Diligence is a key aspect of M&A. Financials, customer concentration and patents are often the focus, but more challenging is the human aspect of a deal. It's tough, on the front end, to know for sure that an acquisition target is a cultural fit for your organization.
"In any of these situations when transactions are being evaluated, you're looking at the numbers first and foremost," says Ian O'Brien, director of private equity consulting for RSM US LLP. "But the reality is you need to be looking at the management team, and really understand the dynamics of that management team, and get a solid understanding of the cultural footprint that they've imparted on your existing organization."
That second part, he says, is pretty tough. When a company is in sell mode, they're working to portray a positive cultural environment. So, in order for an acquirer to be successful on the back end of a deal, you've really got to spend as much time as you can with that management team.
"They're into not only the financial plans but the transformation, the turnover elements of their business and the hows and whys of why that's occurred," O'Brien says. "And you've got to talk a little bit about philosophy because, philosophically, what we've learned a lot in the last couple years, and I see it trickling into the evaluation of deals now, is the philosophical alignment exercise — just making sure that, it doesn't have to necessarily be alignment, but you have to know what you're dealing with going in."
Phil Kretekos, Thunderbird LLC president and CEO, says sizing up the culture and then fitting it into your culture is a real issue.
"That team's in sell mode. They're putting their best foot forward and you've got to assess the culture and due diligence as fast as possible. And it's a compressed period of time. It's a lot easier to assess the property, assess the equipment, harder to assess the people. But you got to understand where they're at."
Kretekos says his team digs into that as by identifying the target's key performance indicators, what drives that business, what they hold in high regard, and looks for alignment with what his company does.
"It's very important," Kretekos says. "You can have the best property, best plant, best equipment, but without the team nothing happens."
Having the right team at close and moving forward with as much of the existing management as possible, is one way to maintain the culture he wants to drive. Also, taking a close look at areas such as safety, quality, aspects that people on the manufacturing side hold in high regard are key performance indicators.
"So, we clearly look to size up and assess the talent and retain as much talent as possible because that group knows how to run that factory and how can they dovetail in with what we want to do," Kretekos says. "It's a compressed period of time, and we do our best to find the match and keep everyone as possible."
Also incumbent on success on the back end, O'Brien says, is clear communication from the from the start.
"You've got to be as relevantly transparent as you can, but to really openly communicate," he says. "People want to just know what's going on. They're used to it. They're expecting it. They have TicTok and Facebook and Linkedin and all these things. They expect to know what's going on. And if you don't tell them then they're going to find out other ways and it may not be accurate. And so all of that, the integrations that are most successful have that as a thread and their transformation exercise and they managed to it."
O'Brien and Kretekos, along with Wintrust's Adam Fuchs, spoke more at the Chicago Smart Business Dealmakers Conference about the human side of buy-side transactions. Hit play on the video above to catch the full panel discussion.