M&A advisers have their work cut out for them when advising clients about a potential transaction.
“It’s always a challenge to run with entrepreneurs and keep their attention,” says Joseph Valentic. “You have to do it running alongside them, providing bits and blocks of information and finding moments of time where you can break it down into tangible pieces they can absorb. You can’t always give them the whole thing at once. It might be too much for them to hear.”
Valentic has provided counsel for thousands of transactions through a career that started in banking — with stints at Comerica, Fifth Third and Citizens, among others. After building his M&A experience, he struck out on his own to create The Growth Advocate, a Sterling Heights firm committed to helping middle market companies better understand the role M&A can play in their respective growth plans.
“I’ve gotten to see the good, the bad and the ugly across the country in so many industries,” Valentic says. “Many businesses grow up doing what they do. They find a niche, they find they do it well and they keep doing the same thing they’ve done. But they do it without developing a clear long-term focus and plan.”
We spoke to Valentic about the approach he takes to help business owners looking to make a deal zero in on the right acquisition strategy.
What’s your story?
The path to a good acquisition often begins with a compelling story. If you have a hard time developing a narrative around your plan to buy another business, that’s a problem.
“That story has to be told in such a manner that it distills the complex down to the core quickly, creating an easily digestible assessment and summary of what needs to be done,” Valentic says. “At the same time, you then need to be able to explode it into the details to make sure all those details corroborate and align with that summary.”
In other words, why do you want to make an acquisition?
“Does an acquisition solve for something that would be inefficient for you to do organically and take too long for you to greenfield into your market?” Valentic says. “We don’t have this technology, we don’t even know how to develop it, but we know we need it. We don’t have the people we need to do it, so we need to buy it. If you legitimately cannot solve this problem yourself and it’s critical to your growth strategy, then it’s time to look at an acquisition.”
This step builds the foundation for everything that follows. Valentic recalls a client he worked with that bought five separate automotive suppliers without any forethought of how all the pieces would fit together.
“They just thought they’d roll it up and IPO it,” Valentic says. “They rolled it up and it imploded. There were no fundamentals to say, ‘This is what we are actually building to. These are the synergies we are driving through this process.’”
When you have a story that spells out where you’re at and where an acquisition can take you, it provides a framework for your strategy and a reason to go forward with it.
“Acquisitions can be a very viable path for growth, but they have to be done for the right reason,” Valentic says. “You have to look at the question: Is this truly going to help my business get to where I want it?”
Understand your capacity
Another common problem for middle market companies interested in making an acquisition is a lack of dedicated resources internally to take on the many tasks and responsibilities that are required to get a deal done.
“You either have to build out an M&A team internally, which for many middle market companies might be cost prohibitive, or you have to do it with an outside crew that can help you,” Valentic says.
“You can’t just go to your people who have their day jobs executing your existing strategy and say, ‘Now we’re going to drop on top of you an M&A strategy and you have to multitask.’ The reality is they will do neither well and you run the greater risk of damaging your core business as you distract your people with something that is not their core focus day to day.”
Study the fine print
Once you get your own house in order and begin the process, you need to think about what you’ll be looking for in acquisition targets.
“More and more, buyers are taking a deeper dive into the quality of earnings for a potential transaction,” Valentic says. “It doesn’t matter what the rear-facing financials say. That’s only part of the story. Are those numbers truly sustainable? Do they have a sustainable model that can help them continue that process? Once we acquire this company and bring it into our shop, are we going to have customer runoff day one? Are we going to find out it’s the end of the road for what we saw as a key product? That quality of earnings assessment is critical.”