Through their investment thesis, buyers ideally consider how any potential acquisition — an industry vertical, a geographic expansion — fits into their overall strategy and whether it will provide the opportunity to grow the way they want to. While it can be assumed that buyers would prefer to stick to their investment thesis as they engage in processes, that’s not always what happens, says Fred Massanova, managing partner at Baker Tilly Virchow Krause LLP.
Massanova says he’s seeing the pace of deals accelerate, leading to shorter diligence processes at a time when that process has become more demanding. That’s led some buyers to turn a blind eye to some aspects of a deal, such as the soft assets — the people and the customers — where Massanova believes much of the value of a company resides.
“A lot of people get so fixated on operational and financial that they don't really pay attention to (the soft assets),” he says. “And then, post-deal, you're dealing with these issues that were there before. The speed of the deal made you miss those. It's a big pitfall that I've seen.”
At this past year’s Dealmakers Conference in Philadelphia, Massanova talked deal pace and the importance of sticking to the plan throughout the process.
Staying on track
Without taking the time to ensure proper diligence is undertaken on every aspect of a deal, the deal dictates how the buyer closes. That pushes buyers outside of their lanes — their investment thesis — and not many are willing to stop and say no to something because they already have considerable time and resources invested in the deal.
“I've seen where companies have allowed the speed of the deal to push them into something that maybe had more hair on it than they thought, and then they deal with it post-acquisition.”
Pace is also something to think about post transaction, particularly when it comes to integration. For Massanova, that means considering what integration speed the acquired company can handle.
“Everybody enters into a deal or into these processes with an idea of how they're going to be able to add value,” he says. “But the speed on the other side of integration could derail something that would have been great if you just slowed down the integration on the backend. So I see a lot of pitfalls related to that ‘too soon, too fast.’ Everybody's anxious to unlock that value in the deal, but sometimes you can cause issues or go off track because of that.”
Earnouts, Massanova said, can be another deal pitfall.
“They're trying to get to that value for the sellers and put that earnout in there to get them to where they want to be,” Massanova says. “But really it's counterproductive, because now you’re dictating to them what you want to do post transaction, and you're really shooting for, ‘Well, I'm going to just make sure I hit all these marks to maximize my value in the earnout.’ Is that really what we want them to be doing in the next 12 to 18 months? So another pitfall that I see is earnouts that are way too aggressive for the management team that's coming in.”
Define your 'no'
The solution, he says, is to stay true to your acquisition thesis and don’t get derailed from your process.
“The ones that do a successful acquisition really pay attention to the process, focus on what their investment strategy was, stay true to their game all the way through and don't veer off,” he says.
One way to do that is by asking yourself questions throughout the process, such as, how does the target actually fit into what you’re trying to do in the marketplace, and how does this expand the plays that you have? There should also be checks to ensure you’re not lying to yourself — that the goals really are attainable and realistic within the new market.
Another important question to ask is, at what point should you stop and say no?
“Have ‘no’ defined on the front end, because it’s a very competitive market,” he says. “There are a lot of deals out there, a lot of shiny toys that people want, but there's a point where it doesn't make sense for you anymore. And if you define that on the front end and you know where your ‘no’ is, it's easier for you to walk away because you already have it on a piece of paper and in your pocket. Then you can take it out and say, ‘Yeah, this is what I determined at the beginning of this, so now I know I'm outside of where it makes sense for me.’ A lot of people don't do that, and they get caught up in the process and end up in a situation that they knew was a bad situation from day one.”