Operational Excellence the Key to Successful M&A

Operational Excellence the Key to Successful M&A

Buying Companies

Most acquirers embarking on an acquisition are ill prepared to successfully buy another company and integrate it. Research consistently tells us we are weak at this common corporate tactic – buying other companies. Acquisitions are for operators. The reasons acquisitions fail are closely related to an acquirer’s ability to run their own business well. Let’s examine these reasons:

  1. Acquirers buy what’s up for sale instead of what really fits their strategy. A transport company buys an ambulance company. An acquirer expands beyond their core competence to fulfill an ambition of servicing all of their customer’s needs. Both are real examples of companies that were up for sale but were a poor strategic fit. Both cases were an acquisition disaster. Look behind their M&A activity and you’ll see a weak strategic planning process.
  2. No post-mortems are conducted on deals closed. There is no learning process in place, which research shows is key to getting better at acquisitions. Look behind a weak acquirer’s M&A activity and you will see a lack of process protocols, a lack of post-mortems on major projects. A lack of a learning culture.
  3. Post-acquisition planning is left to the last minute. World class operators who are on the acquisition trail, prioritize post-acquisition integration thinking right up front, when they meet the target. They build it into their questions, their valuation and their negotiation. And especially in due diligence they focus on operational risk to uncover issues that require to be dealt with in the crucial 120 day period post the deal.
  4. Weak acquirers don’t understand the importance of empathy and cultural fit. They show this lack of skill throughout the deal process, over pay to get the deal done but fail miserably to successfully integrate a target they don’t really understand. They don’t lack M&A skills. They lack motivating leadership skills which you could see if you were inside their business.

I say, how dare an acquirer foist their lack of operation skills on a poor suspecting target (Ok the owners of the target probably do quite well) but the acquisitions are invariably a failure.

Selling Companies

Entrepreneurs growing a private company to hopefully sell it one day, totally underestimate the probability of cashing out a “retirement” level of money (if they sell their company at all). It’s difficult to get definitive comprehensive statistics on private company sales but BizBuySell reported a total of 10,312 businesses were sold in 2018, with a median sales price of $249,000. My own research suggests that larger transactions reported by the big investment banks in the US shows that around 6000 private companies or parts of larger groups sold out for $10m or more. To put these numbers into context, there around 5.9 million companies running a payroll in the US. So successfully scaling a company to cash out for a large sum is much rarer than you think. What’s behind companies that achieve premium valuations? Operational excellence. Here are 10 big examples (we call it our saleability test).

  1. Your compelling story and results you achieve for customers are clear from your web site. Your competitive value proposition is attractive to a large enough market for you to scale.
  2. You produce the highest margins in your industry.
  3. The business is not dependent on the owner.
  4. No one customer accounts for more than 5% of sales.
  5. Top ten managers are regarded as world class.
  6. Staff morale and engagement are high.
  7. Legacy products DO NOT dominate sales and profits.
  8. Industry peers recognize you as top 5 in the industry.
  9. You produce significant annual profits in excess of $2m EBITDA.
  10. Your business model produces a sustainable annuity stream of income.

When deals fail to close we have found that many of these attributes are not being achieved. In other words most company sales are not ready for primetime. They were dead on arrival. Executing a successful sale doesn’t start with the appointment of your investment bank. It starts the day you launch your business!

Scaling a private company (whether you ever sell it) requires operational excellence working on the right stuff. Most entrepreneurs are working on the wrong stuff. Stuff that doesn’t increase shareholder value but perhaps satisfies the owner’s curiosity.

Successfully buying or selling businesses starts with operational excellence and protocols that transform the odds of success. Until we realize this simple fact we will continue to see entrepreneurs fail to fulfill their potential and acquirers continue their pattern of failure.

Good luck!

Further reading:

The Acquirer’s Playbook

Closing the Valuation Gap

 

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