Business acquisitions can be complex at the best of times, so it is always useful to be able to distil key principles into simple, memorable sound bites. Whilst I can lay claim to some pearls of wisdom, most I pick up during my day-to-day interactions with M&A participants: buyers, advisers and sometimes vendors.
One such gem cropped up when introducing a buyer to a client recently. In setting the agenda for the meeting, the buyer concurred that establishing cultural fit was his priority early on in the piece. As he pointed out, if the two organisations cannot work together successfully, no amount of financial engineering will make for a happy outcome.
Expanding further, he explained that “Fit” was the most important – in his mind – of the “Three Fs”: Fit, Future and Finance. Whilst his CFO may not agree, from the business perspective it stood out as the most critical success factor when evaluating potential acquisitions. It’s not hard to see why, when considering the virtual graveyard of unsuccessful M&A transactions of all shapes and sizes. If they didn’t fail due to poor communication with stakeholders, the next value-killer on the list was the incompatibility of culture.
Second on the list was “Future”, an investigation into the growth opportunities and future prospects of the underlying business, particularly post-acquisition and the changes often spawned by such a transaction. For business purchasers, one of the key questions asked is “how long will it take for me to get my initial investment back?”. A fast-growing business or one with immediate synergies suggests that the repayment horizon is short, whilst a stagnant or declining business has longer-term prospects and inherently greater risk. When marketing a business to buyers, I often place significant emphasis on the company’s growth prospects for this very reason.
“Finance” is the final member of this esteemed trio and is largely self-explanatory: how much does the business make, at what margin, requiring what level of ongoing investment and for how long? Whilst the business people will place less emphasis on this piece of the puzzle at the outset, it is very much the domain of the accountant and CFO who would more likely reverse the suggested order. “Culture fit? Who cares?”, screams the bean-counter, “Just throw me a bunch of spreadsheets, P&Ls and balance sheets. That’s where the real action is!”.
What is evident, though, is that no one aspect is inherently more important than another. All three are vital considerations and interdependent for a successful outcome. A company with great fit and finances but no future does not represent an ideal acquisition, in much the same way as one with a great future and fit but awful financial characteristics screams “Risk – Run Away!”.
So when preparing to sell or looking to buy, keep the “Three Fs” well in mind. At the very least, it should allow you to quickly move on from low-probability opportunities swiftly and with minimal distraction.