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Why mergers and acquisition deals often fail

Mergers and acquisitions (M&A) deals tend to fail. We all know that to be the case. Research supports this knowledge as well, as the rate of failure in M&A deals is around 50%.

We are well aware that you are preoccupied with many challenges that go hand in hand with M&A deals, and it’s easy to miss certain details.

In our research, we’ve found several common themes that continue to reappear. Over time, we were able to pinpoint the main reasons why M&A deals tend to fail, and we’ll cover all of them in this article.

Lack of involvement from the owners

It’s vital to appoint M&A advisors in all mid to large-size deals. However, there is no need to leave everything to them. If the owners don’t get involved in the process, the sale can quickly fall apart.

This is important because:

  • Owners are the ones who need to lead things after the deal is over
  • Advisors are the ones who need to be advisors only, not the leaders

Besides the fact that this increases the chance for the deal to go through, it also builds experience, which ends up being a lifelong benefit for the owners.

Surprises in the due diligence process that lead to lack of confidence and trust

It’s a common occurrence that there isn’t enough transparency between the two parties involved in the deal. With such a lack of transparency – surprises quickly become a more common occurrence than they should. These surprises often end being unpleasant, which usually leads to a lack of confidence and trust from the buyer.

Companies need to show full transparency in any M&A deal. The due diligence process is precisely where companies need to prove it. They need to help the buyers by being transparent and by offering tools that create more trust.

Missing essential dates also leads to lack of confidence and trust

Surprises are not the only things that can kill a deal. When buyers or sellers miss important dates for finishing a vital task, they can similarly kill the deal. That’s because missing deadlines ruins trust and confidence, which in turn tends to lead towards the agreement falling apart eventually.

The other party loses motivation for finishing the deal once they lose confidence in the first party.

Such devastating results can easily be avoided by adhering to dates. It’s thus vital to set them in accordance with the wishes and the means of all parties involved. It’s also beneficial to make room for the modification of these dates, if necessary.

The numbers change during the sales process

We can all guess that one of the main reasons why these deals fail has got to be in the numbers. It turns out that this is true. We’ve noticed a connection between:

  • M&A deal failures and
  • A drop in cash flow and revenue of the company being acquired

It stands to reason that buyers want profitable companies. If they notice a dip in these vital metrics during the sales process, they will at least reconsider their decision and start renegotiating the price. In most cases, they’ll eventually back down, however.

The problem with this mostly lies in the company that’s about to be purchased. Their management and financial teams start to concentrate on the sale negotiations, so they stop paying attention to how the company is doing.

Lack of clarity in the post-merger integration process

Once the deal is struck, there are still hurdles to overcome. However, many companies fail here, as they are not careful and detailed enough in the integration process.

Without careful appraisals, deals can ultimately fall apart, but by having them, you can identify:

  • Vital projects
  • Crucial products
  • Delicate processes and other similar matters
  • Key talented employees

When all of this is assessed, you can find the right methods for transparent and successful integration.

Issues with the buyers

In most M&A deals, most of the problems that can arise, usually stem from the sellers. However, sometimes, buyers can cause issues as well.

Many reasons can be the cause of this:

  • The buyer is not showing enough motivation
  • Financial stability of the buyer declines during the due diligence process
  • The buyer’s advisors decide that the deal is bad for their client
  • The buyer is not sticking to the dates set by all parties

Inaccurate or incomplete information

People make mistakes all the time – it’s completely normal. However, when sellers provide incorrect or incomplete information to buyers, the result tends to be a nervous buyer who eventually backs out of the deal.

Such mistakes can easily occur in the financial information, which is why it’s vital to have a third party reviewer. They can review all the information and make sure that no mistakes occur. Plus, they use technology that helps automate many of the processes involved, which results in less inaccurate and incomplete data.

Emotional unpreparedness of the buyer or seller

It’s often said that emotions don’t have a place in business, but we are all still humans who will forever have feelings.

For that reason, it can easily happen that either the buyer or the seller get cold feet during the M&A process.

  • The buyers get cold feet if some material issues arise or if they realize they are not ready to have another business
  • The sellers get cold feet when they are not emotionally prepared to leave the company they built

Whatever the problem is, getting cold feet results in a lot of money, time, and energy being spent for nothing. That’s because most people back out of the deal at the very last moment.

It’s thus vital to determine if the buyer or the seller is emotionally unprepared at the very start of the process.

Issues stemming from the market itself

Sometimes, problems arise that are beyond the control of all parties involved in the M&A deal. The general market may be performing poorly, which results in a bad market for the seller as well.

On the other end of the spectrum, the market can be great, but that can also result in a large number of companies on the market and thus fewer buyers.

You can do nothing about the market, but you can still ensure that the business is always in the right condition to reach a favorable deal when you can.

So, there you have them – the main reasons why M&A deals fail. By identifying them, you can easily avoid them and ensure that your own M&A deal reaches the resolution you seek.

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3 ways private equity firms get post-acquisition value creation

Private equity firms experience many problems in the post-acquisition period. The portfolio company is acquired, but now what? How do you turn the company into a money-making machine that will eventually result in a satisfying ROI?

Out of the many things that you can do, we wanted to focus on one thing in this article. We wanted to focus on real value creation in the post-acquisition period.

The main problem here is that many private equity firms do not fully appreciate that financial reporting is a vital part of this. To create value after an acquisition, you need to upgrade the financial reporting processes in the acquired company.

In our experience:

  • Many private equity firms omit the fact that upgrading financial reporting is a big part of post-acquisition value creation.
  • An even bigger number of companies appreciate that upgrading is necessary, but they rarely understand to what degree.

To help you with this, we wanted to focus on three primary ways through which you can get real post-acquisition value creation. Let’s take a look at what you need to do.

1. Thoroughly assess the internal controls of your acquisition to determine the right type of finance & accounting infrastructure

Private equity sponsors expect rigorous reporting from their portfolio companies from the very start, but many of these companies:

  • Are not able to meet these standards so early
  • Have never had a major external audit (usually performed by a large or regional accounting firm)

The management of the portfolio company needs to gather a substantial amount of information for the private equity firm. They are usually unprepared for this. However, the problem also lies in the private equity firm that assumes their acquisition can handle the gathering and analysis of such large amounts of data.

It’s precisely for this reason why a thorough review from the very beginning is essential.

While assessing the finance & accounting function, you can get a clear picture of the state of your acquisition’s internal controls structure. The evaluation can reveal several areas of improvement and what can be done:

  • Ways for allocating the costs
  • How to improve the cash flow 13-week forecast
  • A way to get a multi-deminsional view by product line or location

Additionally, there’s a significant potential for finding a way to speed-up the entire financial reporting process for the acquisition company.

However, you need to be prepared for the fact that a full assessment can be rigorous. That will depend on factors like:

  • How you address the reporting requirements, which is always different with every private equity firm.
  • The date of the latter reporting period.
  • How quickly the seller needs to prepare for an external audit.

2. Have the right talent in the team

It cannot be stressed enough how the right talent is crucial for the financial team of any company. That’s especially true with new acquisitions because they tend to have small financial teams that could lack the necessary skills and experience required to provide the results private equity firms seek.

We’ve found that many private equity firms are usually surprised to learn this. They rarely realize that these companies have financial teams that are more focused on bookkeeping than on collecting, compiling and analyzing monthly reports.

To rectify this, you need to opt for one of the two main approaches:

1. If the team is reasonably knowledgeable, they can get the job done. They only need to be sufficiently trained on how to properly do financial reporting for their private equity sponsor. They need to learn some things like:

  • How to prepare monthly financial statements and reconciliation statements
  • How to prepare budgets that are 100% accurate
  • How to prepare a financial forecast
  • How to improve the financial close, i.e. its aptness and effectiveness

2. If the team does not possess enough knowledge, you might need to replace them with the right talent. If replacement isn’t an option, you could opt for bringing in outside help. Many strategic PE firms are opt for third-party experts like Consero, who have skilled finance talent to get the job done.

By having a strong finance team in the new acquisition company, you’ll effectively streamline the entire financial reporting process. Additionally, they will also become better positioned to gain the right insights from the information they collect.

3. Learning how to improve the speed and efficiency of financial reporting

In the end, you need to look closely at the actual financial reporting of your acquisition.

We at Consero are well aware that private equity firms have a specific approach that includes:

  • A high emphasis on important metrics
  • A detailed and specific methodology for reporting metrics

As we’ve already established, most acquisitions are not at the level where they use the same methods and the same focus on metrics. Management will most certainly struggle as they:

  • Don’t have the ability to track financials and report the metrics that their PE sponsor wants to see
  • Can’t provide accurate reports on cash flows, net revenue, and all the various expense metrics
  • Can’t provide all the necessary reports in the desired timeframe

This level of proficiency requires time and resources. That’s why they have to start the process of improvement as early as possible. You also need to ensure that the management of the portfolio company fully appreciate this.

To find the most optimal way for improvement, you need to find answers to several questions like:

  • How many business units does your new acquisition have?
  • Can you organize the business units into a single framework for reporting and controls?
  • Can you use the existing methods of other portfolio companies to improve the system of the new acquisition?

Once you gain the answers to these questions, you’ll have a clearer picture of how to approach the improvement of financial reporting.

The bottom line

As you can see, improving the entire financial reporting process to create more value from your acquisitions can be much easier than it sounds.

The only important thing you need to remember is that it’s crucial to start everything as early as possible. As soon as the portfolio company is acquired, you need to begin the process of improving financial reporting proficiency.

 

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Beer with a CFO – The top 3 things you need to do to defend a technology investment to your board

On the recent episode of Beer with a CFO, our own Bridget Howard talked to Lynn Atchinson, former CFO of HomeAway and Spredfast, two well-known brands.In the past few years, she stopped being the CFO of Spredfast, a company that sells enterprise software which helps marketers use social media. As she says, it was a fun and unique experience as it was a completely new industry and software type.

However, when the company was bought, Lynn decided that it was time to stop being a full-time CFO, and do something else. She chose to stay engaged professionally by being a board member, and she is now a member of three different boards.

Lynn is in a unique position to tell us what you need to do to justify a technology investment to the board, as she has been on both sides of the spectrum. Let’s see what her answer is:

The top 3 things you need to do to justify a technology investment to the board

At Consero, around 80% of our clients are backed by private equity. So, whenever one of those companies wants to use Consero’s services, they need to justify the investment to the board first.

Many of them use different methods to explain to the board why the investment is sound, but Lynn has only three main things that you need to be aware of:

  1. Describe how the investment aligns with the strategy of the company

The first point is the most important one as well. Many technology investments are often very opportunistic, and because of that, you can easily get lost in them. It often happens that you don’t consider how it aligns with your strategy.

Additionally, you can’t merely say that it aligns with your strategy. It might not work well with it at all.

You have to consider a few things:

  • The main things you want to do and achieve as a business
  • The things you want to do over the next few years
  • How the investment aligns with all of that

Only when you consider all of this can you adequately justify the technology investment.

  1. The numbers

The second point is familiar to most professionals, and it often trumps the first one, even though it shouldn’t. However, you still need to know how much the investment will cost the company and adequately present that to the board.

  1. A combination of numbers and objectives

The third is Lynn’s combination of metrics and objectives. It’s what you think the investment will eventually yield. Not in terms of ROI, but what it will actually bring.

This part requires writing things down. You need to write down what you believe will happen from the technology investment. Whether it’s numbers or explanations, it’s still important to write it down as that helps you be more thoughtful. It forces you to explain the opportunity properly.

Being a board member and a former CFO, Lynn feels that these three things always apply. However, she also points out that you need to understand that any kind of investment might forgo several others in the future. So it’s important to flesh things out, see if it will all work, and remain prepared to sacrifice some things in the future.

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The best type of CFO for a private equity-backed company

When private equity firms invest in a company, it is inevitable that changes will be made. There are several key factors that they look for when investing in a portfolio. Some of those factors may need adjusting because they want to ensure the investment they are making will pay off.

In most cases, a PE firm will ask the company to start operating at a faster pace.

Consider this:

  • In typical public companies, they report to the board four times a year.
  • In PE-owned companies, they have to report more than once in every quarter.

PE-owned companies usually have to give detailed financial reports every month. Every time the PE firm wants to see these reports, they always go to the CFO.

The CFO is always the first stop

The CFO is usually the leading partner to the PE firm.

The PE firm will always want to contact the CFO because:

  • They are the main channel through which the PE firm can understand if their investment is safe.
  • Through the CFO, the PE firm can see whether or not the company is growing at the pace they want it to grow.
  • The CFO can assure them that the bottom line is fine.

There is one simple fact that companies receiving PE investments need to know – the PE firm cares about the short term. They want to see that the metrics are exceptional at any given moment. This is because most PE firms are looking to exit in three to seven years.

Due to the financial concerns of the PE company, a CFO needs to understand several important things. They want the CFO to:

  • Grasp their urgency
  • Stop spending their time on anything that seems trivial to the PE firm
  • Focus on the bottom-line results
  • Operate at a faster pace

If a CFO is used to working at a slower pace, that’s usually when the PE firm will want to see improvements. They may want the CFO to lead the finance department faster than their usual pace and challenge their conventional method.

Additionally, the PE firm will want to remain assured that their investment is safe. The CFO needs to be prepared to provide accurate and timely financial reports that adequately portray how the company is fairing at any given moment.

So, what do PE firms want to see in their CFO?

  • The CFO must be confident in the data they are giving
  • The CFO should be comfortable with technology to better collect and report data

These traits are not something that every CFO has. However, they are necessary for survival and thriving in a PE-owned company.

The CFO needs to dedicate themselves to the company as that’s what the PE firm expects. However, they can be confident that this will yield great rewards in return. When the company gets sold to another PE firm or goes public, the CFO can expect large compensation packages. The size of the package often goes in line with how well they performed.

So, how can a CFO achieve all of this? What should they have and do to be the best type of CFO the PE firm might want to have?

The right attributes in a CFO of a PE-owned company

To identify the right traits and attributes the CFOs in PE-owned companies need to have, we looked at what executive recruiters are looking for in potential candidates. We at Consero have found that the following traits are the ones CFOs need to have:

  • A desire for becoming game-changers, not just money-makers
  • An ability to keep up with the faster pace PE-firms require from their portfolio companies
  • A good understanding of technology, systems, and processes
  • A sense of purpose, as well as a strong appreciation for urgency
  • A strategic outlook on their job
  • A wish to concentrate on the long term, by forgoing short-term gains in favor of larger payouts at the end
  • Motivation and capability of being a true partner of the CEO

All of these traits are what a CFO needs to possess if they want to be the best CFO for a PE-owned company.

Understandably, not every person is capable of being a person who can have all of these traits. Many professionals simply lack the skills, experience, and personality that goes with these traits. Such people cannot succeed as part of the senior management in PE-owned companies.

That’s something that executives are well aware of. Many are prepared to jump at the opportunity of obtaining such talent for their portfolio company. It’s thus vital for PE firms to appreciate this fact and be ready to do the same as these individuals are rare.

Whenever they are noticed, it won’t take long for them to get the right offer they will gladly accept. It’s important that this offer is good enough and that it comes from you, not your competitors.

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The carve-out conundrum: Effective steps to fast track the finance & accounting function

When a private equity firm carves out a business unit from its parent company, they’re left having to build a new infrastructure for that stand-alone entity. Bill Klein, President and Co-Founder of Consero Global discusses effective steps to fast track the building of a finance team for the new business.

Corporate carve-outs might be a popular acquisition tactic for private equity groups, but that’s not because they’re easy. Whatever the potential upside, GPs will need to build all the functional teams that the parent company provided, all while trying to execute on the strategic improvements that were the rationale for buying the business in the first place. And given the private equity lifecycle, time is of the essence.

And of the various functional teams to be assembled, GPs know that the accounting and finance department is vital, but often they underestimate how hard it is to get the right people, systems and procedures in place. This is why Bill Klein of Consero argues that a finance-as-service model might be the best way to meet the needs of a carve-out investment.

Whether the GP is carving out a single business line or several business units from a parent company, they face the same dilemma. “GPs negotiate terms for the carve-out company to be reliant on the parent company’s systems, software and staff for their finance function when the deal is done,” says Klein. “They can’t begin building that finance department prior to close, for fear of eating those costs if the deal falls through.”

So, on day one, the GP faces the prospect of having the carve-out company build a finance and accounting function from scratch. Klein explains: “The Oracle system the unit is currently using probably doesn’t make sense for the stand-alone business, and since most large corporations centralize such functions, the carve-out is left without staff or software to handle it.”

The high cost of starting from scratch

Normally, the GP will negotiate terms for the parent company to continue to provide the finance department, but there are a number of downsides to this arrangement. “The carve-out is left paying a fee for these functions as their CFO or finance lead scrambles to choose systems and hire their own staff,” says Klein. “But it’s safe to say that spun out business unit will never take priority over a current unit when the accounting staff is pressed for time, and these departments aren’t built for customer service, so there can be communication snafus and delays in getting answers.”

As these hiccups arrive, the carve-out business still needs to find the best way to build that finance department from scratch. “Private equity firms know how important it is to get the finance function up and running, but it’s not among their strategic priorities. It’s another task to be done on that very long checklist after the deal is signed.”

But there are real costs to underestimating the time and skill necessary to create a finance function. “No talented CFO wants to focus on the basic tactics of a finance department, the aggregating and reporting of financial data. The longer it takes to get the department up and running, the longer it takes for that CFO to make a strategic contribution to the company.”

If the carve-out CFO is starting from scratch, building the finance team involves a lot of unforeseen roadblocks. They are going to have to tackle five key steps, and each have their own hurdles:

  1. Recruit and hire people
  2. Research and architect systems
  3. Map the processes to the system (this could be far harder than choosing a system, since a system’s capabilities might not instantly fit with the exact process needs of the business)
  4. Integrate and train users on that system
  5. Configure the system, move the data and test it

The strategic value of starting with a partner

This is where a service provider like Consero can make a real difference. They allow the carved-out business to plug directly into their outsourced finance department. This means they get to skip right to the final step of that 5-step process. “We tend to get a department up and running within thirty to sixty days, while building a finance function from the ground up can take nine to eighteen months,” says Klein.

As the deal team negotiates the terms of the carve-out, Consero can make an initial assessment of the project. “Prior to close, there are limits on the information we can access, but we take a high-level view of the business, focusing on discovering its revenue model and financial structure,” says Klein. “Once we know that, we have 80% of what we need to get started because we’ve so much experience doing this.” Contrast that with a controller that’s hired during a traditional build-out, who might have built a finance department a few times, if at all.

This isn’t to say that Consero relies on a one-size-fits-all model. “There are policies and processes unique to the business which we can tailor our systems to do, but if the accounts payable department is truly “unique” then something’s very wrong,” says Klein. “There’s no need to reinvent the wheel each and every time.”

And Consero’s institutional knowledge helps them design short cuts and best practices for fast tracking the introduction of finance teams to clients. “For example, we make a list of critical vendors, who, if aren’t paid, would cut off services or supplies critical to the business,” says Klein. “In the wake of a deal closing, invoices can get lost in the shuffle, but with this list, we know what vendors to pay, even if the bill didn’t reach the right person.”

This speed and expertise allows the GP to focus on what they do best: create value at the newly independent company through a series of strategic initiatives. But the best laid plans have little chance to succeed if the financial data they’re based on is wrong or slow to arrive. And every GP knows it’s not the plan, but the execution that drives returns.

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The art of the roll-up, part II: Integrating acquisitions into a roll-up

As a private equity firm completes an acquisition, it’s vital that certain finance and accounting activities at the portfolio company continue uninterrupted, regardless of the distraction that a change in ownership can be.

We spoke with Consero’s Chris Hartenstein on how Consero helps ensure that portfolio companies don’t miss a step from day one.

Buyout firms never buy a company to maintain its status quo; operational improvements and growth initiatives are now standard issue elements of any investment case. They often have extensive plans for the first 100 days, but those radical changes can distract the portfolio companies from some of the basic duties that keep the lights on, particularly in the wake of the transaction closing.

That is why Consero’s Chris Hartenstein argues that private equity firms need to ensure that employees and vendors are paid on time, and that invoicing, and collections proceed as usual. This is why when Consero takes on a new client, they make sure these key priorities are addressed at the portfolio company, so that the buyout firm, and the senior management of that portfolio company can stay focused on the larger initiatives set forth in that investment case.

“You’ve got to protect your cash position,” says Chris Hartenstein. “And while that sounds obvious, in the flurry of due diligence and other closing activities, key tasks can get put off long enough to threaten cash flow.”

Consero Global acts as a company’s accounting and finance department, allowing a portfolio company to leverage their expertise and experience. And that experience includes understanding what the core priorities are from day one of the private equity’s ownership of that new company.

Consistency matters (so make sure people are paid)

“One of the first questions we ask is how do we make sure the employees continue to get paid?” says Hartenstein. “What needs to happen to get their payments out on the 15th and the 30th? Because if there’s any delay, employees will be quick to complain about the new owners, at a time when morale is vital to drive change.”

Even if the process of paying employees is changing, Hartenstein makes certain his staff understands what needs to happen, including who needs to approve the payments, so that employees are paid on time.

Identify the business-critical vendors (and pay them)

Another critical task is paying vendors. But Hartenstein says that given the sheer volume of things to do after the deal closes, they need to determine what vendors get paid first. “Typically, we’ll identify the top ten to fifteen vendors that are business critical,” says Hartenstein. “This could include contractors in the midst of a special project, web hosting services or the internet providers that would disrupt the business if they cut off service.”

Once those vendors are identified, Hartenstein and his team determine when they are typically paid, when they were last paid, and if any are already past due. And then they go about making sure those issues are addressed.

Much like a late paycheck, if the internet goes down or a contractor halts work, these interruptions can give the portfolio company doubts as to the competence of the new owners.

How can the GP say they’re here to make the business even better, when the business can’t do what it used to do without a hitch? That can be an unfair assessment, especially given the slew of extra work that comes with due diligence, closing the transaction, and getting the new owners up to speed.

Cashflow is king (so send out those invoices)

Companies in the lower middle market can really struggle to handle their usual responsibilities with such legitimate distractions, and that means sometimes invoices fail to be sent out, and accounts receivables stall.

After all, few customers are clamoring to pay bills they haven’t gotten yet. “No private equity firm wants to discover a few months into their ownership that cashflow has slowed simply because invoices were too far down the finance and accounting department’s to-do list.”

So Hartenstein’s team looks at the initial customer aging report. “Sometimes these reports aren’t in great shape because the accounting team has had so many other things to do,” says Hartenstein. “But we work to get that in order, identifying customers that need to be invoiced and what invoices haven’t been paid, and start to get the company back up to speed.”

Even with these priorities in hand, there is still a transition period, as Hartenstein works closely with the existing staff, collaborating for thirty, sixty or ninety days, depending on the size of the enterprise. Consero knows the current finance and accounting team is a brain trust of sorts, to be tapped so the transition is as smooth as possible.

Multiple tasks are mission critical

As much as making clear priorities is crucial, some things need to get done simultaneously. Sometimes the portfolio company’s books need to be cleaned up and updated, but the company can’t ignore paying employees or vendors or tackling accounts receivables until that’s done. “That’s why we have separate teams for implementation, delivery and clean-up, so they can be done concurrently,” says Hartenstein. “One person or one group doesn’t need to do it all.”

There are so many moving pieces to onboarding a new business into a private equity firm’s portfolio, that delegating the core finance activities to a service provider like Consero can free up both the buyout firm and senior management team to focus on those initiatives, the initiatives that actually improve the business and live up to that ambitious investment case.