Is your organization M&A-ready? 6 questions to ask yourself

This is usually a question that is more often asked to sellers. In the exit game, the seller has a lot of work to do to get their house in order.

The Blackroom Team
The Blackroom Team

This is usually a question that is more often asked to sellers. In the exit game, the seller has a lot of work to do to get their house in order.

We’ve summarized 6 topics you can analyze before considering a Merger & Acquisition strategy:

  1. Can you finance the M&A?
  2. Do you have managers who can work on the integration?
  3. Do you have any organizational debt?
  4. Are you just chasing a shiny object?
  5. Are you PR-motivated?
  6. Do you have the right tools and processes in place?

You’re set on pursuing an acquisition process with a company. Try to reflect on the level of maturity of your organization to absorb a new business. Although all M&As are different, the odds of success tend to increase with the buyer’s maturity. You will always make mistakes but you will gradually fine tune your approach to avoid major pitfalls.

1. Can you finance the M&A?

Did you think about the type of deal you want to make? Cash, stock or both? The difference between the two is quite simple. In a cash only deal, the risk of the acquisition only seats on the buyer’s side. In a stock deal, the outcome of the integration is shared between both parties. Even if the acquisition is made without any upfront cash, extra cash will be required during the due diligence and integration phases. Some buyers try to look for targets and then structure external financing with private or public capital. That’s because some private equity funds will not finance a build-up strategy without clear targets in mind. It’s a chicken and egg problem that usually scares sellers who will not want to spend time if financing is not 100% certain. 

Also, before engaging in deeper conversations, all parties will save time by sharing some ballpark valuation expectations and transaction medium (cash, equity, earn-out).

2. Do you have managers who can work on the integration?

Do you have the time and team in place to integrate? It takes time to buy a company, and even more time to integrate the business. Can your team afford to take on a sizable new project? Have you identified a leader on your team who can focus their time on the integration? Do you have counsel or managers you can trust with strong M&A expertise? We often do not factor in the acquisition price, the risk of defocus and the time spent by the management on the integration. That can be a small company problem, too small to have an acquisition manager profile or a head of integrations and still willing to engage in M&A talks. 

3. Do you have any organizational debt?

Interviews have shown that it is also quite common for recently acquired startups to be caught in the middle of a buyer reorganization that impacts their integration. An entrepreneur shared with us that just three months after being acquired the executive sponsor who had run all the acquisition process had been abruptly let go. The process got stalled and the startup left rotting on the side for lengthy months.

Org debt also happens to serial buyers. Acquisition after acquisition, the organization becomes messier and messier. Reporting lines become fuzzy, the communication and integration between all the acquired businesses can be lacking and the role of the acquired leadership may remain unclear. Adding new changes to an unstable organization will not help. You may want to clean-up the mess before engaging in new disruptive projects. 

It reminds us of the story of Sprinklr, a now publicly traded customer experience platform that used an aggressive external growth strategy to successfully become a leader in its space. In just 2 years Sprinklr acquired 10 startups with a very simple product integration mantra: scratch the acquired product, and rebuild it on their own technology stack. The strategy landed amazing results from a revenue perspective, Sprinklr kept growing and reached unicorn status 8 years after its founding. When it began time to file for an IPO to get extra funding and liquidity for early investors, the pretty story started to crack. When looking under the hood, financial analysts like Seeking Alpha1 undercovered some concerning issues: a lot of churn in the top management, lack of product integration, weak financials including heavy losses and poor gross margin, and an intellectual property infringement lawsuit. Competitors, former employees, and even customers spread the word quickly: “shy away from Sprinklr, they are a mess”. It took Sprinklr 5 long years and an extra $200m of fresh private cash to clean up all the org debt accumulated over the years, regain its reputation among investors and customers to finally be able to IPO in good conditions.

4. Are you just chasing a shiny object?

Are you sure that the acquisition is a long-term strategic opportunity for the buyer? And that you are ready to handle the ups and downs of an integration? Sometimes, the management can give up too quickly on an integration that is not going as planned, and they move on to other priorities, maybe even other acquisitions, neglecting the acquired company. The new M&A makes the previous ones less important, giving the impression that leadership will keep chasing the next shiny target without any clear focus or strategy.

Stupeflix was an online creation video tool that was acquired in 2018 by GoPro for 50+ M$. Nicolas Steegman, CEO and co-founder of Stupeflix explains2 that GoPro was before anything a hardware and marketing company. They purchased Stupeflix, a software company, without formalizing a clear strategy ahead on how they could leverage the value of a Saas product. As a result, they shut down the service in 2020, 2 years post-acquisition.

5. Are you PR-motivated?

The biggest mistake of inexperienced buyers is to buy a company for the wrong reasons like driving momentum, getting their employees excited, raising capital or getting good stories to share with the press. These short-term goals are rarely worth all the costs behind an M&A.

6. Do you have the right tools and processes in place?

Beyond the resources needed, tools and processes will have to be considered so you can be efficient in your project. All the answers to the questions raised above have to be written down in an acquisition plan that will specify your timeline and budget, the roles and responsibilities of the acquisition team members, the kind of company you want to acquire, and the type of risks you are willing to accept.

Another consideration to have in mind is the level of  confidentiality for such a project. To keep your strategic advantage, you can’t afford to have your acquisition plan or documents shared with your advisors vulnerable to leaks or clumsiness. A great tool to equip your internal acquisition team with is a robust virtual data room, so that they can keep your project secure and efficiently manage it with all required third-party resources. 

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