The Value of Building an Acquisition Pipeline

Axial
June 23, 2015

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Imagine yourself talking to your top salesperson, halfway through the quarter, about his plan for hitting quota. “Almost there,” he says. “I’ve got a big deal that I’m working on now that’s going to require my full attention, so I’m going to have to put prospecting on the back burner for the time being.”

“Wait,” you stammer, surprised by this lack of responsibility on the part of a top performer, “but what if that deal doesn’t close?” That’s a valid question – after all, the average salesperson converts only about 20% of leads into new business. Chances are, his deal won’t close.

While that conversion rate may seem low, it’s absolutely astronomical compared to the rate at which deals close in M&A. For your typical private equity firm, where the business model is built around M&A and the team consists of experts therewithin, the closing rate on opportunities evaluated is roughly 1%.

CEOs hoping to grow through acquisition cannot expect to acquire consistently without a strong pipeline of potential targets: that’s a fact. Beyond just ensuring that a deal gets done eventually, however, building an acquisition pipeline affords a number of other benefits.

Choice

The closing of an acquisition does not ensure its success – in fact, 50-80% of all completed M&A activity will ultimately fail to provide any net-benefit to the acquirer post-close. Much of that failure rate can be attributed to a poor fit between acquisition and acquirer – as the two companies complete integration, flaws overlooked in due diligence or at other times in the M&A process expose themselves.

In order to avoid settling for suboptimal targets, CEOs need a wealth of options to compare and contrast. Size, region, and culture, among others, are all variables that could affect an acquisition’s long-term viability. In theory, there should be one permutation of corporate qualities that makes a business the “perfect fit.” While chasing perfection is rarely fruitful, the rate of failure for acquisitions proves that a “good fit” is simply insufficient. A robust acquisition pipeline provides the optionality necessary to make the best buy possible.

Optimal timing

M&A takes a while – 3-9 months per deal is typical. With diligence and negotiation periods spanning quarters, having issues arise mid-acquisition is almost inevitable. Whether it be an internal issue or a problem on the other side of the table, unexpected pitfalls will be a part of the process.

In some cases, these types of incidents will derail a deal, and in other cases, they should. For instance, a personnel issue could cause an acquiring CEO to pause negotiations she had been in with a target. In leaving the deal, however, no matter how temporarily, that CEO has left herself exposed to the risk that a competitor gets the deal done first. Knowing this risk, she may instead choose to continue on with the deal despite her distractions. With an air of desperation and less than her full attention, the CEO forfeits a measure of power at the negotiating table.

Acquisition pipelines distinguish the strategy from the deals – as pitfalls torpedo individual deals and create unfortunate timing mishaps, opportunities remain that can be taken advantage of later when the time is right. If a CEO needs to table a deal, she knows that does not mean tabling her entire acquisition strategy. She’ll simply resume talks, potentially with new targets, when she and her business are both ready to go out and acquire. This ensures that the CEO is not forced to sacrifice any acquisition goals in order to ensure that a deal eventually gets done.

Leverage

Ultimately, options around both company type and timing have the power to add value beyond helping CEOs find the right business for their needs at the right time. Should a CEO be in a position to negotiate a price with an acquisition target, that optionality grants him leverage likely to be unavailable to his counterpart.

Put yourself in the shoes of the CEO who’s selling. In the middle market especially, chances are high that this sale represents the culmination of this CEO’s career – he wants to do it right, but he also wants to get it over with. After half a year or more of diligence and negotiations, it’s unlikely that he’ll be interested in leaving the table without a deal.

When acquiring CEOs don’t have backup options, they’re coerced into closing as well. This cedes leverage they could otherwise use to get a better price or more favorable terms, such as a longer term of retention for the departing CEO. Even if you feel very confident that a deal is going to get done, entering negotiations with viable backup options can add percentage points to the sale price – thousands of dollars at the very least.

Acquiring other companies is not unlike acquiring customers – it’s not about the individual deals, but more so the process of sourcing, qualifying, negotiating, and closing the opportunities. That process is typically summarized as a pipeline, and without one, an “acquisition strategy” is really no strategy at all. Not only do acquisition pipelines help to ensure the probability of getting any deal done, they also help to ensure that the right deal gets done at the right time and the right price. That’s a deal more likely to succeed long-term than not.