Challenges in the M&A Process Have Remained the Same Over Decades
by Mark Edwards
After more than 30 years facilitating mergers and acquisitions, I am reluctant to admit that the challenges remain predominantly the same.
My introduction to acquisitions was way back in 1985, when I worked for business transfer agent, UK Business Sales. The types of companies we were involved with were many and varied - as were their owners - so the role proved a great education.
My M&A work at Boss Equity is now very much more specialised, focusing purely on the software tech sector - However, over the past thee decades, the issues surrounding business sales have changed very little – Sure, I’m now in a different sector, selling different types of businesses for different people and far greater sums of money now change hands – Yet, despite the passage of time and all the other variables, surprisingly, to me, so many of the issues have remained a recurrent refrain.
I have often wondered why so many individuals seem to make identical errors - even when they come from different parts of the world. After much deliberation, I think I have finally stumbled across the answer. Big drum roll………………..
Don't Rely on Your Accountant to Gauge the Value of an Acquisition
Too many people entering the acquisition process rely on formulaic or "template thinking" which has been introduced to them by their finance people. Now, the ‘bean counters’ (as I tend to call them) play an important role in any M&A transaction. However, problems occur when they dominate the process, as is often the case when they are put in charge of managing the deal or where they have educated others in how to run an M&A process.
I am now going to make some broad, over-generalisations with the added disclaimer that I acknowledge there are always exceptions - Not all accountants fit the stereotypical image of the boring bean counter with no social skills or imagination. However, it’s unlikely to be a profession that would attract the next John F Kennedy. We have all heard the accountant jokes; here is my excuse to tell a few more (tongue-in-cheek, of course).
Q: What do you call an accountant who is seen talking to someone?
A: Popular
Q: What's an extroverted accountant?
A: One who looks at your shoes while he's talking to you instead of his own.
Q: What's the definition of an accountant?
A: Someone who solves a problem you didn't know you had in a way you don't understand.
And unfortunately, I know others, so will move swiftly on...
The Precise Habits of Accountants
The typical finance executive will obviously be comfortable with figures, spreadsheets and formulae and possibly, less happy with people, marketing and sales. The reason for this, is that the latter three are hard to quantify and predict by use of a spreadsheet. Consequently, when accountants run a process, they like to use the tools with which they are most familiar. They create formulae for evaluating acquisitions, and spreadsheets with timelines and graphs for analysis – which are all valuable in their place. Accountants are very good at this sort of thing and it is what makes them feel happy and secure because with figures and spreadsheets they have order. They like to be EXACT. That also makes them happy. Accountants even have their own prayer, “Lord, help me be more relaxed about insignificant details, starting tomorrow at 10.53:16 am, Eastern Daylight Saving Time.” Sorry! There I go, back to the jokes again..
Please Don't Let Accountants Dominate Your M&A Process
I think you get my point though.. Accountants have a role to play in an acquisition. The financial figures of any business need to be closely examined and, if somebody has to do it, then it should probably be an accountant. And, so long as I don’t have to be in the same room as them when they are doing it, that makes me happy too - But, please don’t let their thinking dominate the process!
Accountants, by the very nature of their role, are backward-looking to past performance. Business people, CEO’s and entrepreneurs, should be forward-looking and judge the prospects, client base, product fit and pipeline. “Past results do not guarantee future results.” The past does not equal the future and finances can obviously go up or down. A business assessment by the CEO and the other senior business executives is mandatory; they must step forward to create the business plan for the new, combined entity, going forwards.
CEO's - Don't Fall Asleep on the Job!
Far too often, I have heard experienced and talented CEO’s and executives repeat verbatim something they have heard from a bean counter, along the lines of:
CEO: “We don’t care what type of business we buy as long as we can buy it for less than X times EBITDA”
ME: ??!! “I have a friend who is selling a retail shoe business; do you know anything about shoes?!”
All too often, senior executives ‘fall asleep on the job’, relying on the formulae and judgements expounded by their accountants. They forget to use their own market savvy, their skills in judging people; instead, delegating the process to a mathematical equation, handed to them by somebody who should be the cog in the process, not the engine driver.
Talented CEOs Should Be Asking Searching Questions
The real issues are ignored and never addressed in any depth. Once a company has decided to grow via acquisition, the critical questions that need to be answered are the following:
1. What type of company do we need to acquire to help us achieve our goal/s?
2. Can we describe that company with clarity?
3. Does what we are looking for actually exist or are we looking for a five-legged sheep?
4. Would it be a competitor or a company that has complementary skills and services / products?
5. How do we identify the cultural “Right Fit” company for us?
6. How will we best engage with them for the best result?
7. If we find the right company, can we afford to buy it?
8. How will we maximise and leverage the combined companies?
9. How will we gain the confidence and loyalty of the employees and executives from the company we acquire?
10. What can we learn from them?
11. What can they learn from us?
12. Will the target company be interested in us and what we offer?
13. How can we make ourselves attractive for the target company?
14. What will the joint business look like once merged?
Client: “This company is not worth buying because it is a service business”
Me: “Why does that cause you concern?”
Client: “Because the people providing that service could leave the company after the acquisition”
Me: “Why do you see that as a specific danger”
Client: “You can never rely on people”
Me: “I guess that would be true for the people in your business as well then?”
Client: “Yes”
This has turned into a much longer blog that I had intended. If you have stayed with me until the end, I would like to thank you now.
By the way, if you are an accountant and you have been reading this, please ignore all the above. I love each and every one of you. Honestly. I could not provide the service I do, without you - Just don’t expect me to invite you to any dinner parties!
About Mark Edwards
www.bossequity.com
