Over the past 28 years, I have had the pleasure of being a part of five significant transactions as an operator and now as an owner. One thing I’ve learned is that no two deals are alike. Some transactions have resulted in a windfall for the owner or investors, while others have presented challenges for the team. However, the best transactions are those that create a win-win situation for all involved.
That said, studies show that 70% to 90% of M&A deals fail to deliver the expected value anticipated. Read that line again… 70%-90% of deals fail to deliver the anticipated value!
For those well-versed in the deal space, the following information may seem oversimplified, but I would argue that most employees and senior leaders would appreciate a peek behind the curtain. Understanding what to expect when merging, divesting, or acquiring can be invaluable—and for many senior leaders and owners, knowing when and how to sell effectively can make all the difference.
Getting Started
Mergers and acquisitions (M&A) represent a pivotal strategy for growth, diversification, and even survival in today’s fast-paced business environment. Whether you’re a buyer or a seller, understanding the essential steps in the process is crucial. In this blog, we’ll break down the stages, explore where deals often falter, and highlight why assessing the workforce is just as important as evaluating the financials.
The M&A Process: Key Steps for Buyers and Sellers
Steps for Buyers
- Deal Sourcing: Identify potential targets that align with your growth strategy or financial objectives. 80% of successful M&A deals start with identifying targets that are strategically aligned.
- Due Diligence: This is the cornerstone of any successful deal. A thorough examination of the target company’s financials, operations, legal risks, and often-overlooked areas like culture and human capital is essential. Studies suggest that inadequate due diligence is responsible for up to 50% of deal failures.
- Valuation: The company’s worth is based on financial performance, growth potential, and market conditions. Please note that the standard valuation process is not a precise science. Often the true valuation is what a buyer is willing to pay for a particular asset based on how they plan to leverage the deal to further enhance their current company, investment portfolio, etc.
- Negotiation: Structure the deal, including the purchase price, payment terms, and any conditions of the sale.
- Integration Planning: Once the deal is closed, integrating the acquired business into your operations is critical for realizing synergies. Far too many times, closing the deal can feel like the finish line but in all reality once the deal is announced the hard work begins.
- Post-Deal Execution: This is where you bring the two companies together operationally, culturally, and financially.
Steps for Sellers
- Preparation: Assess the business, clean up financial statements, and ensure that operational, legal, or workforce issues are addressed.
- Deal Marketing: Present the business to potential buyers in the best light possible, often with the help of advisors.
- Due Diligence Support: Work with the buyer as they review your company, ensuring transparency and addressing concerns proactively.
- Negotiation: Structure the deal to secure the best price while maintaining alignment with the buyer’s goals.
- Closing the Deal: Ensure all documentation is in place and the transaction is legally sound.
- Transitioning Ownership: Depending on the deal structure, sellers may be involved in the transition or exit immediately.
Where Deals Fail
Despite careful planning, many M&A deals fail to deliver their expected value. The most common reasons include:
- Cultural Clashes: Misalignment between the two organizations’ cultures can derail integration efforts and diminish the value of the deal. In fact, cultural issues are cited as the main reason for deal failure in 30% of cases.
- Over-Optimistic Synergies: Buyers often overestimate the cost savings or revenue generation potential of a combined company.
- Failure to Integrate: A lack of detailed integration planning can result in operational disruptions and missed financial targets. Research shows that inadequate integration accounts for 60% of deal failures.
- Financial Overreach: Overpaying for a company can lead to poor returns and put financial strain on the buyer. In fact, 44% of M&A deals fail because buyers overpay.
Strategic Buyers vs. Financial Buyer can significantly affect the structure and outcome of an M&A deal.
- Strategic Buyers: These are typically companies in the same or a related industry looking to acquire a business to enhance their operations. Strategic buyers are often focused on long-term value creation, with synergy realization being a critical goal in over 80% of these deals.
- Financial Buyers: Often private equity buyers are primarily interested in acquiring companies to generate financial returns, typically within a set timeframe. More than 60% of financial buyer deals involve cost-cutting or restructuring to maximize returns.
The Importance of Assessing the Workforce
In many transactions, the primary focus is on financials—revenue, profits, and balance sheets. However, the workforce is one of the most critical assets in any organization, and its value is often underestimated.
A comprehensive assessment of the workforce can reveal:
- Talent Gaps or Surpluses: Are there key employees whose departure would negatively impact the business? Are there too many employees in overlapping roles post-merger?
- Cultural Fit: A workforce that doesn’t align with the acquiring company’s values or way of doing business can cause disruptions. A poor cultural fit can erode up to 50% of the intended value of a deal.
- Leadership Strength: Post-acquisition, strong leadership is essential for guiding the new combined entity through the transition.
By giving workforce assessments the same level of scrutiny as financials, you can significantly increase the chances of success in your M&A transaction.
Change Management: Protecting Your Investment
Even the best-laid M&A plans can fall apart if change is not managed properly. Employees often experience anxiety or resistance during mergers, which can lead to disengagement or even attrition. This is where external resources can prove invaluable.
Change management experts can help you:
- Navigate the complexities of merging two organizations’ cultures.
- Communicate effectively with employees to ensure they understand the benefits of the change and feel supported.
- Implement new systems and processes without significant disruption to day-to-day operations.
Investing in external change management professionals is crucial. Studies show that deals with dedicated change management teams are 6x more likely to meet or exceed expectations.
Conclusion
M&A deals are complex, with numerous moving parts that need to be managed. From assessing the workforce to managing change, each step plays a vital role in the success of the deal. Whether you’re a buyer or a seller, ensuring that you’ve planned for these critical elements will help you unlock the full potential of your M&A strategy.
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