I was listening to an old Warren Buffet interview about his philosophies on business and specifically acquisitions. He summarized how he decides on acquisitions using four key criteria (size criteria is at least $75m earnings):
- A business he understands
- It has an enduring competitive advantage
- Run by management he likes and trusts
- It’s available at a reasonably attractive price
And he emphasized price is the least important.
The point is that acquisitions are for operators. To be a successful serial acquirer you have to be really good at running businesses. Of course, a rigorous playbook is essential, but the main benefit of a playbook is to stage manage your operators onto the M&A field to add their insightful knowledge (reference Zendesk’s integration expert on operational expertise). Study this interview given by Bradley Jacobs, XPO Chairman, who has completed over 500 deals (WSJ).
As an example, here is a quote from that WSJ article: “Having experience in buying companies, having business experience at running companies and what the integration process is going to be, and using operations people for the M&A team makes us be able to get a deal done very, very quickly—in a fraction of the time that some other buyers may take.”
What fit for acquisitions looks like – Operational Test
Acquisition success is measured at least two years post-acquisition! It’s not measured at closing. Did you successfully manage the acquisition after you owned it? Here is a little checklist to consider which may look remarkably similar to your organic growth checklist:
- Do you have a clear strategic vision, and do you understand why acquisitions would fulfill that vision? Would this story resonate and inspire an experienced operator who is selling her business?
- If you are struggling with your positioning in the marketplace. If you are unclear about your own competitive value proposition, then an acquisition will not help you.
- If you don’t have a systematic marcom program generating quality leads integrated into your CRM system, perhaps acquisitions are a step too far.
- If your legacy products are dominating your sales line and you’ve failed to build an effective product roadmap that launches products customers love, then foisting that pain on a target company seems reckless.
- Whatever industry you are in, if your KPIs are volatile and you lack control over the economic drivers of success then buying another company will just add to your woes.
- Do you have a blueprint for onboarding new customers? Would you be proud to tell that story to prospective target owners?
- Does your NPS score reflect a continual improvement in your customer relationships? Are your response rates impressive? Do your customers love you?
- Are you able to produce your financials within 3 days of month end? Are they accompanied by insightful storytelling by your CFO explaining the significance of your successes and failures?
- Does your monthly sales pipeline review meeting skillfully examine the passage of each deal and its probability of success? Are you measuring the credibility of sales forecasting?
- If manufacturing, does your slot plan align with the assumptions behind the quarterly sales forecast?
- How professional is your recruitment process and how thorough and inspirational is your onboarding process?
The ability to run your own business should not be in doubt. This is why PE firms often double down on their original investment by supporting their portfolio management in scaling by acquisition. They trust them. The evidence is clear that they can run their business.
What fit for acquisitions looks like – Systematic Process Test
But even being a great operator is not enough to guarantee acquisition success. You need a process that pushes post-acquisition integration to the top of the agenda, covers the risks, directs effort, aligns targets to your strategy, shows respect to targets, and reflects the full value to you of owning the target. Here are 10 questions to health check your existing acquisition playbook:
- Does your process generate an Acquisition Profile that articulates target criteria aligned with your strategy?
- Do you rigorously perform a multifaceted research exercise to ensure you uncover attractive businesses?
- Are you factoring in the “integration” challenge to prioritize targets?
- Do you have the best and brightest operators assessing and understanding the quality of the business?
- Have you coached the team on the respect factor? Too often we find acquirers showing a gratuitous arrogance in front of their smaller competitor brethren. Hint: it doesn’t work.
- Does your process allow a complete understanding of the value the target brings to your group?
- Does your deal structure and price reflect the post-acquisition integration strategy and the post-acquisition costs?
- Is the due diligence work driven by the post-acquisition strategy not just the historical facts and figures?
- Has your integration plan been stress tested by skilled operators?
- Do you conduct a rigorous post-mortem after every deal to ensure your process continually improves?
Many school kids dream about scoring a winning touchdown at the Super Bowl, sinking the winning putt at the Masters, or dipping at the line of the Olympic 100m final to win gold.
However, very few will have the grit, talent, patience, process or years of dedication to reach their goal.
70% to 90% of acquisitions are seen as a failure from the acquirer’s perspective.
We need to be better at M&A.
TPP is buy-side investment banking reimagined. We seamlessly become an extension of your team and integrate at all levels to add deep mergers & acquisitions expertise into your business.
Always ready for a conversation – 978 395 1155 or Ian@TPPBoston.com
