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September 15, 2020

The Five Stoplights of Business Deals

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I’ve been coaching executives for about 30 years, and I’ve never had such a concentration around the area of mergers and acquisitions. Start-ups and established companies, for-profits and non-profits, family-owned companies and Fortune 1000 companies. Across all industries, it seems like everyone is considering buying, selling and/or merging.

Just because everyone is doing it doesn’t mean it’s easy, though.

This Harvard Business Review article is a bit dated (2011), but it says that between 70% and 90% of mergers and acquisitions fail. I’m willing to bet that the number hasn’t changed much in the past decade.

Despite this reality, much of my portfolio the last five years has been exploring their options.

For some it’s a stage of life thing. They’re tired and ready to take their foot off the gas, so they would like to sell. For others, it’s as simple as needing a new challenge. For some, the business demands it. Methodical organic growth doesn’t allow the company to go where the owners/leaders desire. For others still, the possibility of an exit/cash out is just too enticing. Someone whispered the potential value of a sell and the $$$$ can’t be shaken.

The problem is that no matter the reason for looking at a merger or acquisition, the final decision is often made with the gut. It’s not a good idea to hire from your gut, and merging, selling or acquiring from your gut is no better.

Simon Sinek said, “Mergers are like marriages. They are the bringing together of two individuals. If you wouldn’t marry someone for the ‘operational efficiencies’ they offer in the running of a household, then why would you combine two companies with unique cultures and identities for that reason?”

Instead, work the process and objectify the decision. I recommend to look for a “fit” in five areas: economic, culture, timing, role and vision. Without a green light at each step you might be headed into a disaster at worst or at least a huge disappointment.

Economic Fit: This is the obvious one. In most mergers and acquisitions, the conversations start and stop around finances. Someone’s got to provide a fair valuation and then the other party needs to agree. What’s this thing actually worth? Keep in mind, though, that in any good deal, both people can’t win on everything. One side might win on price (how much?) and the other side might win on terms (how soon or what is included?).  Be careful to resist greed and make sure you are being fair and reasonable. Anlways look for any hidden economic factors. On yea, one last thing, more times than not the economic fit requires a little dancing so be patient, stay fair and work the process.

Culture Fit: In my book, The Five Tasks: What Every Senior Leader Must Do, I say that one of the “musts” for senior leaders is to set culture. In other words, “we will work and operate in this manner” here in this company. Any consideration of a merger, sale, or acquisition must likewise include good alignment on culture. If you’re selling, you want to sell to a company that treats employees and people the way you would. If you’re merging, you need to look at the working styles of the senior leaders and make sure those line up. Does the other founder treat risk and compensation the same way you do? Is one leader more generous or stingy in treatment of people? Does one owner pull as much money out as possible every year while you push growth capital back in and wait for your payout? If you swapped out your company’s values for the company’s you are merging with, what would change?

Timing Fit: Why now? Even if you can afford to buy or merge (or even sell), and it makes sense,  should you do it…now? Do you have the internal organizational bandwidth to keep this ‘great opportunity’ from turning into a train wreck? Even though it’s a deal, is it still too rich for you at this time? If you pressed pause for 6-12 months, what would change? Does having more data make a better decision or is the opportunity lost? What is the worst-case scenario if I pass on this opportunity? What are the other elements surrounding this buy/sell/merge that impact timing? I remember when my kids were young I would often say when pressed to make an on the spot decision, “The answer is no if you must have an answer this second. If you can give me a few hours, and we can chat about it tonight, then perhaps the answer is yes.” Translated – don’t get suckered into “this deal is going away if you don’t do it this second.”

Role Fit: Buyer’s remorse happens in business too, and in many cases it’s tied to misalignment on roles post-acquisition. Fight for clarity on whether you’re supposed to be the banker, just providing the money, or whether you’re going to be an operator doing the five tasks of the senior leader. In other words, is this a passive investment or an active (operational) investment? Where is the role redundancy? What happens if one leader is hard charging and the other is easy going and relaxed? What if one is a top-line growth leader and the other is bottom-line cost conscious? Is one leader fast with decision making while the other is slow and methodical? Role clarity and fit among the senior leadership is crucial.

Vision Fit: The HBR article I referenced earlier says there are two main reasons to pursue an acquisition. The first is to boost performance. The second is to “reinvent your business model and thereby fundamentally redirect your company.” Is this merger or acquisition about the first or the second reason? If the first, you better make sure that you’re aligned on vision so vision fracture doesn’t kill performance. If the second, you better make sure that you’re aligned on vision because you’re about to go somewhere new. It is usually helpful to know the intentioned endgame. Buy and hold? Milk it down? Build it and flip it? Where are things going?

Conclusion

A local investor friend of mine says that in long-term buy/sell arrangements, you start by making a long list of things that are important to you. In most cases, you can group those items into these five categories: economics, culture, timing, role, and vision. At that point, mark each of them with green, yellow, or red lights. Then, look at your colors, and in most cases, the “go,” “advance with caution,” or “stop” becomes pretty clear.

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