A 2014 Deloitte survey of private equity groups raised an area of concern that has always been costly to buyers and sellers but not addressed. In this survey, 54% of the private equity groups see the failure to integrate upon acquisition is an area of concern. They said:
“the inability to integrate effectively ranked not only as the most critical area of concern when pursuing a transaction, but also THE top concern for companies striving to achieve success in an M&A deal.”
And 87% of these survey participants identified it as their 1st or 2nd most important concern.
Why is portfolio integration so important to private equity groups?
In pursuing a deal, the assumption is that portfolio integration will ensure that the goals, assumptions, and returns that the acquisition promised you, are achieved.
What does not get addressed is the planning and process of integration to achieve those goals, assumptions and financial returns. Acquirers over simplify the integration. They assume that integration involves visiting the acquisition for a week/month for six months and then they’ll naturally be acclimated and assimilated into their processes and culture.
The costs of not addressing integration before and after the deal
Successful integration starts during due diligence and continues many months beyond the transaction itself. Too often it is overlooked, minimized or ignored. As a result:
- The cost to buyers is that the deal implodes before you break even on the investment
- The costs to sellers is that the deal implodes before you achieve your earn out
In terms of survival, the best research we’ve found says:
- Businesses under $5M at sale – only 3:10 deals survive three years
- Business over $5M in Lower Middle Market at sale – only 5:10 deals survive three years
But that means up to 50-70% of all transactions result in a net loss! That’s a high risk to incur on every deal for both buyers and sellers.
Areas of Integration
That high risk is avoidable. Successful integration includes a range of activities over an extended timeline leading up to the transaction and through a transition period. To build an integration plan, start with a discussion in advance of the transaction to scope out differences and changes to be addressed throughout integration. The basics start with:
- Corporate culture differences
- Employee retention and integration
- Economies of Scale
- Geographic Differences
- Cross-selling Opportunities
- Reporting structures
- Accountability
Tradeoffs
Buyer and Seller should agree on who should be involved in the integration process.
When a Buyer minimized the thought and time investment required for a strong integration, there's a resistance to change that increases costs and risks. When a Buyer engages in a thoughtful integration process before and after the transaction, the Seller and the Seller's team will feel more secure, and will have clear expectations going forward.
When the Seller is engaged in a positive way, he has a voice to ensure company success, team integration, and he can be a champion of the deal for everyone. When the Seller is engaged in a negative way, because he may be opposed to the plan terms and outcome, he may unintentionally sabotage the plan.
Seller Sabotage
Seller sabotage is real. But it’s rarely intentional. Without a transition plan and integration plan, the seller maybe just can’t let go. There may be too much friction between how she ran the business and how the acquirer or private equity group will run the business.
Most owners figure they can plan for their reinvention after they get the deal done, which is too late. Without a reinvention plan of purpose and passion pulling them forward, they fall back to what they have always known and their role in the business family they have always had – which immediately handicaps integration success and their total return on the transaction itself.
Your integration plan can mitigate or prevent seller sabotage. Everyone wins when you incorporate an integration plan into every transaction and transition plan.
