Katy Wiles has learned a thing or two about running an efficient deal process.
“We try to minimize the impact to the rest of the business, but there’s no question that there’s going to be an impact,” she says. “People’s time is going to be stretched.”
To lessen an acquisition’s impact on the buyer’s day-to-day operations, it’s critical to create a core team and then pull in additional people, like subject matter experts, as needed.
Wiles serves as lead attorney and legal adviser for Hawthorne Gardening Co., a wholly owned subsidiary of Scotts Miracle-Gro. The manufacturer and distributor of hydroponics products has 45 brands within its portfolio.
Previously, she was lead counsel at Scotts for mergers, acquisitions, divestitures and joint venture relationships.
Wiles discussed best practices for buying faster growth at the Smart Business Dealmakers Conference in September.
What does your core deal team look like?
We set up a core deal team of:
- The deal lead, a strategy person who negotiates the deal.
- A lawyer. That’s usually me.
- The finance person. We like that person to be in the business unit because they understand the space the most, but it doesn’t necessarily have to be that.
- A project manager. This is huge because this person guides the entire due diligence process.
We like to get the business lead involved, but usually in a more limited way than the core deal team. We don’t want to hand over an acquisition to a business lead, where they haven’t been a part of the process, they haven’t bought into the process and they haven’t owned and advocated for the deal.
We’ll typically keep the executive team out of the day-to-day mix but set up a process where we’re reporting to them weekly or every other week.
You don’t have as many one-off discussions out of context or email craziness if you try to put forth a process and stick with the process.
How does the deal process kick off?
The typical timeline is three to six months, assuming you’re not participating in a process that a banker is running — those tend to move a little bit quicker.
You start with your NDA (nondisclosure agreement) and some high-level initial discussions. We try to get to a term sheet quickly and not belabor the terms. We usually try to take a formulaic approach to a purchase price in the term sheet — EBIDTA times whatever multiple you negotiate — and keep the term sheet relatively high level.
The reason for that is because if you get bogged down in the term sheet, it’s an easy way to lose the momentum of the deal. You want to get your key high-level terms agreed to and move on, so that everyone feels like there’s forward progress.
Once you have your term sheet, you kick off your due diligence. This is one area where I think people underestimate the length of time it takes. Unless the seller already has their data room in place, they underestimate how much time it’s going to take to pull together the diligence materials that the buyer’s requesting.
We usually do the diligence through a combination of data room and management meetings that are geared toward a subject matter, like a finance meeting, an operations meeting, a supply chain meeting, etc. Then we like to do on-site visits and inspections where necessary.
This process can really dictate the speed of the deal. We’ve had situations where there wasn’t one thing in the data room until a month and a half after we sent the request. Clearly that deal felt like it lasted forever, versus a seller that’s pretty organized and can load it in pretty quickly.
Usually parallel with the diligence, you’re negotiating the definitive agreements. Ideally, you don’t do it in parallel, but from a practical perspective you need to because you’ve got two sides that want to get to a signing.
The disclosure schedule is another area where the seller tends to underestimate how much work goes into that process. A lot of times they try to push that off to the last minute. They want to get the deal docs negotiated and then they’ll turn to the disclosure schedules.
We push hard for that not to be the case, because, No. 1, you find out about a lot of things during the disclosure schedule process that you may not have found out about in diligence because the buyer may not have thought of it. Two, it takes time for us to digest the schedules, give comments, go back and forth. So, it’s not as quick of a process as people tend to think it is.
Then you get to your signing. If you can do a sign and close, that’s great. If you’ve got approvals, bank approvals or government approvals, you’ve got to build that into your timeline.
How does the management team of the deal target fit into this?
The cultural fit of the management team is a key thing to look at.
The businesses that we tend to target are family owned or small businesses, where the founder is still there. They built the business from nothing, and the management team is used to that style. When Scotts or Hawthorne comes in and buys the business, it’s a completely different world. All of a sudden, they think they’re spending all their time reporting up.
So, I think sensitizing the management team to the changes that are going to happen, and explaining why they’re good, what the opportunities are and focusing on the positives is important.
In some cases, we plan to integrate directly into our business, and there are going to be redundancies. How you control that message to the rest of the workforce goes a long way toward still having a successful deal, even if you are not bringing along the management team.
What do you use as a benchmark for success?
We put together a business case when we decide we want to do a deal. So, we’re constantly calibrating to that business case. Are we achieving the synergies that we expected when we went down this path? And if not, what do we need to do to change what we’re doing to try to achieve those?