8 Expert Tips for New Strategic Buyers

Meghan Daniels
August 27, 2019

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Deal Advice

Many M&A deals fail — Harvard Business Review puts the figure at as high as 70-90 percent. They’ve also found that up to 60% of M&A deals actually destroy shareholder value.

As a new strategic acquirer, how can you help your company beat the odds?

Here are 8 pieces of advice from investment bankers and corporate development veterans to take to heart as you begin to build an acquisition pipeline.

1. Hire a buy-side advisor

“For a company starting M&A, it is very helpful to have a buy-side advisor, particularly if they don’t have someone on their team who is experienced in making acquisitions or don’t have experience doing so as a company. Buy-side advisors can add tremendous value not only for very large acquisitions, but also for deals in the lower middle market. Often we see companies decide to do M&A that have been in the industry for a long time but aren’t fluent in the M&A process. While they might be a great buyer, they may not know exactly how to communicate this. A buyside advisor can help communicate to the sell-side the acquirer’s intent, certainty of close, and their excitement about the opportunity.”

-Elizabeth Daniel, Vice President of Mergers & Acquisitions, Investment Banking, Stephens Inc.

2. Articulate your strategy

“Ask questions like: Why are we buying this company? What exact role does this specific target play in the fulfillment of our strategy? What will we need to get out of it in order to call the deal a success?

“If at all possible, identify one overarching reason for the potential acquisition. That is not to say that a deal shouldn’t have more than one potential source of value, but particularly for smaller, less experienced acquirers, simpler is better. Make the deal’s strategic rational your company’s mantra. Make it the context for every action, priority, and decision.”

-Douglas Yorke, Managing Principal, Rumson Acquisitions

3. Educate yourself on the basics

“Understand the basics. What steps do you need to go through as an acquirer, from LOI to due diligence to ultimately closing? Know the norms of how people transact in the marketplace, for example, do they transact in EBITDA or revenue multiples in your industry? Know in advance what terms are going to be and not be acceptable to you in the long term. I also think it’s important to be open to potential opportunities, but also know what you want. Know what you are going to do with the business after you close. If you’re unfocused going into acquisitions for the first time, you’ll get a poor outcome.”

-Sam Tsui, Senior Advisor, Westwin

4. If it’s not a clear yes, it’s a no

“One of the most important parts of my job [as head of corporate development] is building relationships with all the key industry vertical presidents [in our company]. If we buy something in their segment, we want to have confidence that they will run it properly and do a good job, and grow that business… Any business that you buy as head of corporate development, you’ve got to have full team buy-in. If it’s not a clear yes, it’s a no.”

-Sam Orme, Vice President of Corporate Development at Savage Services

5. Think about integration early

“According to a 2015 industry study by McKinsey & Company, companies with the best M&A results have strong capabilities in post-close integration. As a consulting firm, we’ve found that high performing M&A firms use the diligence exercise to gain critical insight into the target company, its management, key employees, its culture, and its customer relationships. They take a hard look at not only the financial numbers, but at the intangible assets that drive a company’s success plan. Most importantly, they have tools and processes to statistically document the value of the intangible and help them see into the future. They start building relationships with the potential target throughout the due diligence process, months before close.”

-Kay Cruse, Vice President, Strategex

6. People are paramount

“Don’t underestimate the people element. People, and the ability for people to work together successfully, are the most critical factors in acquisitions. We spend a lot more time today evaluating the management teams of potential targets. There are deals we’ve walked away from because we thought the management team wasn’t deep enough and didn’t think we had the depth in our organization to compensate. You can tell a lot from the style of the business leader at the target company. You can look for whether they’re letting other people develop and take ownership of pieces of the business, or if they’re commanding control.”

-Greg Wolf, President and CEO, BHS Corrugated North America

7. Trust your instincts

“My favorite way to think about [cultural fit] is, “Do they pass the barbecue test?” And what that means is, would you have that guy over to your house for hamburgers and a beer? If the answer is yes, that’s a pretty good indication that it’s probably going to fit. Keep in mind too that throughout due diligence and the rest of the process, there are probably around 20 people from [our company] talking to the people at these companies. It’s not just one person’s opinion.”

-Ward Allen, Vice President of Finance at Winsupply

8. Understand that merging is different from running

“Running a company is an ongoing process aimed at optimizing an existing set of circumstances (be they products or technologies or know-how). Merging two companies is a temporary process aimed at changing those circumstances. Running a company is a recurring evolution. Acquiring or merging is a finite revolution. The two have different objectives and require different approaches altogether.”

-Douglas Yorke, Managing Principal, Rumson Acquisitions