While planning an acquisition can seem as simple as agreeing terms (and let’s assume you’ve already scanned the market to select the best targets), checking you can afford the purchase consideration and lining up a trusted solicitor, this approach runs the risk of overlooking the first opportunities to optimise deal performance. We highlight four opportunities to improve your approach to acquiring businesses to go beyond the deal and four more tips to close the deal.
First, without a clear strategic rationale for the acquisition the business case and valuation basis can be disconnected. For example, many businesses acquire to drive commercial revenue but the valuation spreadsheet is primarily based on cost reduction measures that undermine the business case. For example, acquiring a business for its ability to drive advertising average order value but subsequently targeting cost reduction in advertising sales without anticipating that revenues will decline. Subsequently, when that modelled cost reduction is blocked, the acquisition is deemed to have not met approved financial expectations even though the most appropriate operational decisions have been made. We help clients build valuation models that are aligned to strategic and commercial realities and help assess their realistic affordability and payback by drawing on operational experience of delivering strategic objectives.
Secondly, post acquisition integration activities have a significant impact on the performance of the acquired business going forward. There is a natural order to immediate post-acquisition activities with control and communication high on the agenda and the smart acquirer will plan this effectively. Just as important can be delaying certain integration plans and aligning integration steps within the acquirer’s business. While we support clients to deliver system changes, procurement savings and restructuring in the first instance acquirers need to prioritise effectively securing stakeholders’ goodwill and establishing operational lines of communication. A survey by PwC* of private equity firms noted that 33% regretted prioritising rebranding over customer and talent retention, which highlights how easy it is for acquirers to get distracted.
Apart from planning for the impact on the acquired business, is is just as important to not assume that the acquiring business has the ability to integrate and assimilate an acquisition for example:
- Additional workloads, personal uncertainty and inevitable disruption an acquisition creates can feel overwhelming, leading to a loss of staff morale.
- Systems and processes may not be able to scale (financial systems and processes are surprisingly prone to this).
Such issues can be anticipated and addressed pre-acquisition and lead to far more effective integrations. Our practical experience of post-acquisition activities helps clients develop and apply integration plans that focus on value creation and mitigate the risk of walking into a post-acquisition performance dip.
Thirdly, excessive legal and financial due diligence may result in deal failure by slowing deal traction with detailed checks that do not go to value. In many circumstances a set of agreed procedures will address the key risks, especially as additional assurance and protections can be obtained in both the purchase agreement and preparation of the completion accounts. This can help the due diligence focus on more relevant and risk-based considerations, manage the deal process momentum as well as manage cost. Moreover, too often due diligence work focuses on historic considerations rather than going beyond the deal to help identify post acquisition integration and market opportunities for the combined business. Due diligence can provide an opportunity to develop a coherent plan for the combined business and assess value creation drivers such as market positions and talent and business cadence. We draw on our practical experience of acquisitions and managing commercial teams to develop and help our clients deliver the most relevant approach to due diligence to drive value creation.
Fourth, culture is sometimes described as the key reason why acquisitions fail. We don’t think it is quite the bogeyman of M&A that many make out as many businesses have a mix of cultures and we prefer to focus on building common behaviours and shared goals. However the assimilation of different cultures will usually lead to greater demands on the leadership team and oblige them to invest more in business culture to avoid an adverse impact on morale, reduced teamwork or compensating higher costs and loss of focus. We do agree that some cultures can be more challenging to integrate, especially where the value propositions are not aligned. Our advisory services can support not only the HR aspects of due diligence but can go beyond the deal to support leadership teams, consultations and building teams.
While mindful of the aspects beyond just doing the deal are important, it is also worth considering the following points on effective deal closure:
- Despite acquisitions being inherently opportunistic, it is definitely possible to create your own luck, which mature acquirers will be able to capitalise on. A good adviser will be able to put you in a stronger position to create additional opportunities and to make the most of the ones you get. Conversely, they should help you avoid costly mistakes.
- Speed can be essential to stay ahead of competitive bidders and close the deal before the window of opportunity closes. At the same time the increased work and risk of a performance dip means that internal resources can be stretched, not least the senior finance team. Decisiveness, drawing on operational and negotiating experience of managing acquisition teams and advisors can be extremely advantageous. We draw wide experience of working operationally to accelerate deal completion on a wide variety of transactions, including complex international deals involving different advisers to meet listing requirements.
- Developing a clear structure for the transfer before the contracts are drafted can save time, cost and manage risk more effectively. While the share or asset deal structure is often set by circumstance, the timing of ownership transfer can be advantageously varied to take into account consultations, consents, conditions, trading or production schedules which allows the risk and rewards of ownership to be better aligned and more reasonably apportioned between the buyer and the seller. Private equity sometimes employ such variations to apply locked box completion mechanisms and other variations are common in the creative industries.
- Ensure that legal and financial considerations are effectively aligned including initial and deferred consideration, completion accounts (if relevant) as well as warranties and indemnities. A lack of clarity about the consequences of and technical financial and legal aspects of an acquisition can give rise to costly claw backs or disputes arising at a later date. A finance professional experienced in acquisitions will be able to work with the legal advisers to bridge the gap between legal drafting, accounting requirements and operational needs.
How we can help: We work with clients to help identify targets, complete the transactions and go beyond the deal to support operational and strategic delivery. We offer flexible arrangements to best meet the needs of our clients. If you are considering acquisitive growth and would like an initial consultation in confidence to draw on our experience of scores of completed transactions, do get in touch.