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Whether you are on the sell-side or the buy-side of an acquisition, having a thoughtful and defined process to find the right acquisition “partner” couldn’t be more important. Who you choose to join forces with via an acquisition can impact the trajectory of growth and success for your company for years into the future. And acquisitions which unwittingly mismatch two company cultures may alternatively, crush innovation and reduce shareholder value.

A disciplined process to identify the right acquisition partners must embrace  several important elements. All successful companies establish their own specific process through which potential acquisitions are evaluated.  This is not a checklist however. At FLG, we know from experience that M&A checklists with “universal applicability” are likely to lead to integration disappointment. Acquisition evaluations must be an organized business process centered around the key performance drivers determining success in a given market.  I have observed some company processes which even create success formulas which convert indicators of success into quantifiable measures.  These acquisition evaluation processes must also be customized to the specific company as well as its market. Synergistic company cultures, values, and approaches to customer acquisition and engagement matter when it comes to choosing life partners.

So how does this approach to executing acquisitions translate into the real world?

Identifying Sell-Side Acquisition Opportunities

If you are preparing to sell your company in a liquidation and/or exit scenario, you need to quickly reorient your focus to think like a buyer. You want to first validate the value your company brings to the acquiring party and then create a compelling story around this value proposition. Your value can take the form of solving a critical resource or IP issue for the buyer, bridging a market gap from a product standpoint, providing a competitive hedge and/or providing access to critical relationships in their supply chain. In a life sciences acquisition, for example, you might be able to offer up clinical studies your company is pursuing. In a software business, you might be able to show early customer metrics and product/market traction.  Know your non-financial value before you start the process.

The Importance of Cultural “Fit”

You also want to be clear about the likely ease and efficiency with which your company will be integrated into the buyer’s operation. A buyer who has a long track record of acquisitions via rollups or early stage enterprise acquisitions is a very different situation from a venture-backed private company with founders still very involved in the enterprise. In the case of the former, you want to look at corporate values fit since acquisition integration will be a smoother path, while in the case of the latter, you need to carefully consider whether your buyer fits from a broader perspective (culture, team and product/market fit).

Making Your Company an Attractive Acquisition Candidate

Once you have identified your prospective partners, how do increase your appeal to potential acquirors? At FLG, we often refer to this as essentially, maintaining “good corporate hygiene”. By this we mean keeping your assets, risks and company performance metrics both current and simple. Maintain a simple capital structure. Update your cap tables. Keep your legal entities in your organizational structure as simple as possible. Is your product a compliment to your acquiror’s product line? Is it superior? Or is it an expansion of it?

You should also always be prepared because acquisition overtures can happen anytime. Know your market and your place in it. Understand your value to a venture-backed partner bootstrapping their operations vs to a Fortune 100 partner with more extensive resources. Make sure you can articulate the upside potential for each so that you can override perception problems quickly and forcefully. Most importantly, be honest with yourself and with your acquisition partner. Then create a crisp story around your product/market fit, forecasts and company value.

Executional Planning

Acquisition partners who offer “1+1=3” opportunities where it is clear that your company is more valuable when combined with the infrastructure and assets of your acquirer’s ecosystem offer optimal returns to investors. Ideally, you want to look at product/market metrics, financial metrics and liability risks comprehensively and collaboratively with your acquiring party. “Bolt-on” acquisitions also imply quite different resource investments versus fully-integrated merger situations and your and your partner’s forecasts around what it will cost to execute your acquisition should factor these in.

Acquisition Failures: What Can We Learn?

Most acquisitions fail as a result of poor execution or because something was missed along the way during due diligence by the acquirer or acquisition target. Typical cases include situations where top line revenue growth is strong, but a company’s customer base is flattening. This is natural to some degree as many companies seek to sell at their peak performance when they can demonstrate strong revenue metrics. Other examples include acquisition prospects where product lifecycle timing is important (such as in life sciences) and where next generation products are early on in their development and will take a long time (and costly investments) to get to market. If your acquisition target gets into IP delays along the way, these can delay your acquisition for a year or more which can kill the acquisition’s value entirely due to competitors leaping ahead during that timeframe. In the software industry, these types of delays can send an acquisition prospect from first in their class to fourth.

Maximizing the Potential for Success in Acquisitions: What Matters?

In my experience, there is one quality which is consistent across successful acquisition teams – they are boringly disciplined. Whether an acquisition is of a $2 million-dollar prospect or a $2 billion-dollar one, it makes little difference when it comes to the need for solid acquisition due diligence and integration planning.

That said, every acquisition will have its own idiosyncrasies, and business sectors of course matter. For example, Apple, which has gaming, software, hardware, and services businesses, appropriately looks at their acquisitions by business sector, not at the corporate level. Your approach should be thoughtful but simple and based on the facts. I have seen one Fortune 100 company convince themselves that the company being considered for acquisition had “huge disruption potential” when it had a 10-year track record of underperforming. You can avoid such pitfalls if you use a disciplined approach to your acquisition analysis tailored to your specific industry sector and your partner’s competitive situation and financial objectives.

At FLG Partners, we work on a lot of acquisitions – from the most straightforward to very, very complex ones. If you have need for experienced advice and counsel for yours, do tap into our FLG partners’ wealth of strategic and financial expertise.

 

Chris Lowe

Chris Lowe joined FLG in 2014, serves on the Firm’s Management Committee and was elected Co-Managing Partner in 2018. Chris has over 15 years of senior management experience as President, CBO and CFO of various private and public life sciences, medical technology, and technology companies.  Additionally, he has served as…Read More