In my history of leading M&A programs, I have seen a lot of different ways that organizations build and manage their teams. One of the structures that has confounded me the most is the attempt to separate diligence from integration. Many firms I've been involved with make the decision to have a diligence team out front valuing a company and performing financial diligence to prove out their purchase price. All the while, an integration team sits back in the dark waiting for a deal to be "thrown over the wall." The result is usually lost time, potential misses in diligence, and team friction. The most effective M&A teams have everyone working together — so how does that happen?
Let's envision first how most M&A teams are built. An organization starts its M&A team out very small — sometimes with an executive trying to complete an acquisition on their own. The first addition to this newly created team is usually a financial expert who can help value a deal and review P&L info. That "first" deal is no more than a stab in the dark at trying to buy a company and then figure out how to fit it into the existing company after close. Integration on this first deal comprises functional managers looking at their piece of the acquired company and bolting it onto their departments. The result: a sloppy process of missed red flags from diligence and bad communication with the seller, the employees, and the customers — excused as "this was our first deal, we had to start somewhere, and we'll get better."
The autopsy of that first deal brings with it the hiring of an Integration Manager — a role tasked with building out process and managing the integration steps to improve on that first result. The mindset: "we know how to value a deal, now we need a body in place to get things right on the back end." And thus, the wall is created. Two different functions, diligence and integration, working on two different activities. Why would they need to talk?
There are four advantages I've found to combining your diligence and integration team members.
More eyes on the details
Yes, financial diligence is important — making sure the numbers from the P&L flow through your model, and that a seller is actually receiving the cash for sales, is critical. Want to know what else is important? Customers receiving the same service level from the buyer, employees being treated the same as they were under the previous owner, equipment being maintained to the buyer's standards. All of these details that integration usually focuses on can be critically important to the valuation of a company — or to whether you can close the deal at all. Diligence on deals is a twofold exercise, financial and operational. When you don't include your integration team in the diligence phase, they're forced to "just figure out a way to get this closed."
Shorten the time to close and integrate
Why have your integration team sitting on the sidelines, wasting critical time, when they could be gathering data and planning their actions? By most accounts, once an LOI is signed by a potential acquirer, deals close over 90% of the time. Sure, one out of ten times the integration team will spend time and effort on a deal that doesn't close. But on those other nine out of ten? Successful integrations happen because plans are put in place and red flags are discussed long before close. That puts the focus, post-close, on running the business and welcoming new customers and employees — instead of putting out fires.
Growth in knowledge base
Having diligence and integration teams collaborate on deals also increases the knowledge base. When your integration team understands what costs and metrics the diligence team is looking for, they can feed useful updates back into the diligence process — pay rates, customer pricing, how the buyer actually operates — which the diligence team can use to update their valuation models. Likewise, when the diligence team sees the steps integration takes, they gain knowledge of what metrics to look for during the valuation stage. The M&A process is constantly evolving from deal to deal, so the more team members share information, the better for your process — and your people.
Happier customers
Who are the customers in an M&A deal? There are four subsets in every deal: the seller, the seller's customers, the seller's employees, and the buyer's internal management team. Each has different needs, which makes the M&A team one of the most difficult "pleasers" on the business planet.
The seller. This one is pretty obvious — the seller wants to get paid. But the seller also wants to be left alone. They expect that once an LOI comes in, they can simply sit back and wait for a check.
The seller's employees. These customers have no idea what is coming, and it's their livelihood at stake. Will they have a job tomorrow? Will their pay and benefits be cut? How is this new employer they didn't choose going to treat them? The M&A integration team is the gateway to all these answers.
The seller's customers. Like the employees, most customers will be caught by surprise when an acquisition closes. They didn't choose this acquisition and aren't expecting any benefit from it — in fact, most customers see an acquisition as a betrayal of their relationship with the seller. This is a customer the M&A team must focus on intently, because lost customers and revenue can turn an acquisition valuation upside down in no time flat.
The buyer's internal management team. This is the number one customer for M&A. All those issues with the seller's employees and customers become the functional teams' problem after close — how a deal pencils out in six and twelve months is on them. Making sure their voice is heard is critical to the success of the acquisition and the M&A team. Functional teams have day jobs; M&A gets in the way of normal business.
So how does diligence and integration working together make happier customers? For the seller, a collaborative M&A process means fewer meetings and not answering the same question multiple times — a good, concise process that makes the seller feel the buyer knows what they're doing. For the seller's employees and customers, collaborative M&A teams can diligence both groups' expectations and either ensure continuity or plan in advance for how those relationships will change before having to notify them. And collaborative teams make certain the functional teams are set up for success and that their voices are heard throughout the process.
M&A organizations are tough places to work. There is constant pressure to meet timelines and not miss anything. Mistakes in diligence and integration cost companies dearly. Working together is working smarter. Collaboration breeds success — and happier customers make happier M&A team members.