Transcript
Hello, I’m Justin McKeand, Vice President of Strategic Markets. Today, I’ll be discussing how business owners can prepare for a successful merger, acquisition, or sale. I’ll cover when to begin planning, who should be involved, common issues that can arise before due diligence, and more. A strong M&A outcome starts well before a transaction is on the table, with thoughtful planning and the right preparation.
How early should a business owner begin preparing before seriously considering an acquisition, merger, or sale?
The sooner the better. Since M&A is about a lot more than just revenue, business owners should consistently review their numbers: their commissions, their fees, their margins, their staffing levels, and their growth. The idea is that when you’re consistently aware of your firm’s financial standing and are consistently making tweaks, you’re consistently maximizing efficiency and profitability.
For sellers, this will help maximize their enterprise value. For buyers, this will provide clarity around areas of existing strength that they can build upon and areas of opportunity. Understanding and accepting your company’s strengths and weaknesses provides a compass that points toward the best long-term partner.
Which members of the internal team and what external advisors should be involved in preparing for an M&A transaction?
Depending on the size and goal of an acquisition, the C-suite of a firm will be involved, at a minimum. If the larger goal of the buyer is to not only acquire new clients but also new employees, it’s a best practice to involve managers so they understand how the new staffing model will work and can provide guidance or suggestions to the decision makers.
For sellers, involving a consultant or broker can be a great way to get the house in order before listing the business. Since not all sellers have the same goal in mind – some are only concerned about getting the highest dollar while some are more concerned about providing a continued path and advancement opportunities for their existing employees – a consultant can help address the core objectives and can build the listing around those items.
What financial, operational, or organizational issues commonly create problems during the early stages of M&A, and how can business owners address them before due diligence begins?
A big issue I typically uncover is that most firms that want to acquire aren’t sure what they should be looking for. For example, scale. It’s very risky for a firm with $1M in revenue to acquire another firm that’s generating $2M in revenue. It creates a threat for the buyer because they’re tripling in size and usually staffing overnight. It’s challenging and risky to scale up that far that fast.
Another issue we commonly see is buyers chasing sellers based on revenue numbers, without any focus on specialty overlap. For example in the insurance world, an agency with a lot of premium written through Erie would typically seek out other Erie-centric agencies. Or for CPA’s, a tax-focused firm should seek out other tax-focused books of business to acquire. It’s worrying to have a large new swath of bookkeeping clients to service, while simultaneously learning about how to service them.
How can buyers and sellers prepare employees and clients for a smooth transition while minimizing uncertainty and disruption?
Communication – direct communication. And creating and implementing a thoughtful transition plan.
With employees of the selling firm who will be moving to the buying firm, a face-to-face introduction with the new owner or owners allows them to see, for themselves, who will now be at the helm. Question and answer sessions are always well-received and create an atmosphere where employee concerns can be heard and addressed immediately.
With clients, early communication from the seller can create a longer runway transition. Additionally, hearing the news from the selling firm directly, which they may have had a years-long relationship with, creates more trust and certainty. Let’s face it: no one likes to feel as though the rug has been pulled out from underneath them. That creates fear, which typically leads to client attrition. We often see transition plans that include the seller “sticking around,” even in a part-time capacity, for three to six months after a transaction closes. This overlap of the old guard and the new guard gives clients confidence – because if my old contact works with and likes my new contact, I’ll probably like them, too.
What separates an M&A transaction that simply closes from one that is truly successful over the longer term?
The simple answer is a well thought-out plan.
Targeting the right firm or book of business for specific, overlapping purposes is step one. Whether the buyer is looking for another firm with employees who already specialize in an area into which they want to expand, or the buyer’s strategy is to further grow their specific niche, the smoothest mergers don’t rely only on revenue growth to fix all things.
Having a plan for communicating with employees and clients is also crucial to a successful M&A transaction. Without employees and clients that both trust ownership, service levels and customer lists, not to mention client referrals, will decline and impact business revenue.
The first acquisition is the most challenging. Many business owners don’t know what they don’t know, and unforeseen issues that arise during the first twelve months after closing require immediate attention. This pulls energy and resources away from expanding relationships and revenue streams, which is the purpose of M&A.
Preparing for a merger, acquisition, or sale is a significant undertaking, but early planning and a thoughtful transition strategy will have a big impact on successful results. By addressing key financial, operational, and organizational considerations in advance, business owners can help position their company for a smoother process and strong long-term outcome. Thanks for watching.
