- 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.