‘If you don’t know what you are looking for anything will do’. In prior blogs I discussed the front end of deals from the perspective of a company taking the initiative to ‘go looking for a deal’. Also, what can be done prior to looking for a deal that increases you doing a successful deal. Although I haven’t researched it, my experience is that a large percentage of SMB acquisitions by ‘strategic buyers’ are drive-byes. What I mean is the genesis of the deal comes about through either an existing business relationship between buyer and seller or a third party that knows the motivated seller and a potential buyer. I know of a number of deals where the buyer wasn’t even looking but someone else thought they might be interested and brought the deal to them. These are the type of deals that can be very dangerous.
For the moment let’s assume the ‘front end’ work has been completed and it’s time for finding a deal.
What are the most useful tools during the Hunt?
What dangers do I need to be aware of?
What about this culture thing, does ‘Fit matter’?
Finding a deal is fairly standard process, but it has a lot of stops and starts to it. Your personal network, attorneys, bankers, are good place to start the hunt. I recommend Investment Banks that handle just the ‘sell’ side within the Profile you have developed. Although ‘business brokers’ are out there they typically handle ‘small deals’ and volume but they seem to be moving ‘up market’ in some cases. Your personal network will help you evaluate who to talk with. Besides your personal network your Profile is the tool you will use to help others understand what you are looking for (just the part that describes target profile characteristics.
What is the most useful tool? Your Acquisition Profile
What I have experienced as ‘dangers’ during the Hunt and you have to manage carefully are: First is fatigue. At the start it’s high energy and exciting but then the process has a lot of stops and starts and after a point in time you get impatient or fatigued and “looks close enough” sets in or you see so many potential deals you lose your focus. Second, Tunnel vision is the reverse, you are so set on the Profile that you overlook someone. Someone who is close should cause you to reevaluate your profile guidelines and goals by asking questions like; would this acquisition help achieve our goals differently or quicker? Why doesn’t it fit well? Etc. the key is to be looking back and always revaluating prior work on characteristics and goals. Last is focusing only on price and forgetting to look at total cost of the deal. I talked about how Cisco System looks at cost. Ernest and Young used a model that said you can figure 1% to 7% of deal value will be your integration costs. The main point is don’t forget integration costs. More again during due diligence and integration planning. At this point use 10% as a rule of thumb.
I have admonished you not to ‘fall in love with a deal’ also, don’t feel you have to do a deal within a certain short timeframe. Calling a ‘timeout’ for a period of time usually makes good sense if all you are seeing are bad deals. If this is the case, revaluate your potential deal sources. They are probably the problem.
I have been involved in the acquisition process were owners say they want to sell their company but seem to be dragging their feet to move forward. Solution, put a preliminary Letter of Intent in front of them. This will smoke out how serious they are. Sometimes they say they are interested but they just like the attention. This is another danger of a ‘drive by’. However, if they are represented by a reputable broker or investment bank, they should have taken care of this. Another reason to work through these third parties.
What about this culture thing, does ‘Culture Fit’ matter?
I bring this up now because it is the ‘soup Du Jour’ of M&A’s that go ‘south’. It is the main excuse leaders use for unsuccessful or difficulties in M&A’s. I will discuss this in more detail in due diligence and integration but for now here are some points on culture:
- Culture can mean many things to many people. It’s difficult to effectively define your own culture let alone another companies. An effective definition should be understandable to everyone and fit with how you compete in the marketplace.
- Does culture matter? YES, but unless you understand it from a business operating framework (yours and your potential acquisition) you will end up during more harm than good.
- I would not let perceived differences in culture automatically ‘kill’ a deal, but I am realistic in the costs these differences bring to the deal.
- I have seen ‘acquired’ companies culture become the dominant culture in the new entity and not with the consent or liking of the acquiring company.
In my next blog I was going to move into due diligence. However, after talking about the culture ‘thing’ above and most of you asking “what in the hell is he talking about” I will talk about understanding a companies’ culture as a part of M&A’s process in the next blog because understanding culture is important in all parts of the M&A process.
Some of the questions I have heard leaders ask in regard to culture are and I will try to answer next time are:
What is a company culture and how does it relate to a M&A?
Why is it important to understand culture in order to have a successful M&A?
How does culture relate to how my company operates?
Why do people use cultural differences as a reason for difficult M&A’s?