So which is it:

Time for a sharp exit – you need time for your exit strategy to kick-in
Time for a sharp exit  – you need to plan the timing of your exit?
Time for a sharp exit – your exit needs to be swift?
Time for a sharp exit – you need to start thinking about how you are going to exit the business…

Preparing Your Business for Sale

Getting your company in shape for a sale

It’s time to turn our attention more specifically to ensuring that your business is well positioned to achieve an optimal outcome in an outright sale or indeed on a partial sell-down by the existing owners. The ideal scenario sought by business owners often involves a high price, payable in cash on completion, with no onerous terms and minimal disruption during the process. This can often be achieved, but not without prior planning.

All too often business owners are not well prepared when a decision is made to sell and believe their business is worth considerably more than a purchaser is prepared to pay. The timing and reasons for a business sale can be critical to determining the outcome. Unfortunately, the decision to sell is often forced upon the business by circumstances and many business owners fail to unlock the true worth of their business.

Reasons for selling

Common reasons for a business sale fall into two categories – planned and unplanned – and include:

Planned – Retirement.

 Access to capital to fund business growth.

– The entrepreneur that grew the business recognises that the management capability required is beyond his/her skill sets.

– There are no family members to pass on the business Realisation of personal wealth to pursue other business or personal interests.

– Expectation of future profit erosion within increasingly competitive environment.

Unplanned.

– Health issues, such as illness or death.

– Financial difficulties, either within and external to the business.

– Divorce, family split up or other change in personal circumstances.

– Partnership/shareholder dispute or divergent shareholder objectives.

-Opportunistic approaches by potential acquirers.

– Loss of a major customer, comprising a significant part of the business.

Whether a business sale has been planned for some time or is the course of action decided upon in response to particular circumstances, the outcome will almost certainly be better if the business has been well prepared for sale.

In order to ensure that your business is positioned to achieve an optimal outcome on sale, the following eight key issues should be addressed:

1. Establish a clear competitive edge.

The value of your business will be considerably enhanced if you are able to demonstrate a clear competitive advantage in a particular niche or market segment, leading to more sustainable margins, greater customer retention and an increased ability to win new business.

This means understanding where the core capabilities of the organisation and its management lie, aligning these two areas of market opportunity, and repositioning the business if necessary to develop a clear and sustainable competitive advantage within these areas. This can be a major undertaking, which may take several years to achieve. However, in the absence of a competitive advantage, potential purchasers may view your business not as a strategic acquisition, but simply as the opportunity to achieve rationalisation benefits through adding production capacity – a far less valuable proposition in an industry suffering from overcapacity.

2. Ensure adequate strength and depth of management.

Many businesses rely heavily on the business owner or a small management team. If you intend to leave the business following the sale, you will need to ensure that the business is able to operate without you and that the ongoing management has the desire, energy, ability and commitment to take the business forward in an increasingly difficult environment. Generally, a business owner should progressively step back from the business over a period of at least 18-24 months prior to the anticipated date of sale, handing over key relationships and responsibilities to other members of the management team. Also, the reporting line to you must be established on the operations of your company in a regular time frame. By taking this action you will receive a better price for your business.

There is also a need to assess whether there are talented and committed people in the wings to become the next generation of managers, to ensure as far as possible that the business is not reliant on one or two people. If particular individuals are key to the business, it may be advisable to align their interests with yours by offering a bonus linked to a successful sale of the business, or indeed an equity stake.

3. Mitigate risk of customer losses.

If your business is overly reliant on one or two major customers, it may detract significantly from the value placed on your business by a purchaser or investor. This is particularly so if your product or service is not differentiated and/or the customer relationship is not secured through a contract or by other means, such as being the provider of an end-to-end solution closely integrated with the customer’s own business processes.

In order to limit the risk of customer loss on the business and provide a purchaser with greater comfort in relation to future revenues, consideration should be given to entering into contractual arrangements with major customers, whilst greater diversification may also need to be built into the customer base to reduce the financial impact of the loss of any single customer.

4. Eliminate personal transactions.

In presenting financial information to a prospective purchaser, it is advisable to eliminate non arm’s length transactions between the business and its owner (and related parties of the owner), in order that the financial statements reflect the true underlying performance of the business. For example, personal expenditure incurred by the business should cease, any transactions with the business owner or affiliates, should be on an arm’s length basis, personal assets such as expensive cars or yachts, should be extracted from the business, and the employment of any family members should continue only if they are paid a market salary for duties actually undertaken within the business.

The existence of complex or undisclosed arrangements such as these not only distorts the reported financial performance of the business, but also can significantly undermine the confidence of a purchaser in the reliability of the information provided.

5. Ensure robust Management Information Systems.

Having a management information system that provides timely, accurate and relevant information both improves the quality of decision making and provides a potential purchaser with considerable comfort with regard to the way in which the business is managed. It is fundamental to costing and pricing, the purchase of supplies, stock holding, work scheduling and the overall management of profitability and cash flow. This in turn should translate into management accounts ensuring that management keeps its ‘finger on the pulse’.

6. Review the state of financial records.

Of equal importance is maintaining the financial records in a healthy state and making sure that all statutory requirements are complied with within the required timeframes. Yearend financial statements that are easily reconciled to monthly management accounts, debtors and creditors ledgers, tax returns, etc without any surprises provide confidence to prospective purchasers, investors and financiers.

Additional confidence or surety is further gained when a business has been regularly audited. There is certainly a sense of greater corporate governance and acceptance of the figures presented by would – be acquirers.

7. Evaluate tax planning and structuring opportunities.

At the end of the day, it is what ends up in the pocket that matters most. With every sale, there are a raft of structural considerations and taxation implications which, all other things being equal, can make a substantial difference in the net cash received.

Often these considerations are left to the very end, resulting in a less satisfactory result being achieved. Planning well in advance can assist you in ensuring that the business retains valuable tax attributes (such as tax losses), and in establishing a structure which minimises the likely tax liability on sale.

8. Build a track record of profitability and cash flow.

Finally, the most important determinant of a business’s value from a purchaser’s perspective is its future earning capacity and ability to generate cash. Given that past performance is often used as a predictor, in the assessment of likely future performance, it is imperative that the business can demonstrate a track record of profitability and strong cash flows. Therefore, if this has not been the case, sufficient time may be required to rectify the situation.

Warning signs to purchasers

If your business displays one or more of the following characteristics, its value is likely to be impaired, even if there is a strong underlying business. – One or two customers comprise a large proportion of revenue. – All the knowledge and key customer relationships reside with the owner. – No ‘new blood’ coming up through the ranks. – Accounting records in a mess and not up to date. – No transparency between tax return and management accounts. – Extensive personal assets and expenditure within the business. – Fluctuating historical revenues and profits and unclear growth expectations. – No cash flow forecast and profitability projections.

Whether or not you plan on selling your business in the near future, a little planning and preparation can significantly enhance the likelihood of an optimal outcome when the time comes – bearing in mind that it may not be of your choosing. Grasp the opportunity now to make the business more attractive and increase its value to a purchaser you have nothing to lose and everything to gain!

Maximising The Value – in Your Business………

Preparing Your Business For a Successful Sale

Eight Ways to Optimise the Sale of Your Business

`Selling/Buying Your Business Successfully`

Realise – Your Business – Your Future – Your Potential!

Plus, information on obtaining guides on:

`Buying a Business` and `Due Diligence Guide`

“ An Investment in Learning, gaining Knowledge and Skills Pays the Best Interest for You”
Colin Thompson

Being an ICF accredited executive leadership coach myself, I am in awe of how certain decisions are taken, executed and sustained, given both the precedented and unprecedented challenges during a transformation of this nature. Even before a decision like this happens, it needs to be visualized extremely well in the mind of the leader. 

In the landscape of corporate transformations ans takeovers, few cases have garnered as much attention as Elon Musk’s acquisition and rebranding of Twitter to X. This bold move, executed in July 2023, offers valuable insights for senior executives navigating large-scale organizational changes. In this article, I make an attempt to articulate my observations from a distance. 

So, here we go on 5 crucial lessons that emerge from this corporate transformation.

1. Vision-Driven Transformation: The Power and Perils of Radical Change

The Strategic Imperative

Musk’s vision for X transcends mere social media functionality, aiming to create an “everything app” that integrates social networking, financial services, and various facets of AI. This ambitious vision demonstrates the importance of thinking beyond incremental improvements to envision transformative possibilities.

Executive Insights

The transformation of Twitter to X illustrates how a clear, ambitious vision can catalyze organizational change. However, the execution reveals both opportunities and challenges. While bold visions can inspire innovation, they must be balanced with practical implementation considerations.

Challenge Management

The rebranding effort shows that radical change, while potentially transformative, carries significant risks. Studies indicate that approximately three-quarters of change efforts fail to deliver anticipated benefits Leaders must therefore carefully weigh the trade-offs between revolutionary change and evolutionary progression.

2. Organizational Restructuring: The Delicate Balance of Efficiency and Culture

Strategic Workforce Management

One of the most controversial aspects of X’s transformation was the dramatic workforce reduction, with approximately 80% of staff being laid off in the initial phases. This aggressive restructuring aimed to create a leaner, more agile organization 

Cultural Implications

The implementation of a “hardcore” work culture and significant policy changes has demonstrated how organizational restructuring can profoundly impact corporate culture. Leaders must recognize that structural changes inevitably affect organizational DNA and employee morale. And of course, it is not a cake walk.

Leadership Consideration

While cost efficiency is crucial, the X case shows that rapid, extensive restructuring can lead to operational disruptions and loss of institutional knowledge. C-suite executives should consider phased approaches that balance efficiency gains with cultural preservation.

3. Stakeholder Management: Navigating Multiple Interests in Times of Change

Advertiser Relations

The rebranding has had significant implications for advertising revenue and stakeholder relationships. The transformation aimed to revitalize the platform’s appeal to advertisers through new ad formats and enhanced targeting capabilities 

User Engagement

Post-rebranding metrics reveal the challenges of maintaining user engagement while implementing substantial changes. The platform has experienced varied responses, with some users embracing the changes while others express resistance 

Strategic Communication

The X transformation underscores the importance of maintaining clear communication channels with all stakeholders during major changes. Leaders must develop comprehensive communication strategies that address the concerns of employees, customers, and investors simultaneously.

4. Brand Evolution: Managing Heritage While Embracing Future Identity

Strategic Rebranding

This is one of my favourite observations. The shift from Twitter’s iconic blue bird to X represents one of the most dramatic rebranding exercises in recent corporate history. This change offers valuable lessons about managing brand equity during transformation.

Market Positioning

Similar to successful rebranding cases like LEGO and Starbucks, X’s transformation demonstrates the importance of maintaining core value propositions while evolving for future opportunities. However, unlike these cases, X’s more abrupt approach may enable new insights into the risks of rapid brand transformation.

Implementation Insights

Leaders considering rebranding should carefully evaluate the balance between heritage and innovation. The X case shows that while bold rebranding can signal decisive change, it may also risk alienating established stakeholder bases.

5. Change Management Strategy: The Intersection of Speed and Sustainability

Implementation Approach

The speed and scope of X’s transformation offer important lessons about change management. While rapid change can create momentum, it can also lead to implementation challenges and resistance.

Leadership Style

What I understand, Musk’s hands-on approach to management and centralized decision-making style extends insights into the role of leadership during major transformations. This approach demonstrates both the benefits and limitations of strong, centralized leadership during organizational change.

Long-term Sustainability

The transformation’s long-term success will depend on the organization’s ability to stabilize operations while maintaining innovation momentum. Leaders must consider how to sustain transformation efforts beyond the initial change period.

Reflection – Balancing Bold Vision with Practical Execution

The transformation of Twitter to X offers valuable lessons for C-suite executives contemplating significant organizational changes. While bold vision and decisive action can catalyze transformation, success ultimately depends on balancing multiple factors such as —

• Strategic clarity with practical implementation
• Efficiency gains with cultural preservation
• Innovation with stakeholder management
• Speed with sustainability
• Vision with execution

As organizations continue to navigate increasingly complex business environments, these lessons from X’s transformation provide important insights for leaders planning their own transformational journeys. 

I’d say, the key lies not just in the vision itself, but in the careful orchestration of change across all organizational dimensions.

After the global pandemic, many people started to consider alternate ways to secure their financial future. As surprising as it may seem, the majority of these considered buying or starting a business.

It actually makes good financial sense. While the market can be volatile and events like the pandemic can cause real issues, you’ll feel more in control of your finances and destiny.

There are over 1.3 million businesses in Canada. An impressive 98% of these are deemed small businesses. A large proportion of these firms are classified as micro firms, meaning they have fewer than five employees.

If you already have some financial backing, you’re likely to find the prospect of buying a business more attractive than starting one. If you choose the right business you should find it easier to return a profit.

Here’s what you should ask before committing to buying a business.

What Range Of Businesses Do You Sell?

You no longer need to live in the same area as your business. The power of the internet means you can run a business from anywhere. Of course, if you want to be hands-on, you’ll need to be geographically close.

However, if you’re not worried about being hands-on or are prepared to move, you should consider where the business is located. It can significantly affect the taxes and other charges you pay.

That’s why it’s worth asking about the range of businesses offered. A business for sale in Edmonton may have a comparable price to one for sale in Vancouver. But Edmonton has lower taxes and other business charges. That means it’s a better option as you’ll be able to maintain higher after-tax profits.

A good agency will offer you a range of businesses across industries and locations.

Why Is The Business For Sale?

There are many reasons why someone may sell a business. The most obvious are the owner is retiring or a partnership is separating.

Most reasons are genuine, but this question still needs to be asked. The owners may be selling because they know the competition has just won a critical contract or that the market is about to decline steeply. In short, they are getting out while they can.

You need to know why they are selling, and you should verify that this is a genuine reason.

How Long Has The Business Been Trading?

78% of businesses in Canada survive their first year. By year five, only 50% of businesses survive. It’s worth asking how long the company has been trading. By looking at this, the way it’s run, and the order/sales books, you should get an idea of how well it is likely to do in the future.

The longer a business has been trading the more established its systems and hierarchy should be. This is worth looking at closer as you may need to think about replacing staff, such as the CEO.

Are the Books Up To Date?

Every business should submit financial records at the end of each year. If the business doesn’t file, they will be fined. That’s not your concern.

However, if the business doesn’t have up-to-date books you won’t be able to see if they are truly profitable or not. Equally, you will need to question why this is the case. It could be poor management or it could be an attempt to hide something bigger.

If you’re looking at a business without up-to-date books then you may want to demand they are corrected or step back.

Are There Any Ongoing Lawsuits?

A business should disclose if they have any ongoing lawsuits. It’s advisable to ask to ensure they don’t. A lawsuit could cause severe financial stress for the business. Alternatively, it could mean issues with any of their products. That could make a dramatic difference to future sales and your ability to run a successful business.

It’s worth noting you can find out if any business has been involved in litigation by requesting a report. It’s worth doing this and comparing it to the business owner’s answer.

Who Are The Target Customers?

A business should have an established customer base. It will depend on the product. For example, the latest tech is often targeted at younger people.

You need to assess their product and their target audience. It will help you decide the level of competition and whether you’re likely to encounter difficulties continuing to trade in the same way.

Summing Up

The final decision is yours. It’s advisable to collect as much data as possible before you decide whether a business is a viable investment or not.

But remember, a business that is floundering can be purchased for less. If you have some good ideas for restoring its fortunes, it can still be a viable investment. It all starts with asking the right question.

In today’s competitive business world, many organizations are choosing to focus their growth strategy through mergers and acquisitions. The value proposition for leaders is that by joining forces with another organization, growth can be more exponential and accelerated when compared with attempting to expand organically. When an organization is considering a potential merger or acquisition, they often place a priority on evaluating the prospect’s industry segments, geographic footprint, revenue, and service offerings. While this is critically important to achieve the desired goals, if the people & culture component is overlooked, there is a significant risk of turnover, low engagement, and low performing teams which in turn affects the experience for clients and ultimately organizational performance. This is where HR leadership has a critical role to play.

Before we dive into some best practices, I’d like to take a moment to differentiate between a merger and acquisition as these words are used interchangeably. A merger occurs when two organizations agree to join forces to create a new, joint organization. The recent merger of BKD and DHG to become FORVIS is a good example of a merger. Conversely, an acquisition is where one organization is absorbed by another. The recent agreement for tech giant Oracle to acquire Cerner is an example of this type of transaction. It is important to note that since an acquisition can have a negative connotation as a “takeover”, it is sometimes informally referred to as a merger, leading to the use of these terms interchangeably. Now that the business lesson has concluded, let’s return to the topic at hand.

Regardless of the type of transaction that is taking place, it is essential to have people strategies as a central component, particularly at the onset of conversations between two organizations. For this to occur and for HR leaders to be invited to this conversation, a prerequisite is for these individuals to establish credibility as a strategic business partner so they can have a seat at the table. For more on this topic, visit my blog and download the whitepaper “How to Get a Seat at the Table”.

To truly put people first, here are five best practices to consider for your next merger or acquisition:

Conduct People Strategy Due Diligence

At the onset, a people workstream should be formed to conduct due diligence for the prospect organization. This team’s responsibility is to evaluate the following elements of the potential transaction:

• Cultural Values
• Benefits Structure and Philosophy
• Compensation Structure
• Critical Policies
• Personnel Structure
• Performance Processes

The focus of the people workstream is not to look for 100% alignment in all of these areas, but to envision what the future state of the organization would look like given this information and how it would impact the employee experience. Even if the prospect organization would be forced to transition to the acquiring organization’s policies and practices, how would this transition play out and would differences have an impact on employee morale and retention? Alternatively, would there be elements of the prospect organization that you’d want to adopt? These are just a few of many questions that you’ll want the people workstream to dig deeper into.  

Develop a Consistent, Repeatable Due Diligence Process

Especially if you are an organization that plans to have significant M&A activity in the future, there is great benefit to having a well-thought-out process that can be replicated and scaled up/down as you look to evaluate a variety of different prospects for a merger or acquisition. It is important to have an “apples to apples” comparison process so that you are consistently looking at the same metrics of each organization being evaluated so that you can be objective in the decision-making process. This does not mean you would need to have similar size organizations you are evaluating, but rather a consistent set of principles to operate from as you do the due diligence. For example, if you are looking at three different organizations, using the same principles for evaluating benefit structure and philosophy will help you clearly identify the best fit given your goals for the transaction.  

Develop a Robust Internal Communication Plan

Likely one of the most important elements of the M&A process is communication, and more specifically, internal communication. There are two components to this: the announcement and the integration. During the announcement phase, important elements will need to be considered such as how and when your employees find out about the deal, who they hear it from, and what type of medium the information is being disseminated in. Moving forward to the integration, employees need to feel as though their organization cares about them, regardless of what side of the transaction they are on.

Below are three key goals that should drive your communication plan:  

1. Engagement and Retention: How will you provide the opportunity for team members to stay informed, feel invested in the change, and have a compelling reason to stay?
2. Career Planning and Development: What will you to do help your team members connect the dots between now and the future as it relates to their career growth?
3. Team Building & Connection: When the transaction is complete, what will you do to empower your leaders to facilitate high performance and connection within newly formed teams?   

Create Great Onboarding Experiences   

Particularly in the case of an acquisition, it is essential to have a thorough onboarding process. This begins with the sharing of basic organizational information, operations, and benefits, but extends beyond the first day to help new employees become assimilated into a new culture. During their first 90 days, employees will begin to form opinions about their role, their leader, and the organization overall. How they feel about these components will drive the likelihood of retention. As a result, there is a great opportunity to create a world-class onboarding experience for new employees to include elements such as the following:

• Local social gatherings
• Team building events
• Exciting project opportunities
• Intentional coaching conversations
• And much more!

If you can envision the first 90 days like a “red carpet” treatment where each employee is taken through a personalized experience, the chances of that person feeling engaged and connected is high and the probability of them staying is increased.

Mergers & Acquisitions: Closing Thoughts

There’s no way around it; mergers and acquisitions are hard. Having been through many of these through my career as an HR leader and employee, I can attest that there are always challenges to overcome and varying perspectives to navigate. But the one thing you can control is to have a well-thought-out plan in place that puts your people first. If you do this, your chances of success will only increase.

If you are looking to learn more about mergers & acquisitions or are getting ready to go through one and would like a guide to lead you or your team, I’d love to help!

Summary

Surveys show that, in average, mergers and acquisitions destroy value. Highly publicized successes are not sufficient to compensate for disastrous operations. Yet, it is relatively easy to set the rules of good acquisition practices. M&A professionals know them well, but seem to keep breaking the rules: make acquisitions beyond the scope of their strategy, produce unrealistic business projections to accommodate for sellers exorbitant demands, or fail to implement integration plans. The mechanisms leading to these repeated mistakes are powerful enough to overcome experience and wisdom; because M&A is a fascinating activity, with stakes far beyond simple efficient business; because closing an Avoiding the acquisition curse is a short term objective, and making it profitable is a long term activity. A matter of egos, passion and consistency over time.

Introduction

Mergers & Acquisitions underperform

The measure of acquisition success is the Net Present Value of the operation: initial price and transaction cost (cash out), and resulting cash flows that would NOT have occurred, wouldn’t the acquisition have taken place. A positive NPV means the cash used produced more value than if it had been paid back as a dividend to the shareholder.

Surveys consistently illustrate that:

• one fourth of all acquisitions create value far in excess of initial expectations (very positive NPV, above budget)
• one fourth of all acquisitions perform less than expected, but pay the cost of capital (positive NPV, below budget)
• one fourth of all acquisitions destroy some value (negative NPV) even though cash flows remain positive
• one fourth of all acquisitions end up generating negative cash flows.

In half of the cases, the buyer would have been better off not doing the acquisition. And worse, the aggregated Net Present Value of all M&A activities seems to be significantly negative. In other terms, humankind would be better off without M&A… But we don’t really want to hear this, do we?

M&A is of course not only a matter of NPV. It’s a way to remodel industries, to create new businesses, to change corporate culture, to introduce new talents in the organization, and to bring additional growth beyond internal growth… And M&A is a lot of fun. In other terms, we would rather accept negative NPVs than live in a world without M&A. Fair enough. But we also want to improve the M&A process, don’t we?

The M&A curse

M&A teams are usually high profile professionals and acquisitions are under top management scrutiny. So why would bright people perform less in acquisitions than in other activities? Some deals occur that should have never closed. Some decisions to drop a deal are never taken, because acquisition teams are exposed to pressure that biases them towards closing deals at any cost:

• pressure for short term external growth: in publicly traded companies, boards commit to external growth; closing a deal is always a good short term result, while real NPV is measured many years later, and with unreliable measures…
• pressure from partners: Mergers and Acquisitions involve actors (banks and consultancies) whose retribution depends on the conclusion of the deal; they tend to heavily influence decisions toward making the deal at any cost; in the expression “success fee”, success often means “deal closing”,instead of “good deal closing” AND “bad deal dropping”…
• pressure from inside; acquisition teams invest a lot of passion, determination and intelligence, and the process is long; the more it progresses, the more it becomes difficult to interrupt, even when some rational reasons suggest that the whole project is uneconomical.
• pressure from top management: acquisition is not merely a matter of fine economy, but also a matter of leaders’ egos. The moral satisfaction of increasing the size of one’s business through an acquisition may help make bad decisions to buy… Overdeveloped egos have a cost.

In addition, the value of an acquisition comes from years of good operation. Yet, the team that makes the acquisition is not the team that will extract the value. Not one person or group can be made accountable for the whole process.

So yes, there is a curse on M&A. It is somehow like poker: players who drift away from purely rational processes lose money… And it is also like derivative banking: the transaction is a short term objective, disconnected from the long term profitability…

It takes outstanding procedures to remain on the safe side and resist pressure. Or it takes to be familiar with all the processes that may affect judgment at each step of the acquisition process.

Zooming on problems

All acquisitions are decided on the base of positive projected NPVs. If real NPV is negative, it means either that the initial projections were wrong, or that the post acquisition process goes wrong. Or a bit of both. And it may also mean that the acquisition should have never been considered in the first place! We will see how this can happen during three essential phases of the acquisition process:

• Target screening: this is where the global strategic fit of a target is assessed.
• Deal negotiation: the team builds a business case that provides a realistic NPV, given a fair purchase price
• Acquisition integration: a team is built to implement the planned integration process.

1 – Global Strategic fit

The theory

Targets that are not within the scope of the global strategy should not be considered at all. They are bound to become failures, even if they may look at first glance as good opportunities.

If part of the target business is within the strategy, and part is not, make it break apart before you consider buying the piece that fits your strategy.

The wisdom behind the theory

But why should we ignore a business “just because it does not fit our strategy”? After all, we are in business to make value for the shareholder.

Efficiency

We all dream of being omniscient geniuses, but we are not: we develop over time a competence and a culture in specific sectors, and this is where we can strive for excellence. Entering a business where we have not competence is costly. If we do it, this cost has to be considered, as part of the company’s strategy.

In the example above, 60% of this business is not within the field of competence of the potential buyer. The buyer will not be able to maintain the operating margin, because he does not know this business. The acquisition will not be profitable.

Sustainability

Sooner or later, the acquired business will require some investment. And investment money is a limited resource: inside a corporation, projects and businesses are in competition to obtain a share of available investment money. It is highly unlikely that the acquired business will get investment money in 3 years time, even if he deserves it, just because it is simply not in the focus of the company. A business outside the strategic scope is bound to fade and fail.

The reality

The target screening process is very subjective, and non-measurable factors have a very heavy influence. Few corporations have a clear strategy, with an easy-to-use and objective model to assess the strategic fit of an acquisition. This leaves a lot of room for manipulation.

Twist the strategy

Starting with a sound strategy, with proper market definition and clear core activities, it is easy to widen the scope of the strategy to make it encompass the target:

• Define “necessary complementary activities” to core activities: typically, a service activity that was not considered initially can become part of the strategy if someone explains clearly that the core product business cannot develop without services. The problem is that service activities require a very different skill set, and provide very different returns…
• Extend the definition of a market to encompass the activity of the target.

Influence the perception of the target

It is very easy in an analysis report on the target business to reduce the importance of the non-core businesses, or increase their apparent profitability to make them more appealing, underestimate costs, or overestimate the capability to divest non core businesses.

Work around strategic priorities

Some external factors help soften the rigor of the strategic fit analysis:

• if a business has not received acquisition money for some time, its targets may be considered with more tolerance
• the candidates of a political heavyweight may be exposed to a more lenient screening
• than others.

2 – Realistic NPV given a fair purchase price

The purchase price negotiation is an external process (between the buyer and the seller) AND ALSO AN INTERNAL PROCESS, as the acquisition group negotiates the NPV of the deal. The goal is to make it not only positive, but also more attractive than the NPV of other competing acquisition targets! The NPV projections for the deal attractiveness (short term) are also the base of post acquisition integration budgets.

The theory

Terms – To express the theory, we need to remember some simple terms:

• P1 is the amount of money that this business represents for the owner today, as it is: Net Present Value for the seller of the cash he would generate with his business, with reasonable growth and sustainable profitability.
• SP is the minimum price the seller wants (in technical terms, the seller’s reservation price). SP is often way higher than P1 (can be double), as business owners add emotional value to the true realistic economic value.
• P2 is the amount of money that this business will represent in the hands of the buyer: Net Present Value for the buyer of all future cash flows that can be attributed 100% to this acquisition, once all the synergies have been calculated.
• BP is the price the buyer’s acquisition group negotiates internally: it represents the buyer’s maximum price, also called the buyer’s reservation price. BP is lower than P2, but often close.
• P is the negotiated purchase price.

Basic negotiation theory

The conditions to make a deal possible are:

• P2 must be above P1, so that the acquisition makes sense from an economic point of view;
• SP must be lower than BP, so that it is possible to make a deal.

P1⇒ SP ⇒ P ⇒ BP ⇒ P2 ⇒

The seller starts somewhere above SP. Buyer starts somewhere below BP. P is somewhere in the middle depending on the very complex mechanism of negotiation.

The wisdom behind the theory

From a purely rational and theoretical point of view:

• P1 represents a value that belongs to the seller.
• P2-P1 represents a value that should go to the buyer, as it is the value of the synergies that the buyer will be able to extract from the acquisition.

The negotiation will split P2 –P1 in a part that will go to the seller (P –P1), as a result of his negotiation capability, and a part that will go to the buyer (P2 –P), as an extra benefit for his cash.

The reality, beyond pure negotiation

The buyer determines initially his P2 and BP, based on his perception of the company, and an anticipation of P. Over the course of the negotiation, he may revise both P2 and BP, if he finds relevant and valid reasons to do so.

The seller drifts

What the seller has in mind at the beginning of the negotiation is an opinion on SP, but not an accurate P1, for 2 important reasons:

• the seller is emotional
• to compute his P1, the seller always projects a business where HE continues to put efforts everyday (and night) to make it grow,taking chances, using all his entrepreneurial skills. In reality, P1 is the opportunistic cost of stopping this business to start doing something else (holidays,new business, or salaried job with buyer to continue running the business post acquisition).

In addition, the seller can claim that the value [P2 –SP] only exists if he accepts to sell… And he will try to get a share of this value during the negotiation, in particular if there are several potential buyers. The seller is a “lean and mean” guy, tough minded, and a shrewd businessman.

Hence the almost crazy prices that some sellers announce. It may happen that SP is higher than P2. Or that the seller’s entry price is above P2. If buyers were rational, they would of course negotiate down quietly, and walk away if the seller persists.

The buyer drifts

The buyer’s team is under pressure to make the deal, as we saw earlier. And P2 is subjective… because it integrates synergies, which are financial projections of future efficiencies… It is easier to re-work P2, rather than take a chance to break the negotiation, or tell the boss that the deal is impossible. So, the acquisition team goes back to Excel. Excel does amazing things when handled properly to justify about anything:

• Shift costs from recurring to extraordinary: long term post acquisition profitability will increase
• Shift revenues from extraordinary to recurring (same effect)
• Increase the marginal profitability of synergies
• Increase the scope of some synergies
• Transfer some synergies from “possible” to “certain”
• Reduce and delay some future investments

Anything that improves the final year cash flows boosts the value of the perpetuity… In the end, the acquisition team may negotiate a price way above anything acceptable, and the acquisition will NEVER be a good one, because the price is way too high.

None of the above is dishonest. And nobody can blame an acquisition specialist for fine tuning his perception of the business. But when needed, fine tuning will mean increasing P2 more often than it should.

Good practice – On the right price

Determining the right price is complex, and there is a lot of literature on the topic. Some gurus stick staunchly to one method (see in the box) that usually provides a very low price. Of course, life requires a little flexibility, but there are still some rules with which none should cheat, and that negotiators should repeat as a mantra before any negotiation exercise:

• Anything above P1 (no-growth no synergy) belongs to the buyer, not to the seller. Because the value of growth belongs to the manager that makes it happen.
• Any cent above this value is strictly a matter of negotiation skills, and that’s where the negotiator is evaluated.
• he negotiator’s maximum price should be the NPV of the most likely synergistic case,with three years cash projection, no investment and a simple perpetuity.

A good practice is to establish negotiator’s incentive to reduce pressure on deal closing and increase pressure on “bad deal dropping”. The negotiator should be rewarded if he loses to a competitor, but forces the competitor to buy at a price OVER P2.

Good practice – On NPVs

NPV is both a necessity, and a fool’s game. It is a necessity because of the amount of work it takes. Making proper projections brings a better knowledge of the target business. It also is a necessity to compare projects competing for the same acquisition money. But it also is a fool’s game because then, it may only tell who is the most talented and credible liar…

Finally, computing NPV can become a toxic exercise when acquisition teams start building NPVs to justify a purchase price. As NPVs look like math, they may influence decision makers, and comfort them in bad decisions. NPVs should only be made by the people who are going to manage the business, as they are their budget.

The negotiator should never be entitled to discuss the NPVs. Not even “under supervision”: if the negotiator is good, he will negotiate P2 up with his supervisor!

Synergies should be discussed ONLY with business people not involved in the negotiation process.

3 – Sound integration process

If there is one thing on which all modern managers agree, it is the importance of the integration process. And still, in reality, this process is mostly overlooked. The study of best practices gives the following guidelines:

• Dedicated integration team
• Free the previous owner in the first year

Yet, in reality, things happen very differently, and always for apparently very sound reasons.

Dedicated integration team

The theory

Recommendations based on commonsense are:

• Include the integration team cost in the acquisition costs, or as a negative synergy, or as a cost of synergy, and budget it.
• Create an integration team made of one person from the acquiring company (A) and one person of the target company (B) FULL TIME FOR AT LEAST SIX MONTHS, and some more part time resources from A and B;
• Create an integration review committee, meeting once a week for 6 months, then monthly for two years, including one of the key people of A’s negotiation team.

The wisdom behind the theory

Integration team:

• The goal is to have on both side a person from each culture making the transition, and solving the problems through a JOINT approach taking A’s AND B’s culture, not just A’s culture.
• The two workers from A and B have as a mission to get to understand the culture of the other company, to explain the discrepancies, and prepare the “action” phase.
• People who have two part time activities tend to favor the easiest and most rewarding activity. Integration work is very difficult to reward based on incentives. If people are not full time o such activities, they may end up doing little to nothing for their integration duties.

Review Committee:

• the member of the negotiation team is a key element: the negotiation process brings a lot of information on people’s hidden agendas, company’s informal processes, and it also creates scars that only the people who ran the negotiation may understand.
• Review committee must not dissolve once an “action list” has been exhausted: problems appear after several months, as a consequence of the acquisition, and someone must be there to monitor it.

The reality

Integration teams are budgeted part-time, because in general “none in A or B can all of a sudden stop doing his usual work and dedicate his time to pure integration tasks…” I agree, it may look particularly straining on an organization to dedicate so much time to integration. But it is so easy to destroy value that it is worth doing it.

A common practice is to select the most open persons in B, ask them to get to know A on their spare time, and act as transmission chain for B towards A. This ignores that A also needs to talk to B, and that A may have to adapt marginally to B, not just B to A!

The acquisition integration team comprises some people from the due diligence team. But the negotiators are usually high profile guys, who immediately jump on their next negotiation, far more valued than an integration.

DUE DILIGENCE DOES NOT PROVIDE THE SAME UNDERSTANDING AS NEGOTIATION. So this valuable information is lost.

Action plan

The theory

“Observe for three months, prepare for three months, announce after 6 months, implement in a week, fine tune over 6 months, everything is finished after one year”.

The wisdom behind the theory

The reason for this is not a male display of action oriented management style. It is based on several human rhythms:

• It takes some time for people to speak up. People in B will not speak openly: an acquisition is a trauma, and it will take some time before people open up. So please remain patient and only listen for three months.
• It takes six months for anyone to understand a new environment: a new job, a new house,a new organization; you cannot expect to make sound decisions before.
• People expect changes to happen, whatever has been promised to them. If changes do not appear, after a year, people are disappointed and start playing a new game.
  • People cannot perform in the first months following an acquisition: because of stress, because of the additional burden to understand and adapt to new constrains; because there is an easy scapegoat when things do not go right: the acquisition! After six months people are ready for change, and change is urgent.
  • If things do not change, there are bad side effects after a year: relationships between former colleagues spoil, and some irreversible moves are made. It takes a year to disaggregate a human system that goes through the trauma of an acquisition.

In B, people know who is good, and who is bad. They expect the bad people to be let go, and the good people to be identified, promoted and rewarded. A must not disappoint this expectation. This means listen, plan, and act.

Of course, acting after 6 months may cause to make some mistakes. But mistakes made at this time hurt much less than expected actions not undertaken. And mistakes will be quickly forgotten if people are back at work with clear objectives, and a confident future.

The reality

People speak before they listen. We all do. And we all tend to agree with the simple idea that “there is no reason to wait to make the administrative integration, so let’s proceed now”. It is wrong for 2 reasons.

• Existing administrative processes usually match operational reality and sometimes some human particularities: B may have some very specific habits that are not compatible with A’s standard administrative processes. Of course, B will adapt, but it may affect operations adversely.
• A’s stiffness on processes may be a good business practice, but it will be perceived by B as a lack of care, or worse. Acquirers have a reputation of being arrogant: as A is in a dominant position, A’s middle management may be tempted to abuse. Any process that reinforces this impression during the initial phase is negative, and often useless.

Some things go quickly, and some other things never occur! In some cases managers in A will say: “the best thing is NOT to touch anything! It will be business as usual; the acquisition will be transparent”. It is not only wishful thinking, it is a mistake, and it often covers the reluctance to do changes. There is no such thing like business as usual after an acquisition. For many reasons including three major:

• The owners have sold: they were the fearless devoted leaders, they are now the fat Ferrari drivers. Their troops do not consider them as before the acquisition, and it is in itself a drastic change.
• B was permanently at risk, B within A is NOT anymore: this may not be true, but it is B’s employees’ perception. And this is again a major change.
• Customers of B do not have the same perception and attitude as before. Funny enough:they will NOT accept anymore some mistakes that they were tolerating from B, and at the same time, they will expect B to inherit all the bad habits of A!

In addition, action is not always nice. It means firing people. It means taking chances selecting the people who should go and the people who should stay. For some managers in A, it is the first time of their professional life that they have to restructure. The first time is not easy. And when things are not easy, it is often simpler to postpone them. BUT, people in B expect things to change. They expect some restructuring, and from day one, they have started to anticipate: single out the least appreciated people, promoting oneself, all the non-glorious attitudes that we animals tend to adopt when threatened. It is struggle for life, and it also creates wounds. These wounds, if not healed, get infected, and infection propagates.

Good practice

All integrations are transitions. The virtues of transition management compared to ordinary management are now well understood in all industries. Integration should just be handed to transition managers for 18 months, until they are ready to hand back the business to standard operation. No more, but no less.

I may add that some things should be purely and simply prohibited:

• pretend in any way that business after the acquisition will be “business as usual”.
• make an integration task list, and consider that once the final box has been ticked, the integration job is over.
• pretend that line managers are able to handle an acquisition without special skills and training.

Conclusion

The economic crisis that we are experiencing has demonstrated at length that professionals with excellent technical skills could work their best to create major failures affecting people’s lives. Some of the lessons learnt were:

• short term goals may lead to major wrong decisions
• excessive trust in technicality obscures economic reality
• self interest make people lose all commonsense
• passion for figures and money challenges consideration for other human beings.

Lessons learnt from acquisitions are very similar in many aspects. But money pains are not the most important.

Integration is a matter of helping professionals who had dedicated their working time to a certain way to do business, transition to a new professional life. There is much more than figures at stake. All acquisitions result in some people losing their job. Fair enough: business also follows some kind of Darwinian evolution. But bad integration results in unnecessary and often irreversible human damage. And managers should never accept that. It’s not an operational mistake anymore, but a human fault.

It may also result in simple destruction of an activity, of a production capability, of a previously dynamic business, of a creative or innovative momentum. I will describe such a thing in a next paper. Then, beyond the fault, it’s a lack of elegance, a “crime against business aesthetics…” Not to be forgiven.

“Someday, on the corporate balance sheet, there will be an entry which reads “Information”; for in most cases, the information is more valuable than the hardware or software which processes it.” Rear Admiral Grace Murray Hopper, US Navy (Ret)

As the economy goes digital (and global), competitive advantage is increasingly synonymous with information. More and more organizations are dependent on information systems to store their assets, be it a pharmaceutical company’s novel drug formulations; a music company’s original recordings of artists’ latest albums; or a tech firm’s code for new software applications.

Gaining competitive advantage through a merger or acquisition means that a company acquires the information assets of the target entity. How both acquirer’s and target’s information assets are integrated and shielded from various types of risk during the M&A can play a role in the success or failure of the new entity.

This paper discusses the challenges of managing information risk for several types of M&As and introduces a framework that can be used to address those challenges. The paper also offers a checklist of best information risk management practices for an M&A, based on the author’s experience as a Certified M&A Advisor.

CHOOSING AN INFORMATION RISK MANAGEMENT APPROACH

Companies pursue M&As to enhance their market position, drive growth, or to expand capabilities, products or services. Senior management typically focuses on four major areas during an M&A: brand protection, customer retention, cost reduction, and change management.

A robust information risk management (IRM) strategy supports the areas of management focus while creating value for the new entity. In this author’s experience, managing information risk can be a challenge during an M&A, because it is typically a time of intense change and rapid execution.

Understanding the type of M&A the company is undertaking allows for more effective information risk management. M&As can be broadly categorized by the type of buyer (financial vs. strategic), the size of the deal, and the extent and speed of integration. These factors affect the overall integration strategy and call for different approaches to managing information risk (Figure 1).

The first M&A category are financial buyers who seek targets outside their market that will enable them to create value through transformation. These buyers will usually extend their existing products and services into a new geography or diversify by connecting with large conglomerates or private equity groups. Integrations are usually done slowly so as not to rock the boat for the target or distract people through rapid change.

For these financial buyers, the information risk management strategy should focus on compliance issues, laws and the regulatory frameworks that will impact the business. There is likely to be minimal formal integration and IRM teams must understand the resultant complexities in governance. The policies and procedures, although used to run distinctly different businesses, should be consistent across the two organizations. On the people side, IRM teams must recognize there are two different levels of risk awareness, skills and cultural knowledge. Since there is not full integration, there is little scope to bridge the gap between entities; this increases the complexities of governance. If not managed properly, this can adversely affect the strategic agility of the entities.

Figure 1:

The second M&A category is the strategic buyer pursuing market leadership by consolidating two large entities to eliminate redundancies, improve operations, and leverage economies of scale. These M&As often warrant a full integration and are usually done at a modest pace. Pushing forward at a rapid pace could be risky, jeopardize the full value of the deal, and burn out resources from the sheer size of the effort.

For this strategic buyer, IRM teams should focus on classifying sensitive information to ensure the right people have the right level of information access, and the wrong people do not. The risks of any downtime and availability of information from systems migrations and integration of disparate systems should be well thought through; any downtime could affect customer retention and brand reputation. All obsolete and non-standard systems should be eliminated. Poor migrations and integrations often result in data accuracy and integrity issues, which have a huge impact on an organization’s key business processes.

The third M&A category are those financial buyers who execute a series of “bolt-on” acquisitions to create a new platform for growth. These expansions could be geographic or involve vertical integration. The speed of integration is rapid, leveraging the skills and scale of the platform company. There is likely to be low extent of integration beyond eliminating redundancies and overlaps in corporate functions and the back office.

Here, the IRM teams should focus on compliance with specific regulations. Access risk and residual access risk must be evaluated and acted on quickly. There also needs to be a tight level of integration at the governance level, similar to that needed for the “transformational” financial buyer.

The strategic buyer who is absorbing a competitor – usually of a smaller size – are the final M&A category. This buyer seeks to capture operational synergies by eliminating excess capacity and enhancing efficiencies. This often includes merging sales functions, scrapping product lines or services, or closing offices.

While this is a full integration at rapid speed, extra care must be taken not to alter the risk profile of the target so much that it diminishes in value and takes on too much agility risk. In addition, access risks play a very important role in this kind of a merger, having the same level of impact as consolidation with full integration. The use of non-standard or obsolete systems stand a negligible chance and hence much time and effort is not spent on this area during absorptions thereby reducing accuracy risks.

Frequently the methods used by the acquirer for managing availability risks are adopted by the new entity.

THE ‘4 A’ FRAMEWORK: UNDERSTANDING RISK PROFILES

M&As create environments more complex than steady state operations, and thus should be viewed differently when managing information risk. It is also important to have a common IRM framework during an M&A, so that the integration and IRM teams can ensure changes are visible and controlled.

To manage, mitigate and monitor risk in this highly complex environment, it helps if the framework is robust enough to be customized by the type of M&A. The framework should allow for integration between the tactical tasks that help manage risk and the strategic imperatives of the transaction. Such an information risk framework also aids in building a common language of alignment between business design and the information environment.

Figure 2:

The 4 A Framework is a model that allows IRM teams to look at all aspects of risk. Using this framework for M&As allows IRM teams to customize to the transaction, maintain transparency and connect risk management to strategic goals. Entities undergoing M&A can evaluate the risk profile of the acquirer and the target company, and that of the combined entity based on these parameters:

• Availability – keeping existing processes running and recovering from interruptions, while avoiding negative incidents such as outages and security leaks
• Access – ensuring that the right people have access to appropriate information and that the wrong people do not
• Accuracy – providing accurate, timely and complete information to all relevant stakeholders
• Agility – supporting changes in the business with acceptable cost and speed.

With the 4A Framework, the IRM team can manage top-down, rather than get bogged down in operational details right away. This can simplify execution. It’s important to note that the 4As are not independent of each other. For example, overengineering access can reduce agility, while overengineering agility can increase availability or accuracy risks. Ultimately, balancing the 4As in alignment with business objectives leads to better integration and risk management.

Figure 3:

INTEGRATING RISK PROFILES

Seasoned M&A professionals usually tend to select either the acquirer’s or the target’s IRM approach because similar choices usually work for other functional areas.

Traditional information risk management professionals, on the other hand, tend to lean towards standards or regulatory frameworks during an M&A. While this does work for steady state operations, it often leads to issues during the transaction, because the risk profile of the new entity differs from steady state.

IRM teams also should avoid using either company’s risk profile for the new organization. The best practice approach, the acquirer imposing approach, or a standard approach might work for other areas of integration, but not for information risk management.

An organization’s business architecture revolves around five broad areas: customer segments, scope of products or services, geographic coverage, strategic differentiation, and profit pools. During an M&A, organizations tend to alter one or more of these areas. This impacts the IT strategy needed to support the new structure. As a result, the new entity is likely to have a different risk profile than either the acquirer or target. The information risk profile for the new entity should align with the new business architecture as well as the new IT strategy, thereby creating and protecting value for the new entity.

An example would be if the acquirer’s focus has been historically skewed towards access and availability risks because of the nature of their business, while target’s agility risk management was a competitive advantage for them. By imposing the acquirer’s profile on the target, there will not only be erosion of competitive advantage and loss of value, but also perhaps new exposures for the new entity.

BEST PRACTICES FOR MANAGING INFORMATION RISK DURING AN M&A

Based on the author’s experience, these tactics are best practices for M&As from an information risk management perspective:

1. Get the information risk management teams involved right at the due diligence phase.
2. Form the governance committee upfront and get agreement on the merger imperatives.
3. Understand the risk profile of both organizations and agree on the risk profile of the new entity.
4. Ensure the risk profile, IT strategy and business architecture of the new entity are aligned.
5. Align information risk management with the overall risk management work stream supporting the business rather than have it as a work stream within IT.
6. Understand the strategic intent of the transaction and get a solid handle on the speed and extent of integration.
7. Some mergers are heavily focused on capturing synergies through cost reduction; make sure this does not come at the expense of increasing risk beyond the appropriate threshold.
8. Understand and classify all sensitive information early in the transaction. Know where information resides and ensure adequate controls are in place to protect it during the integration and in transit to the new control structure.
9. Critical skills and knowledge reside with people and both acquirer and target need to retain good people to make integration successful. Loss of key people during the M&A could increase project risk and increase costs while impacting efficiencies in other areas.
10. Understand the regulatory environment. Regulations such as SOX, HIPAA, Basel II, GLBA etc., may come into play. Though some regulatory guidelines might overlap, addressing one does not mean compliance with others.
11. Understand and document all cross border issues with respect to legal possession of systems, applications, transactions, data rights and regulations that might come into play.
12. Use of non-standard technologies can result in loss of agility and affect speed to market, procurement, invoicing, or other critical business processes, thus eroding competitive advantage.
13. Pay attention to all information migrations; most accuracy and integrity risks arise due to poor migration executions.
14. Give immediate access to information on Day Zero. People will need it to do their jobs. Improper integration or poor consolidation of access control systems could lead to access risks, potentially violating SOD rules.
15. Look for hidden liabilities in licensing that can increase costs.

Getting Started

You can’t always choose your own starting point when you start a business. Sometimes it is good luck or misfortune that finds you making that life changing decision to start a business.

Even in more favourable times, finding somebody to back your venture was difficult and these days it is even harder.

Thus one route to starting a business with minimal investment is to find a niche in the local market place, which will allow you to generate a revenue stream. The market needs to be one that you want to grow into, based on your expertise or knowledge and growth possibilities if you had the investment. This is known as “boot strapping” a business. In effect pulling itself up by its boot straps.

Your goal then is to build contacts, market and industry knowledge and a business system that generates cash. This is where you learn first hand, how to get to know your market, how to communicate with it, how to bring new products and services to it and start to develop your brand whilst building a team and systems around you which can help you achieve your goals.

From experience most business owners are able to supply their products and services to the customer and with a bit of training, to produce a set of accounts using modern payroll and accounting software. What seems to be lacking and where the new entrepreneur needs help with, is marketing and subsequently sales and understanding their processes from their customers’ perspective. With so many routes to market today, it can be quite challenging for the new entrepreneur to know which route(s) to take.

Most start-ups use previous contacts to get going. Most people have sufficient contacts within their industry to get started. This can be a previous employer or if that business has failed their customer list.

Getting the cash flow going

The hardest part of starting a business without external funding is getting over the problems caused by the lack of working capital. Here the support of a partner or family is crucial so that any money generated in the business stays in the business. Slowly over time the business can then start to invest in marketing, systems and people. If a new entrepreneur is clear on their goals of aiming for larger things, there are today many ways of minimising cost whilst maximising image and exposure in the market place.

Minimising cost, whilst building a brand

For example there are a number of “virtual office solutions” which allow you to dispense with an office and plenty of secure lockups for the storage of goods and equipment. Modern smart phones become your mobile office and with a content managed website you can write and publish marketing materials and get your prospective customers to download and print your materials. Faxes and emails can be sent direct to your phone without the customer knowing. Twitter, blogging, free global PR resources and professional and social networking sites can help you get exposure to your market and help to manage and grow your network. This can all be done on a minimal budget.

In addition, with the advent of cloud computing, you no longer need to be an IT boffin to have access to good reliable and dependable IT systems. These days, there are plenty of “cloud” or Internet based systems and applications so that all you and your team need, is a decent broadband link and secure access to the systems. Non geographic telephone numbers and specialist call answering services mean that you and your team can be anywhere and still take calls. Hotels have caught on to this trend and it is quite normal to walk in to a hotel near a motorway junction and find that it is very busy with all types of business meetings.

Being virtual does not mean working alone. Far from it. There is a large army of well trained, highly motivated professionals working from home, running their own businesses who can help you with any challenge that you may face. You can also hire interim managers to quick start your business. The nice thing is that they can be part of your virtual team and you only pay for what you use.

Developing the right disciplines

The key thing is that as the team grows it needs to regularly meet face to face. You can only do so much by email and phone. Every so often it is important to meet and have a chat over a coffee.

Scaling the business

Eventually, the business needs to take on office based staff. However, this can be the hub and the focus for the organisation. Minimising the overheads whilst maximising the value delivered to the customer will keep more cash in the business so that it can fund its future growth.

Going into the big time

Eventually, the business gets to the stage where organic growth becomes too slow and external investment is needed. At this stage the business will have developed a systematic approach to its marketing, a loyal customer base, all the accreditations and systems needed by larger companies to do business with it and have developed a well trained and dedicated team to support it.

The entrepreneur now has an attractive proposition to get external funding on its own terms and be able to fully exploit the available opportunities.

Alberto Elli looks where the resources are concentrated during the three major temporal blocks of an acquisition

After so many years of being involved in business development, I think one of the most critical moment in an acquisition is the integration phase, when there are great chances to destroy shareholders’ value.

Let’s see where the resources are concentrated during the three major temporal blocks of an acquisition:

1. Strategic intent, target setting and proforma decision to justify the deal price. Great focus from top management, quite unrealistic expectations pushed both from inside (needs for growth) and from outside (bankers driven by fees as a percent of acquisition price).
2. Negotiations and closing. Seller, buyer and advisors have strong vested interests to get the deal done, also stretching proforma. Maximum peak of resources involved: multi-functional team from the acquirer and handsomely paid consultants from outside: lawyers, environmental experts, tax experts and accountants, bankers for financing and for advising on the deal. Once Due Diligence is completed (and at times it is done too quickly and without depth) and Purchase Price is set, all these actors tend to disappears because they have reaped the biggest rewards.
3. Once Senior Management is on a new acquisition and the “clock” of external advisors has been stopped, the local team and a bit of divisional support is left with the huge task of integrating the new acquisition and to deliver the shareholders’ value they are committed to.

RISK ASSESSMENT

To better understand the challenges of integration, an analytical risk assessment will help to highlight the areas that will need most management attention and dedicated resources. The following model can be run both in a qualitative way (describing the issues) and in a quantitative way (assigning values to each variable based on prior integrations experience). The latter approach is particularly valid for “serial acquirers” that will quickly size the risks and assign internal or external resources based on prior experiences and … lessons learned!

Nature of the transaction
1   Clarity of Strategic intent
2   Board of Directors Approval
3   Highly leveraged
4   Proforma on more than 5 yrs.
5   Acquisition and integration costs budgeted
6   Target, public or private
7   New Market Entry
8   Bolt-on acquisition
9   Transformational
10  Joint Venture
11  Minority Participation

Complexity “up-front”
12  Sales $10 – $50 Mill. Or more
13  Multi-divisional
14  Multi-geography
15  Plants to shut-down
16  People to reorganize / downsize
17  Due Diligence -> major adjustments
18  Net Worth Adjustments
19  Ear-out on multiple years

Customer Facing / Front Office
20  Key Management to Retain
21  Criticality of customers – Sales retention
22  Criticality of customers – Terms&Condition
23  Bad Debts Reserve
24  Compliance issues / severity – FCPA specific

Back Office
25  IT integration complexity
26  ERP to implement
27  Business Intelligence
28  Supply Chain established
29  Production Planning
30  Safety Procedure
31  Inventory management / slow moving
32  Centralized Purchasing
33  Critical Suppliers
34  Finance – closing and reporting in less than 5 days
35  Finance – monthly B/S reconciliations
36  Finance – Cost Accounting
37  Finance – Bank relationships, complexity
38  Finance – Cash Flow Management
39  Finance – Tax strategy
40  Risk Management – Insurance and Legal support
41  HR – Payroll (internal or Outsourced)
42  HR – Labor Contracts repository
43  HR – Benefits defined, perquisites definition
44  HR – Pension Plans assumptions understood and funded

Others
45  Culture, consonant or dissonant to acquirer
46  Regulatory and IP protection, criticality of issues
47  Warranties on long term sales contracts
48  Warranties on long term purchasing contracts
49  Documentation of Labs procedure
50  FX hedging in place

WHO HAS TO LEAD THE INTEGRATION PROCESS?

Every each integration is different but the best practices on the resources needed have informed the following considerations:

1)  CFO (Acquiring or the acquired)

Given the ultimate goal to deliver on expected shareholders’ value creation, the involvement of the acquiring CFO is very important but cannot be the sole responsible, given the many others concurrent responsibilities. At times, the acquired CFO has been asked to lead the integration; results are mixed because the internal knowledge can be over weighted by the temporary nature of his/her mandate. Only if the acquired CFO will have a long term place in the organization, the integration role works pretty well, actually if executed with excellence is the best entry in the new organization.

2)  Internal Project Leader (Full time or part-time)

PMO skills are needed; either imparted through internal training or available in specific professionals but the true integration leadership is quite different: best is to have a manager that is slotted to become the leader of the acquired entity or the leader of another acquisition.
Depending the size of the organization and the frequency of acquisitions, the investment of full-time resources is to be considered; the experience is usually multi-functional and the resource can be redeployed quite easily.

3)  External Project Leader

Solution to consider when the acquisition is one-off or is particularly complicated from a geographical/cultural point of view. Difficult to recruit the right profile but once is individuated the scope, the timing and the cost is fixed, even more important is the independence from internal politics and divisional agendas.

4)  Internal Team (permanent or ad-hoc)

Best practice is to form a full-time internal group of experts that can be redeployed after the acquisition is integrated or kept as a team if more are foreseen. To be noted that integration can be a relatively compressed time frame but full achievement of synergies can be a longer effort, like for Supply Chain and for IT in the contest of ERP implementations.

5)  External Team

Risky proposition in term of having the right quality and number of resources for all the time needed to complete integration. Once a resource is hired for a functional area, always ask to identify a back-fill. If possible, try to shy away from time and material contracts in favor of closed end sum, or based on payment at milestones’ achievement.

CONCLUSION

Clarity of the objectives to achieve, well defined timetable, proactive risk assessment and correct deployment of resources are key to a successful integration that will deliver the full value of an acquisition.

About the author: Alberto Elli for the last three years has been Interim-Chief Financial Officer for private and PE-owned companies in the space of consumer electronics and fashion, leading processes of turnaround and exit strategies.

From 2008 to 2013, he was Vice President and Controller of Sherwin-Williams Global Finishes Group (OH) (Automotive Finishes; Chemical Coatings; Protective and Marine Coatings and Emerging Markets) with about $3 billion Sales. Since inception, in 2008, the Group grew sales 70% both organic and with several acquisitions. Alberto joined Sherwin-Williams in 2006 as Vice President and Controller of the International Division after ten year experience in the pharmaceutical industry with Schering-Plough. His first assignment was as Finance Director in Italy and he was later promoted VP of Finance for the Healthcare Division headquartered in US-NJ and after three years was named VP of Finance, Pharma International, a group of $4 billion Sales. From 1985 to 1996, Alberto held various financial positions in Italy, the last of which was from 1989 to 1996 as Finance Director for SCA, a leading Swedish multinational in paper and packaging industry.

Alberto earned his degree of Dottore in Economia e Commercio from the Universita’ L.Bocconi, Milano, Italy

Export is nowadays not anymore a “nice to have”, but a necessity for innovative SMEs. It goes through building an international export culture and contracting local executives.

The Global Innovation Index 2011 indicates that countries like France and Italy are lagging behind other equivalent countries in terms of innovation. However, these countries demonstrate a capability to innovate in many fields.

Recently, the French Business Confederation has expressed the concern that French SMEs seemed less capable than others to grow internationally. And the Global Innovation Index ranks France very low for services export (like Italy).

The latter could explain the former: innovation without export remains confidential and has little chance to succeed and generate profitable business.

But exporting is not easy. It takes the willingness to approach each market as a totally new market, in terms of customers, distribution and competition. Innovative companies must enrich their culture with international business culture, mixing foreigners and locals at executive level.

Export is a necessity

Some very large countries have a domestic market large enough to generate significant revenue and economies of scale, ie: profitability.

But in many countries, home markets are not large enough to turn innovation into profitability: international growth is a necessity. Some countries, like former Commonwealth countries, or from the former USSR have a very favorable access to a selected international market. But for most European countries, their previously fast growing domestic markets are not sufficient today in a context of international competition.

Language is a barrier that can be overcome as the Dutch and the Scandinavian have demonstrated. In some countries, export is almost in the genes of the population (Singapore, the Netherlands, Ireland, Belgium…). And they are successful. But other countries do not have the culture to do so, even though they don’t really have a choice: export is a matter of survival today.

Specific needs for export

Success in a country does not make success in another country. Some specific products like small electronics, chocolate bars, shoes or cloths may induce to believe that markets are homogeneous internationally, but at a more granular level, it is not the case. Design is often country specific, but also market structure and market regulation. Crossing borders takes to reconsider all local elements: customer’s expectations, competition and distribution.

Foreign customer expectation

Entrepreneurs immersed in their home market have a natural understanding of their customers’ behaviors and expectations. They can identify new trends and design the right solution. They can complete their intuition getting market feedback and applying well known marketing processes, to gather customers’ opinions, finalize the right offer, and go to market. They know well their distribution network and after a bit of trial and error, they can find the right final packaging for the offer.

Question: how much of this offer is specific to their home market?

Food is the easiest example: eating habits, cooking habits are significantly different in all countries (can you compare Japan, Spain, the US, the UK, India, Morocco or France?) In some countries, people prefer to prepare meals, in others, they buy and cook ready meals. Some like to buy fresh food every day, others long life products once a week. Food chains know this problem well as they are used to adapting traditional recipes to local habits when they export a concept.

It is easy to make mistakes: a car called “Nova”, created in an English speaking country, was exported in Spanish speaking countries under the same name (“no va” means “doesn’t work” in Spanish); the German “Gerber” baby food, could never be sold in France as “gerber” means “vomit” in French.

These are funny obvious cases but many are not that obvious. Each country has its peculiarities. One of our iCEOs(*), about to launch a telecom business in a new Asian country, decided not to trust international marketing analysis covering this country: “I asked a local marketing agency to run a local market study, by fear that I would miss something crucial. And I was right! I would have gone “one-eyed” amongst competitors with good eyesight.”

Local competition

Being in one country at the forefront of innovation does not mean in today’s world that there is no competition abroad. Service ideas are not unique, new products can be created at the same time on both sides of the Atlantic.

Having a competitor on a new market is a good thing: customers are more inclined to make the leap of faith of buying an innovative solution if there is a diversified choice already. But ignoring a local competitor can be a bad mistake, as he has the natural understanding of is native market. In addition, when a foreign company arrives on a new market, it boosts local potential competitors who can catch up thanks to their intimacy with local customers and distribution. Local market expertise is a necessity when developing abroad.

Foreign country distribution

One of our iCEOs described a typical situation: two soft drink companies developed almost simultaneously in an Eastern European country; one hired local executives, and quickly established a dominant position, while the other, with mostly foreign managers, stalled. It wasn’t until the second company “poached” local executives from the first company, that they regained a market share more consistent with their international market position.

Most countries have subtle specificities when it comes to distribution that international managers may not always identify. A multinational industrial company with 35 different business lines found out that for some businesses, the global strategy had to be specific for targeted countries, because of local distribution peculiarities (different habits for wholesalers, retailers or installers, 2 tier distribution in some countries, 1 tier in others). They could identify it because they were strongly established in each country, and followed their local executives experience and knowledge.

Local executives may also be aware of local regulations, or have political contacts enabling them to influence local regulations or simply approval by government bodies.

Creating an international culture for export

In order to address these challenges, innovative companies need to build an international business culture, as early as possible in the export process.

It is sometimes difficult for SME top executives to trust and hire a foreign executive in the target country. Prejudices are engrained and even sometimes justified! Moreover, language barriers can make it difficult for the recruiting company to perceive the real competence of a foreign executive.

But there are executives with either bicultural competence, or a strong international business culture in addition to their local business culture. The problem is to find them. This is what a natively international recruiting network can provide: identify, select and propose these profiles.

In addition, exporting entails major financial risks. Hiring a full time executive too early is somewhat hazardous. In order to mitigate the risk, SMEs need flexibility: the possibility to temporarily contract these executives and go for permanent recruiting only when success is in sight and when the personality match is confirmed.

About the author: Olivier Pujol has worked over 23 years in many countries, positions, and companies. He has conducted business in 12 European countries, in Africa, North America, South America, and Asia, for companies like Schlumberger or Honeywell, as well as SMEs and start-ups. He has been in the position of CEO, COO, field manager, strategy and M&A specialist, business developer, and consultant. He worked on offshore platforms, in the jungle, but also in board rooms and electronic labs. Olivier holds an MSc of l’Ecole Centrale de Paris, and an MBA from Insead. He can speak 5 languages (French, English, Spanish, Portuguese and German).

Context

How to acquire the company with its own money: XYZ is our main competitor, with similar activity than ours, but complementary and of great marketing interest. Its 2XXX revenue amounts to $110M and its financial result is nil. In 2XXX, XYZ shareholders gave up ownership, as a result of an LMBO (Leverage Management Buy Out), to 4 executives holding each 25% of the equity. The September 11, 2001 events produce tragic effects for the entire community of the US travel operators, and early November 2XXX, following a meeting in Chicago with XYZ’s owners / managers, it happens that their company is for sale at $7.5M asking price. Our shareholders give us clearance to undertake such acquisition. I issue a conditional offer, at $7.5M price, subject to due diligence, after which payment terms will be exposed and final commitment given. The four XYZ shareholders agree.

Actions to acquire the company

Whilst performing due diligence, I detect that $1.8M in cash are blocked, of which $1M with USTOA (US tour operators association) to protect customers deposits against bankruptcy risks, circa $600K with their credit card operator and roughly $200K with various suppliers. Ourselves we have a $1M deposit with USTOA, which constitutes the statutory limit. Here comes to my mind the idea of recouping all these deposits and to use them to partially fund the acquisition. I check and then confirm the feasibility of such approach. Furthermore analyzing how XYZ is handled shows that numerous opportunities exist, to merge or optimize activities (marketing, accounting / Finance, IT, call centers, etc.) In my opinion delivering a $1.5M net profit is quite achievable at the end of year 1, tax free if we purchase the stock, which constitutes a reasonable assumption supported by the fact that no legal risk has been found during the due diligence. And lastly the XYZ shareholders agree to be partially paid in stock. Using the same criteria they have themselves used to appraise XYZ at $7.5M, and over valuating our technology at $50M, I end up appraising our company at $87M. Thus, and even though our revenue is only twice theirs, I valuate us at 12 times XYZ. To be honest I was expecting serious objections about my valuation. At the end of the due diligence, and after getting clearance from our shareholder, I articulate the final offer, which stands as follows:

• $7.5M for the entire stock, payable
• $2.5M in cash at closing,
• $2.5M in cash payable 12 months after closing, and
• $2.5M in our common stock, only representing 2.86% of the total equity.

Appraising ourselves at $87M is not fought against, as XYZ share holders mostly focus on the cash portion of the deal. After a few minor modifications our offer is accepted.

Results and appreciation after acquiring the company

By the end of January 2XXX the purchase is completed and XYZ belongs to us. Within 4 months the credit card processor is migrated and the $1.8M total deposits are captured back. 72% of the initial payment is done using XYZ’s money. XYZ’s CEO is quite effective and we keep him in his position. I rebuild with him the 2XXX budget and shoot for a $1.5M net profit. By the end of 2XXX, all restructuring operations are satisfactorily completed and the financial outcome is a net $1.8M profit, thanks to using losses carried forward. I use this result to fund 75% of the second payment. By the end of 2XXX, after I have left for other business opportunities, I learn that XYZ’s profits have continued to increase. Thus the cash portion of the deal has entirely been paid with XYZ’s money, in less than 18 months. Subsequent to acquiring the company, our revenue jumps from $200M to $320M, or 60% growth. The profitability increase is harder to measure as our shareholder takes advantage of our external growth to reduce the commission rates granted to sell their products (which constitutes transfer pricing…but this is another story). However they demonstrate satisfaction by paying the CEO and myself an exceptional bonus.

About the author: Patrice Suncic has 32 years of international experience in corporate & general management. He is a aajor actor of change, able to transform business processes and generate improved efficiency, productivity and profitability, whilst maintaining social cohesion and has strong purchasing & negotiation skills.