From Lose Lose to Win Win - Why M&A Must Change
Having been on both buy and sell side, I have seen first hand how troubling this process can be. How many times have you witnessed the perfect marriage?
The reality is that the buying and selling of businesses is not set up to create a win win scenario and this can so easily be undone – thankfully, there is no better time than now.
“The worst financial transaction you will ever make is selling yourself short” – Greg Gilbert
Let’s start with the WHY. Why is the system failing so often? Well ultimately the fundamental principle behind an acquisition is value enhancement and in this case value represents profit. The buying and selling of companies is set out as a financial transaction and in any transaction, the buyer will feel they have over paid, and the seller will feel their value expectation hasn’t been met. This leads to resentment and often remorse on both sides. Not starting on a particularly good foot is it? The process itself can be lengthy, it often means the leadership are distracted which can hurt the business and its value creating a vicious circle. Leaders, used to control are forced to cede control to 3rd parties who mediate on your behalf. Lawyers, brokers, accountants – all of which don’t have skin in the game and are operating on a time based fee. Unquestionably once legal teams are involved and the deal is negotiated on worst case scenario principles, conflict and hostility is created leading to mis-trust on both sides. Trust and respect are very difficult to build, but they are the easiest things in the world to break.
“The safest way to double your money is to fold it over and put it in your pocket” – Kin Hubbard
Then we have earn outs. So we’ve been through a process, we are tired, we are somewhat resentful and mis-trusting, and we feel like our value has been squeezed. Now we are expected to defer the majority of that value over an extended period of time, committing ourselves to a business we may or may not be unsure of. Sellers remorse can kick in very quickly and before you know it, the buyers are equally remorseful and the situation is almost impossible to recover from there.
“To do a common thing uncommonly well brings success.” – Henry J Heinz
So HOW can we turn this process from a lose lose to a win win? Well we have to start by changing the rules around perceived value. We have metrics. Boy do we have metrics. Staff cost ratio, Gross profit per head, top line and margin growth. Most management consultants earn value by circling these numbers and driving towards industry standards. At what cost is the question. What surprises me is that we don’t have metrics around culture, around quality of life, around values, around onboarding and integration. These are the things that really matter and are rarely discussed at board level. Wouldn’t you rather buy a business and make it work, rather than stripping it of its essence and removing the factors that made it successful in the first place?
Here’s how to make it work:
- A successful business relationship is built on an infrastructure of trust. If two business leaders, both used to control, both used to their way of thinking and working are to collaborate, there needs to be a meeting of minds and a process of trust creation. The conversation should start around incentive, cultural fit and value creation beyond multipliers. These seem like obvious questions but they are rarely discussed meaningfully
Why do you want to buy this company?
What can you do for each other?
How does this benefit the leadership and the broader team?
It’s important as a leader to lean on some of those leadership tools like empathy. The leadership of the selling business may have spent a long time managing the exit process which is an evening job on top of the day job. They may have dealt with difficult stakeholders, conflict, fear, anxiety. They have been personally vested and at heightened personal risk were the deal to fall through. They could be close to burn out or at least experiencing ongoing anxiety. Often these people are asked to start their new job inside a larger business, without their independence, fresh faced and ready to go. - Unless you’re an IP business, your business is ultimately about people. So how do we bring people with us on this journey. How do we show them that there is value in this partnership. How do we ask them to come to work every day to give it their all, even though this isn’t what they signed up for. Critically, how do we motivate the leadership beyond earn out payments. They have run this business for years – they are looking for something else, not a continuation of their role inside a larger organisation beset with politics and bureaucracy. Career development paths are essential.
- Onboarding and Cultural Integration is critical. This process should begin as soon as possible. If we put our trust in lawyers, accountants and brokers, why can’t we mutually find an independent 3rd party who can bring these businesses together to find mutual purpose. Where are the commonalities in values? How do we enhance collective strengths? And what is the joint purpose we now have? This is an essential process which is often ignored believe it or not.
The M&A market is changing. No longer are we looking at the standard WPP model and accompanying metrics. We are now looking at the rise of independent powerhouses, market challengers such as consultancies, private equity to drive accelerated growth and partnership models which create value on both ends. The people we are hiring are changing. There is low supply for high demand positions. The need for attracting and retaining talent has never been so important. We are seeing an employees need for a culture that respects them as a human being and allows them to flourish in accordance with their life needs, not necessarily just the needs of the business. All of these things need to be considered when buying or selling a company.
COVID will have heightened some of these anxieties. It may force a companies hand or it may jolt a leader into action if they fear a repeat or don’t have the energy to re-build. We, as a human race, finally have a degree of perspective, of what’s important. We are surely less likely to work for someone that doesn’t inspire us or actively creates conflict. So surely we are more likely to give our potential buyers a proper interview. Ask some questions back!
I feel very confident that this process will improve if there are enough people around to re-enforce the change required. And I look forward to being involved in more processes that start to recognise value beyond just profit. It’s important, no doubt. But I believe if you create win win scenarios that ultimately drives bottom line growth albeit in an indirect manner. We will also see more leaders thrive in new positions, create more opportunity for the broader workforce and contribute more to personal fulfillment as well as productivity in the work place.
Adam Rubins, Co-founder NNW