’ve put into the deal. Gain confidence in your decisions in our webinar “M&A: From LOI to Close” on November 10 and learn how to navigate these steps move the deal to the finish line. This webinar will provide insight any professional involved in M&A will want to know.

After completing this webinar, you will be able to:

  • Explain the structure of an LOI and how to make it beneficial to your situation
  • Describe how to manage the Due Diligence process from both the viewpoint of the Buyer and the Seller
  • Utilize strategies to negotiate an agreement that is beneficial to both sides
  • Identify how valuation is affected during the Due Diligence and Closing processes
  • Recognize what is expected at Closing
  • Begin to execute your Integration game plan

M&A: From LOI to Close

Date: November 10
Time: 1:00 PM ET – 2:15 PM ET
CPE credit available

Photo Credit: Simon Law via Flickr cc

Trust is everything. As leaders, we can forget this during the excitement of a deal. We can get caught up in reviewing financials, bogged down in the details of due diligence, or absorbed in mountains of research and completely forget about the humans involved in the transaction. When you take a moment to think, it’s obvious that no deal can take place without some level of trust between the two parties.

I was reminded of this a few weeks ago when I had the opportunity to participate in an event, From DoG Street to Wall Street, at the College of William & Mary. The event connects current students interested in finance and investment banking with alumni, and I was happy return to my alma mater to answer questions and discuss my experience.

David Braun Dog St to Wall St

Participating in the investment banking roundtable discussion at From DoG Stree to Wall Street.

During the event I shared with students was the importance of trust and relationships in mergers and acquisitions. When I speak about relationships I don’t mean relying on your friends and network to make deals. I simply mean establishing a connection with another person. Especially in the world of not-for-sale acquisitions, paying attention to the human aspect of M&A is critical. Our philosophy is built on relationships and we work hand-in-hand with our clients from initial strategy development through deal execution in order to ensure they are in the best position for long-term, strategic growth. Some of our clients have stayed with us since we were first founded in 1995.

We not only take this approach with our clients, but also with the owners of acquisition prospects. In the world of privately held not-for-sale acquisitions trust is critical. Unlike in for-sale auctions, most owners of not-for-sale companies are not looking to sell their business to anyone, let alone a stranger, and many are initially distrustful of any potential buyers. Focusing on the mechanics of the transaction and financials at the onset is a sure way to kill any potential deal. The path to a successful acquisition begins with winning the owner’s trust, sharing your strategic vision, and developing a relationship that leads to mutually beneficial acquisition.

Photos courtesy of the College of William & Mary

After signing a letter of intent, you expect the deal to close, but there are a number of reasons acquisitions fail ranging from regulatory hurdles to unexpected challenges that arise during due diligence to cultural clashes. In my last post, I discussed reasons deals fall apart even after both parties sign a LOI. Here are three ways to make sure your deal stays intact and reaches the finish line.

1. Strategy First!

Using strategy as your guiding principal is helpful in all steps of the M&A process. As you finalize your deal, continue communicating your shared vision for the newly merged company with the owner. It will be easier to reach an agreement and smooth over negotiations if both parties agree on the direction of the acquisition. Make sure both you and the seller keep the big picture in mind and are aligned on strategy.

2. Understand the Seller’s Perspective

Many owners have a strong emotional attachment to their company; it’s their baby. They’ve spent their lives building the business and they are not going to sell to just anyone. Prior to signing the LOI, you had to convince the owner that you were the right home for their company. Even after signing the LOI, it’s important to continue reaffirming the seller that you are the right buyer. Remember to keep the seller’s perspective in mind rather than just barreling forward and pushing your own agenda. Remember – a LOI is not the same as an agreement and the seller can still back out.

3. Negotiate in Parallel, Not Series

During negotiations, rather than arguing each little point, gather all the points of contention and settle them together. This way, you can determine what’s really important to you and to the seller. Bringing all the issues to the table at once will reduce frustration and prevent you from getting stuck on unimportant issues that can prevent your deal from moving forward.

Have a Plan B

Even if you follow the strategies listed above, your deal may still fall apart. It’s part of the nature of acquisitions – high risk, high reward. The best way to mitigate risk and make sure you haven’t wasted all your time and effort is to have a backup plan. Have a robust pipeline of companies to consider for acquisition. This way if one deal falls apart, you can still move forward with your other options.

Learn more in our upcoming webinar “M&A: From LOI to Close.”

Date: November 10, 2016
Time: 1:00 PM – 2:15 PM ET

 

Photo Credit: Brandon Hite Flickr cc

Remember that just because a deal is announced, it doesn’t mean it will go through. A record number of M&A transactions announced in 2015 have been cancelled bringing the total deal value down from $4.374 trillion to $78 billion. Unfortunately cancelled deals mean a lot of time, resources and effort were wasted putting together these transactions.

Why Do Deal Fall Apart?

Typically when you first read about a deal in the news, especially with large publicly traded transactions, the transaction has not been completed and the two companies have only agreed to a letter of intent (LOI). After signing the LOI, the two companies can iron out all the details of the final agreement and wait for regulatory approval if necessary. During this period between LOI and close, the deal may break up for a number of reasons.

1. Regulatory Hurdles

Anti-trust issues and regulatory hurdles create delays for many large, publicly traded transactions. Regulatory scrutiny doesn’t necessarily mean a transaction will be called off, but it can be a contributing factor. Pfizer planned to acquire Allergan for $160 billion and relocate its headquarters to Ireland in order to lower its tax bill. However, due to new U.S. Treasury rules aimed at curbing these types of transactions, called tax inversions, Pfizer and Allergan called off the deal earlier this year.

2. Disagreement over Deal Terms

Other acquisitions fall apart because the two companies can’t agree on deal terms. The massive $35 billion “merger of equals” between Publicis Groupe and Omnicom Group faced a number of challenges: personality clashes, cultural differences, and disagreement on deal structure and senior positions. The deal was expected to close in six months when it was first announced, but nine months later the two companies mutually agreed to disagree and went their separate ways.

3. Cold Feet

In the world of privately-held not-for-sale acquisitions, it’s not uncommon for an owner to be anxious about selling their business. Typically by the time you’ve signed an LOI, you have overcome many of these fears by ensuring that the acquisition is the right strategic fit and gaining an understanding the owner’s perspective and motivations. However, the owner could still change their mind and decide not to sell.

On the other hand, circumstances could change that make you back out of the deal. Something uncovered during due diligence or a surprising turn of events may prevent you from going through with the deal. We once had to walk away from a deal because we didn’t share the same ethical values as the prospect company; the owner had two sets of books.

In my next post I’ll go over strategies for moving your deal forward after signing the LOI.

Some might say the best time to pursue an acquisition is when the right opportunity comes along, but they’re wrong. The best time to pursue M&A is whenever you are ready. The best opportunities are those that you seek out proactively. If you wait around for opportunity to come to you, you may be missing out.

To many it’s a novel approach, but we advocate pursuing not-for-sale acquisitions: that is, companies that have not advertised themselves as potential acquisition prospects, and may have not even have considered the option. The truth is, every company is for sale…for the right equation. Especially in the privately-held world, when a company is “not-for-sale” it simply means the owner is not currently considering selling, but they may be open to it if a sufficiently attractive vision is presented. It’s possible that up till now, they haven’t found the right buyer, or simply have never really thought about M&A as an option. If you only look at companies that are for sale, you drastically limit your choices.

By being proactive you can search for a company that meets your ideal profile and fits in with your growth strategy rather than accepting whatever happens to be on the market. If you were planning to buy a car, you wouldn’t wait for s salesman to knock at your door and hope you like what he offers. You’d decide on exactly the features and look that you want, and go in search of the closest match you can find.

Pursuing acquisition on your own terms starts with a carefully developed M&A strategy. This should complement your company’s overall growth strategy. The most successful acquisitions aren’t about cost-savings or financial engineering; they are about setting your company up for long-term growth. Acquisitions can be one of the fastest ways to grow your business and help you reach new markets and customers.

It usually takes at least one year to develop your M&A strategy, create a step-by-step plan, identify the right companies and execute and close the deal. Keep this timeline in mind when you start thinking about a transaction. So if you’re anticipating any challenges to your current growth, the time to start on your acquisition plan is not some future date when you run into an eager seller — it’s today!

Photo Credit: Insansains via Flickr cc

Culture is an important part of an organization, but it can be difficult to define. Unlike other areas, such as finance and operations, which have concrete metrics like revenue, EBITDA, and number of employees, quantitatively measuring culture can be challenging. Leaders often rely on their “gut” to understand another company’s culture, but this leaves an incomplete picture.

When pursuing mergers and acquisitions, fully understanding the seller’s organization, including its culture is critical to your success. Rather than relying on subjective impressions, we use the Cultural Assessment Tool to measure a company’s culture.

We look at about two dozen key areas and scrutinize how the company goes about doing business in each area. For example decision-making: Is it centralized or decentralized? It is fast or is slow? Is the company consensus-building or dictatorial? We use this tool in the first place to look within, and then to analyze a prospective acquisition. For implementation, we use an online questionnaire tool, such as SurveyMonkey, which is easy to deploy and delivers quick results.

The Cultural Assessment Tool

The Cultural Assessment Tool

How we apply the Cultural Assessment Tool depends on the size of the organization. We typically approach the process on four levels: shareholders, executives, managers, and employees in the organization. What we’re looking for is the perspective on the company’s culture at each level, so we can create a crosspollination of views across the organization. What often causes surprise is how differently people at various levels may view the same company culture.

For example, we worked with a company where the shareholders felt the culture was open and transparent, with flexible, nimble decision-making that nurtured innovation. The rank-and-file staff held a diametrically opposite view. They didn’t feel that the mission and operational plan were at all well communicated. In fact, they saw the culture as closed, dictatorial, and averse to consensus-building. It was almost as though we were talking about two different companies.

Using the Cultural Assessment Tool is one way to objectively measure and evaluate your own culture and the seller’s culture during due diligence.

When contacting an owner about acquisitions, don’t be surprised to hear “no.” Most owners, when asked about selling their “not-for-sale” business will automatically refuse simply because it’s unexpected. Remember, for an owner focused on running the day-to-day operations of his business, this offer is coming out of the blue. There are, of course, a number of other reasons why owners don’t want to sell including history, age, family, and community. Don’t be afraid of rejection or give up after the first try. If you are persistent, you may find the owner is open to at least talking to you or meeting with you to hear you out.

However, in some cases, despite your determination, you may find that the owner still is not interested in selling or any type of partnership. So what do you do? Do you keep calling him or do you give up?

When contacting an owner about selling his “not-for-sale” business you must be persistent, but not obnoxious. It’s important to strike the right balance. If you’re at an impasse with an owner who is not budging on his “not-for-sale” position, there are a few strategies you can employ.

Write the Owner a Letter

If the owner is still refusing to meet with you after multiple phone calls, try taking the conversation from verbal to written. In a letter, you don’t seem as pushy and the owner has more time to think through his response rather than react in the moment.

Stay in Touch

If the owner still seems uninterested after a letter, put him on a keep in contact list. We have a list of prospects that we call every quarter to check in and see if anything has changed since we last spoke to them.  A big part of acquisitions is timing and an owner who is not ready to sell today, may be ready six months down the road. When something changes in his business and the switch flips, he may pick up the phone and call you. While there’s no guarantee that the owner will sell, at least if you made the initial approach, when he is are ready, you will be at the top of the list as a potential buyer.

Move on

If you’ve tried both of the strategies listed above and still have not had any success, it may be time to move onto another prospect. You shouldn’t keep beating a dead horse and some owners are really not going to sell their business no matter what.

If you have a robust pipeline of acquisition prospects that you are pursuing in parallel, this won’t be a major setback to your acquisition program. With many options you increase your chances of a successful acquisition.

With every acquisition you have a choice of how you will integrate the two entities. Often buyers assume a “winner-takes-all” approach where they impose their systems and culture on the acquired company. This is not always the best way to successful integration. In fact, it may be best to integrate some of the seller’s practices into your own organization.

In our new M&A Express Videocast, I advocate a strategic approach that leverages the best from both entities. I will also introduce the power of the 100-day plan in achieving a successful integration.

How Far to Integrate

April 5, 1:00 pm – 1:20 PM ET

About M&A Express

M&A Express is a high-impact series of videocasts presented by David Braun, founder of Capstone and author of Successful Acquisitions. Each videocast runs 20 minutes or less, and delivers cutting-edge insights on proven growth strategies for middle market companies. M&A Express is free! M&A Express is free! Visit our website for more information.

Watch previous Videocasts on-demand:

  • Why You Need a Roadmap
  • Where to Start Your Search
  • When to Walk Away
  • The Hidden Power of Minority Ownership
  • Cultural Due Diligence
  • The Letter of Intent: A Key Milestone

How can you tell a good company from a bad company?

A lot of CEOs say that they trust their gut when it comes to acquisition targets, but unfortunately instincts and opinions aren’t enough. We need facts and metrics. We need real tools to generate quantifiable data about the companies we’re considering. M&A is a massive undertaking and relying on instinct alone to guide you is a mistake.

The Prospect Criteria Matrix

One tool we use to help objectively evaluate potential companies for acquisition is the Prospect Criteria Matrix. It starts by defining the key characteristics of a good acquisition for your strategic objectives. In each case, you want to determine a way to quantify the criterion on some kind of scoring system.

For example, “good financials” may be one criteria and your metrics may be a revenue between $25 and $35 million, and a strong balance sheet. Other criteria could include customers or geographic location.

Typically we recommend clients limit to no more than six criteria. With more than six criteria, it’s easy to lose focus on meaningful strategic aspects of the company. Each individual criterion should have multiple, measurable metrics.

Weighting Criteria

But simply scoring the criteria is not sufficient. The information you gather needs to be weighted because not all criteria are created equal. Some factors will be more critical than others. You need to sit down with your team and identify the things that are most and least important to your organization. For example, financials might be a very high priority for your acquisition strategy, so you might weight that one at 30 percent. If location might be less important, and you’d give that 20 percent.  You juggle your criteria to add up to 100 percent.

So how do you use this tool? Let’s say you have 20 companies you’re evaluating. Get everyone on your acquisition team together and ask them to rate each company based on the criteria you’ve chosen. It usually works best to use a scale of one to ten. One company might get an eight in a particular category while another gets a three. Once you’ve established the average for each category for each company, you multiply by the weighting percentages to find the weighted average.

The Prospect Criteria Matrix helps you objectively evaluate potential acquisition candidates.

The Prospect Criteria Matrix helps you objectively evaluate potential acquisition candidates.

What’s even more important than the areas where everyone agrees are those where there is dissent. If you give a company an 8 on financials and someone else gives it a 2, then that should be the start of a conversation. And because you’ve chosen measurable criteria, you can compare the data rather argue about whose “gut feeling” is right.

The tool allows you to easily prioritize companies, and it also helps to confront some of the warning signs we’ve looked at above. For instance, if your CEO is pushing a “Brother-In-Law” company, instead of having an awkward conversation about why you think he’s wrong to be so enthusiastic, you can show him the data and insights generated by the Prospect Criteria Matrix.