Give the seller a clear sense for your culture and approach to integration. Help them see the difference that investing in their business’ future can make.

 

In the first post of this series, three corporate development leaders from LLR’s portfolio companies shared their insights on developing a Mergers & Acquisitions strategy. They stressed the importance of first understanding the value creation thesis of your business, and then identifying what could be added to help complete the long term growth story you want to tell.

Once the acquisition strategy is set, how do you find the right businesses to acquire?

Jesse, Joe and Ed share what’s worked in their experience sourcing acquisitions for getting their story out there, approaching potential sellers and engaging the right stakeholders. They also offer helpful warning signs to identify when a lead may not be the right fit. Use these tips to source acquisition opportunities more efficiently and avoid costly – but common – mistakes.

Our panel of experts:

  • Jesse Gray, Vice President, Industrial Tech, LLR Partners
  • Joe Luceri, former CFO/COO at Numotion; former Chief Development Officer, Schweiger Dermatology Group
  • Ed Spaniel, former legal and corporate development lead at SDI Health (sold to IQVIA in 2011), SICOM Systems (sold to Global Payments in 2018) and Edmunds GovTech

Jesse Gray: Sourcing acquisitions should be a team sport.

The work to find and interact with potential sellers often falls on the executive team and corporate development function (if you even have the latter), but idea generation should stem from the entire organization. Sourcing acquisitions should be a team sport. Make all employees aware of where you want to take the business and why. Get them to buy-in and offer suggestions.

For example, reach out to the people who interact with your customers and touch the product regularly. What feature or functionality do they think you should add based on feedback from clients and prospects, personal interaction with your product or first-hand experience in your market? Who do they suggest you target for acquisition?

Whoever is leading your M&A strategy should take into account all ideas and possible touch points; some won’t make strategic sense, but all are worth considering.

I can’t stress this enough: approach a potential seller as you would a partner. To use a golf analogy, successful transactions end on the fairway. When they begin on the fairway, too, things go more smoothly. You must be honest and fair through the whole process. If you start out dog leg left, and the seller starts out dog leg right, you will end up in the same place, but with a lot more work and maybe some resentment.

Be persistent and holistic. You’re going to hear “no” often; you’re going to kiss a lot of frogs. But you never know when you’re going to get a “yes.” Sometimes you’ll get a “yes” and then realize it’s not a good fit. That is why you have a diligence process.

Lastly, as a buyer it is always important to remember that you will be a steward of the business you are acquiring and the legacy of the seller. That is a big responsibility and one you should take seriously.

Reach out to the people who interact with your customers and touch the product regularly. Who do they suggest you target for acquisition?

Joe Luceri: Get your story out there and establish a reputation for transparency.

Networking is the most important thing you can do to build a healthy pipeline of acquisition opportunities. Get your story out there to generate inbound leads. Participate in industry groups, go to the trade shows (set up meetings in advance and reserve time for talking to anyone who approaches your booth), leverage your contacts and don’t forget about your own employee contacts.

In our case, we have more than 100 dermatology providers who know others in the field, so we constantly ask for internal referrals. We also focus a lot of effort on having thoughtful conversations with doctors about the value of selling and thinking about a retirement plan well before the end of their careers. This enables us to align interests and offer the most attractive opportunity.

I am a firm believer in establishing your reputation as someone who does what they say they are going to do. In the M&A world, that means being transparent and working hard to make the experience a clear and positive one for the seller. It is often an emotional experience for them, and they will want to talk to someone who has gone through it before, preferably with you. Make sure what they hear is positive and consistent with what you’ve promised.

One last rule that I think is important: try to minimize the involvement of the ultimate decision maker during early transaction and valuation discussions.

Otherwise, it can lead to challenging and compromised negotiations.  There are times when it’s advantageous to bring the CEO in to strengthen a relationship and show how important this opportunity is to your business, but he or she should not be there to discuss the transaction.

Participate in industry groups, go to the trade shows, make time for those who approach you and don’t forget about your own employees.

Ed Spaniel: Leverage your customers, equity sponsor and most relevant employees.

Satisfied customers are another valuable audience to leverage when sourcing potential acquisitions. If you provide 5/8 of a full offering suite, who are customers using to fill in the rest? Even one solution that is customer-endorsed and adds 1/8 to the puzzle can be pretty compelling.

If you have an equity sponsor, leverage them to make a soft inquiry into the ancillary businesses that service your customers. They can serve as a third party to say “we see you, and we see them, and we like the fit,” and work to ignite more in-depth conversations. This can be particularly beneficial with competitive sourcing opportunities because the target is more likely to take the first call from the sponsor.

One key focus during sourcing is to establish a trusted, personal relationship with a prospect. Start with a small, highly-relevant group of people from your side to establish comfort before the full diligence team is introduced.

Give a founder or CEO a clear sense for your culture and approach to integration. Explain how you will steward the business they built and discuss the growth opportunity and benefits of being a combined force. Help them see the difference that investing in the future of their business can make, and how your business accelerates that growth. Be fair and bid where the economics require, or you generally won’t get the business.

When someone consistently tells you that they are not interested in selling, move on. You can’t buy a business that doesn’t want to be sold. You need the seller’s emotional buy-in to be successful. Even if you go forward, lacking that buy-in will inhibit your ability to integrate well and recognize the benefits of the combined business.

Satisfied customers are a valuable audience to leverage when sourcing acquisitions. Who do they use to complement your solution?

Our next post in this GrowthBits #M&A series will share our expert panel’s advice on acquisition diligence and negotiation.