Blending the Art and the Science of M&A
By Jack Prouty, President of the M&A Leadership Council
There is a very important reason the M&A Leadership Council program titles begin with “The Art of…” When it comes to M&A, having structures, processes, tools, etc. (the science of M&A) are very important, but understanding the art of planning and executing in mergers, acquisitions and divestitures is paramount. In this context, let me share with you a best practice in effective due diligence.
Many of you, including attendees at our due diligence programs, are acquiring small, privately held companies. While the points in this article are particularly relevant to these situations, the lessons learned are applicable to any due diligence effort. The typical approach is to immediately launch a full-scale effort to collect data on the target company and bury them in all sorts of information requests. We jump into the tactical activities without first engaging the target management to be part of the joint process. We fire off without first aiming. Let me propose an alternative approach that focuses on the “soft stuff”, or the art of effective diligence:
- The first meeting with the target company should be all about building a relationship, not reviewing information requests. The objective should be to earn the right for a second meeting. A successful agenda would include:
- Why we want to acquire you
- The capabilities and assets your company brings to the combination
- How you fit into our overall growth strategy
- Why we are excited about having your company join ours
- How we would work together during this due diligence process, including roles and responsibilities
- The purpose and objectives of the diligence
- How the process would work
- For our diligence team, we should onboard and train them on not only our objectives and purpose in this diligence, but how we are going to interface and work with the target company. Areas of emphasis should include the rules of engagement with the target company, the need to “sell” to the target folks on the value of the deal, making a friend and building a relationship during the diligence, addressing the target management’s emotional issues and concerns by establishing trust and credibility with them, etc.
- For the target company, I would also recommend educating and onboarding their team on the diligence process, basically a more detailed drill down on the points covered with the key target executive during that first meeting so they know what is required and what is not, how the diligence process will operate, how to escalate issues and concerns, non-disclosure agreements and gun-jumping. Most will have never been through a diligence project before, especially on the sell side, and you need to communicate with them and set expectations.
- I would recommend that you put in a central coordinator on the flow of information requests to and from the target. Nothing frustrates or irritates the target more than multiple requests for the same information or a huge data dump of information needs that go beyond the information that is really essential. Set up the process so just one person on your side is facing off with the appropriate person on their side. For example, I have had large clients with a shared services group consisting of 6 different financial teams, each of whom want to interface with that one financial person in the target. When I have been involved in these situations, I insist that there should would be only one point person with the responsibility to coordinate the information requests from 6 financial areas and be the sole interface with the target’s financial person.
- This next suggestion comes from a very smart client I worked with. Think about two different roles driving the process: the Negotiator and the Hugger. The Negotiator is focused on all the things that need to be done to assess the business; determine the value; and negotiate the purchase agreement and price. The Hugger is that person who deals with all the emotional issues and concerns the target seller has. These are real issues that could crater the deal if not addressed and include such real concerns as:
- Why are they asking for this information?
- Do I focus on running my business or providing all this information your company is requesting?
- I have a real concern about a certain person on your team and how they are interacting with my people. This deal is not even close to being finalized, yet they are telling my people what to do and how things are going to work.
- I am beginning to have seller’s remorse: Do I really want to sell my business? What will be my role after the sale? What happens to my business and my people?
The key role of the Hugger is to be the trusted friend, advocate and coach to help navigate the seller through the process; to give them a safe haven to vent and raise concerns; and ensure that these emotional barriers to the sale are effectively addressed so they don’t hinder the close of the deal.
I am just touching the surface of this area. But the key point is that you need to focus on the how of effective diligence just as much as the what, the art as much as the science. In other words, don’t fire before you first get ready and aim.
This topic of Seller Dynamics is just one of many that we cover in our course, The Art of M&A Due Diligence. Feel free to email me with your thoughts and comments on this article. I would also love hearing about your experiences and lessons learned.