Michael's M&A Playbook: Are You Ready for M&A?
Are we ready for M&A? This is the question that CEOs often ask before the company starts with M&A activities. The M&A readiness assessment is not easy and depends on the specific reasons and goals of your company that you want to achieve, but there are a few topics you can check to see whether your company is prepared for an M&A transaction.
Tips for an M&A Readiness Checklist
You have a target pipeline and rank companies on a scorecard. Often companies start thinking about M&A when a specific opportunity comes up. Consider different options, and don't just say yes to the first project. Develop an M&A target pipeline with a list of companies and rank them on an M&A scorecard. The scorecard should include quantitative (e.g., revenues, EBITDA) and qualitative elements (e.g., cultural and strategic fit). Usually, companies can come up with some target ideas, but I also recommend using external consulting firms or investment banks to ensure that you look broadly in the market before you commit to a specific target.
You clearly understand the target and have a strategy for the value capture. When you develop the target-specific business case, include in addition to operational and financial key metrics also strategic metrics for measuring the value increase. Value capture is all about M&A benefits and making sure that you create additional value for your company with the M&A transaction, which is the most important goal. Also, calculate different scenarios of your business case.
Your board of directors (BoD) is up-to-date about your M&A plans. The BoD is one of the most critical stakeholders in M&A activities. Include M&A regularly as a topic in the quarterly BoD meetings and demonstrate clearly that M&A is an essential element of your growth strategy. Timing is one of the many reasons why companies choose M&A activities because you would lose otherwise time to market.
You have an M&A project team with people from different departments. Evaluating a company means you must look at all of its relevant elements. This includes, for example, the reason for a competitive advantage, the go-to-market strategy, customer service and operations, R&D capabilities and product/solution quality, HR strategy, cultural fit, and financial performance. Having people from various functions helps to determine those aspects.
You do not overwhelm your organization and have a list of external specialists. Especially in smaller companies, M&A transactions can create a lot of stress for day-to-day operations because your most talented people will also be part of the M&A team. Consider using external help such as M&A lawyers, accounting firms for the financial/tax due diligence, and consultants for the IT integration.
You have a way to finance the transaction. Why do I mention this? Because I have been in companies where management did not address financing early in the process, which created significant issues. Your CFO can define a target financing structure between equity/your own cash and external funding. I recommend reviewing those debt leverage assumptions with external financing experts. Funding is a big topic with a significant impact on the company, and I plan to write a separate article about it.
You are not surprised that many things come differently, and you have a solution-based company culture that will find ways to solve unexpected issues and can implement them quickly. From my experience, almost all M&A transactions turn out to be different than planned. Be ready for that.
You are aware that M&A is different from day-to-day work. This distinction is crucial, and I know from experience that some companies struggle with that. M&A work is project-related work with all of its positive and negative aspects. It means tight deadlines, long hours during the negotiation and integration, an extremely output/result-oriented work style, a high level of unplanned activities, and a high degree of exposure to senior executives. In some companies, this also applies to day-to-day operations, but in most, it is different. Ensure you have the people with that project-based approach in your M&A teams.
You have an integration plan. The post-merger phase can be overwhelming. The earlier you start thinking about topics like the integration of accounting standards, management reporting, cultural integration, how marketing and sales will work together, using synergies in operations, etc., the better. Be specific in the integration plan, have a strong project manager, follow up closely at the beginning, and you will be successful.
Continue Adjusting Your M&A Approach
Starting with M&A can be intimidating initially, but even if the M&A readiness assessment shows that your company misses a few things, it doesn’t mean that you cannot begin with M&A. The good news is that many experts and consulting firms can help you set up the project. You don't have to do it by yourself. The most critical element is to continue learning from your transactions and improving your tools, processes, team setup, and external support. You can make it work!
