The M&A process is like the dating game: there’s plenty of fish in the sea, but hauling in the big catch isn’t easy.
Firms close deals every day without engaging an M&A consultant to help them, but does that mean that you’re prepared to manage on your own? Consider this scenario that applies to both buyers and sellers: you identify a list of 60 or so firms that you think would be a good fit for your company. You research them to get a bit more information, and to figure out who the right contact person is at each firm. You reach out to the top ten or fifteen firms on your list – whatever you have time for, you still have to run your own business and do all of the other things that keep you at the office late – and you strike up a conversation. The person on the other end of the phone is subject to every single pressure that you’re under as a business owner or decision-maker. After an initial conversation, maybe an email or two that makes you think that this could be “the one,” they drop off the face of the earth. They don’t reply to your last email. You wait a week, then you call them to check in. You leave a voicemail. Now what?
First, it should be pointed out that the comparison to dating is more clear than ever at this point in the M&A process. You met someone interesting, felt a connection, and then – suddenly – they vanish. Is it me? Is it them? Are they seeing someone else? Were they just leading me on? Maybe they lost my number? Maybe they really are just busy with their own stuff right now? How do I remind them that I’m still available and desirable without sounding, well, desperate?
This exact scenario is reason enough to “outsource” the M&A process to a consultant, and this is just step one of the process. All of that anguish – and all of those hours – and we are just talking about the stress of identifying the target firm in the first place and keeping them interested while you reach out to dozens of other potential matches. We have not touched on what happens next – evaluating firms for fit, analyzing financials, critical review of operations, determining a value, drafting term sheets, due diligence, negotiation, and planning for integration!
A few points about this process:
- Time is even more valuable than money. It is not uncommon to approach 100 firms in an M&A search. Is it really the CEO’s highest and best use to search for these companies and to manage this part of the process? Selling firms, especially, always need to be aware that every hour that they spend not out there developing new jobs or otherwise continuing business as usual is risking the value of their firm. Our Valuation Survey shows that the single greatest distinction in a valuation obtained for an actual or potential sale or merger (versus any other reason for a valuation), is backlog. Buyers want to know that they understand what they are buying and that the revenue is predictable in order to minimize risk.
- It’s not what you say, it’s who says it (and how long it takes). A consultant acting on your behalf can “follow up” with the target that’s gone MIA many (many!) more times than a firm can on their own. The consultant, although always professional and courteous, can be perceived as pushy, at worst. The firm that leaves five voicemails? Desperate. No other options. In addition, the first-date jitters are only exacerbated when it takes two business days to hear if there will be a second date. Having someone whose job it is full-time to manage the communication process and to be one step ahead of the conversation helps relieve that burden. The more time spent between a conversation and an “action item,” the more likely someone is to get distracted by work or other prospects. M&A is about clear communication and decisiveness, and that’s hard to do well when it is not your focus.
- Breaking up is hard to do. It’s just as unpleasant to be the one that gets cold feet (“It’s not you, it’s me”), as it is to be the one left wondering what went wrong. It is hard to tell a firm owner – whether the firm is one that you initiated the conversation with through research, or one that you have worked with on projects for years – that you just don’t want to try to make this deal work. I worked with a client that felt that the right thing to do was to end the discussion with the target firm directly (versus asking us to help). The client was so complimentary of the target that the target didn’t even realize that they had just been dumped. I got a call the next week from the target to discuss deal structure! They had no idea the wedding was off.
- The risk of “falling in love” with the wrong target is minimized when you incorporate a level of objectivity. The CFO is often a voice of reason in these circumstances. So can a board member who sees the train wreck up ahead before the first-class ticket is bought. The right level of push-back is important in M&A, whether you have assembled an internal or external deal team. There is a fine line between “over engineering” the target firm profile to the point that you have excluded plenty of great options, and having no idea what you’re looking for when you start the process. Firms in the former category never find what they’re looking for, or they get exhausted from the pursuit of perfection and end up overpaying. Firms in the latter category are at higher risk for wasting time with firms that don’t make a lot of sense for them.
This article is from issue 1158 of The Zweig Letter. Interested in more management advice every week from Mark Zweig, the Zweig Group team, and a talented list of other guest writers? Click here for to get a free trial of The Zweig Letter.
