Inside the lower middle market, many firms view acquisitions as a path of last resort. Or the path to take when all other paths to growth have been exhausted.Middle-Market Executive (MME) recently spoke with M&A consultant David Braun, who has long claimed that acquisitions provide middle-market firms with the fastest, securest, and most profitable way to grow. Recently, Braun published what he calls a road map approach to buying companies as part of a book he authored titled Successful Acquisitions (Amacom Books, 2013).
Braun: When you think about M&A, one of my favorite comparisons is the HR function and hiring people. You will today find that there are HR manuals that go into detail about job descriptions and salary levels and KPIs and how to go about finding people and give performance appraisals. There’s lots of process and lots of detail. However, when it comes to acquisitions, when companies are sometimes spending millions or even billions of dollars, strangely, companies don’t have a process. We looked at this and laid it out along with the tools to go through the merger process.
MME: What are some of the unique challenges that smaller companies face when it comes to mergers?
Braun: One of the things that I think can be challenging for the smaller companies is that they just don’t have all the people resources in house to do all of what needs to get done when it comes to an acquisition. We divide the acquisition team up into an internal team and an external team, and what we see happen with many of the smaller companies is that the external team gets leaned on a bit more. We supply a number of tools that help companies to identify who should be on the internal and external teams, but we also go even deeper. Meanwhile, the people who are involved in integration shouldn’t be parachuting in after you bought a company. They should be involved early in the process so that they take ownership for the direction of saying, Here are the companies that we want to bring to the table, and they at that point take ownership of actually integrating those companies. We talk about how that team works and how it goes about developing the criteria, weights, and metrics required to determine what markets the company needs to be looking at. Then the team takes a closer look at which companies are public and which ones are private.
MME: What about larger firms?
Braun: When it comes to bigger companies, the differences we often see have to do with the decision-making process. Bigger companies tend to be very slow, and there can be many committees. When it comes to big companies, I like to streamline the process. I call it “planning for ‘Yes.’” In other words, if we find a company that’s a good match for a larger firm, we want to make certain that the bigger firm is prepared to say “Yes.” What we find is that a lot of the larger companies are not. This can be a very big challenge, and consequently these companies end up unable to move on some very good companies because they are just too slow.
MME: How do you measure the success or failure of an acquisition?
Braun: There are lots of ways people try to measure the success of a merger. We often hear the question: Did it meet our expectations? What I have found is that expectations over time morph into the outcomes that actually occurred. What I prefer is a more arithmetic approach. The formula we use is return on invested capital (ROIC) against your weighted average cost of capital. In other words, I need to be making more money than what my money is costing me, so we try as best we can to use this as our metric when it comes to determining whether an acquisition was a success or not. Frankly, many companies don’t even know what their weighted cost of capital is, and they keep track more of the qualitative things, or they measure high-level things like revenue.
MME: Culture is often a big piece of merger puzzle. How can companies avoid some of the mistakes that are common when integrating two cultures?
Braun: Just because two companies are culturally different doesn’t mean that it’s going to be bad from an integration standpoint. What you want is to understand the differences. When we first meet with an owner, we like to meet the night before, and we have the owner pick where we have dinner and we have them pick where we stay. We like to get a sense of how they treat people — and it can really be a window into their culture. We find that if we meet the owner on their turf, we can get some deeper insight into how they run their business. Regardless of whether you like his or her style, it has likely permeated their organization. There are times when we have dined with an owner at a restaurant that was maybe one step above fast food, and other times when we’re invited to the country club. It’s not as if one place is better than the next, but this also reveals something about this owner as far as how they run the business goes.