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Some thoughts on an overlooked dimension of mergers and acquisitions
I’ve been asked a number of times for advice about how to approach acquisitions from friends and entrepreneurs who are looking to sell their companies. Their questions have ranged from inquiries about valuations, to questions about how to run a market process. People want to know all kinds of things, like how to determine what’s in the LOI (letter of intent), to how to request an introduction to a banker.
These are all good questions that are very logical for a CEO to ponder as he/she embarks on the mission to maximize stakeholder value.
Through my experience, I find there are a number of important questions that tend to be under evaluated in the decision making process to choose an acquirer. For example:
– What will life be like to the individuals of the acquired entity?
– What is a likely product mandate?
– Who will they work with within the acquirer?
– What are some early goals for the entity?
In an entrepreneur’s quest to get the financial implications as precise and as high as possible during the early negotiations, the priorities of the right side of the brain become subordinate to an absolute financial return calculation. Typically, the LOI is then signed and the process to move towards an acquisition begins. Many times, there is no thought given to high level integration plans, and very little regard for the power of relationship building.
Here are 3 tips to give your acquisition the best chances of success:
1) Understand the integration structure early
I believe that moving too quickly past an understanding of what the structure of the integration feels like, prior to signing an LOI, can be a big mistake for both parties. This is particularly true in the current technology landscape in which we are operating. The team and the IP of the entity are a big reason many companies are acquired. As we all know, LOI’s are really just the start of the acquisition process. It’s required that they are exclusive between both parties in a majority of cases. Having a reasonable sense of how the integration might work, before signing, can bring to light show stoppers and personality challenges before parties commit to spend resources and time. There are not only financial costs, but also emotional costs to consider.
2) Create Excitement and positive energy around big ideas
Another major benefit to spending time on a pre-LOI integration plan is that positive energy can be created between the two parties because of the excitement of what could be. Positive energy can create trust and momentum that will carry parties through the more tenuous parts of completing an acquisition process. This enthusiasm can inspire all employees who are looking forward to the mutual sharing that will happen.
3) Bring the teams physically together to bond
Relationships are the true fuel that propels us on a daily basis. When setting up an acquired entity and its entrepreneurial employees to succeed, it is crucial to bring the teams together to bond to establish a foundation. Having an honest and open discussion to set realistic expectations of what an integration might be creates trust between people. These early bonds are the seeds that will sprout good communication post closing. Looking forward to working with someone is a great way to get over the post-sale malaise. Established team bonds make it much easier to get into the hard work of realizing the exciting discussions that happened early on. Individuals will feel good about the work they do on a daily basis because there will be less anxiety about who they are working with and for.
In the end, to feel good and create value is what both parties want, and it’s a virtuous cycle. So instead of just running those proformas and cap table calculations before you sign that LOI, make sure you find the time early on to play out the integration. It might just be the thing that maximizes the most stakeholder value for everyone!
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