Wednesday, May 30, 2012

How Do the People Add Value in Merger and Acquisition Activities?

Business investors don’t buy companies. They buy good business assets and excellent
management teams. This was the key message of a recent meeting at The Collaborative on
mergers and acquisitions. Koliso appreciates this because we focus on using people skills to
leverage financial and physical resources.

Contrary to what you might think, there is a lot of money out there looking for good businesses
to invest in. Low interest rates may make the stock market and fixed interest securities less
attractive, but businesses that show potential in difficult times are ideal targets for merchant
bankers. One of the panelists estimated there is currently a $400 billion overhang in equity

A business looking to sell or find an investment partner knows if it has good assets to sell.
Cash flow, return on net or gross investment, net present value: there are lots of ways to put
a financial measure on the value of a business. But most owners think their business is worth
more than just the value of the assets alone.

One of our clients—an attorney who specializes in M&A work—was speaking on a panel on
the topic of the current state of play for business mergers, joint ventures and acquisitions. We
always tell our clients, “the soft stuff is the hard stuff,” so we were particularly interested in what
would be said about the people side of business reorganization. Would these bottom-line driven
investment analysts and merchant bankers think the same way as us?

It turns out these investors think like we do. Over and above the value of the assets of a
business, it is the management team that leverages good assets and makes them great. The
soft stuff is the stuff that makes the hard stuff work.

We would like to share some key insights that come from people who make millions putting a
price on the value human capital adds to the physical assets of a business.

These top four tips apply to every management team:

1. Don’t build your team for today; build your team for what you need in five years. If you have a good organization and you expect it to grow, you need to find people who will want to stay and build the business you want. Don’t fill today’s holes; grow tomorrow’s top performers.

2. Measure everything, and show progress. The saying “nothing succeeds like success” is true. The big capital investors look for teams that know what success looks like and aim for it with clarity and purpose. Measure the few things that make the most difference in the success of the business. This means more than just budgets. Show progress with specific key performance indicators that keep everyone on track and focused.

3. Hit the numbers! If you want to sell a business, set reasonably ambitious goals and make a habit of exceeding them. Big, audacious goals? Not necessarily. There’s good research that shows that high achievers (individuals or teams) don’t set seemingly brave goals and then pull rabbits out of hats. Instead they make continuous improvements by hammering away at the few things that make a difference every day and relying on the equivalent of compound interest to turn their efforts into gold.

4. If you fail, at least earn the failure dividend. What is that? If you miss your targets, you’ve already paid the price; don’t pay twice by failing to learn from mistakes. Good management teams methodically review failures so they know better for next time.

These two additional tips apply specifically to teams that might end up as part of a merger,
venture or acquisition:

5. Have a good advisory board with good governance. An investor likes to know that the performance they see will reasonably continue into the future. A good advisory board not only brings in outside thinking, it also provides a structure for decision-making and continuity for the future.

6. Make sure the key performers have some skin in the game. Someone who is investing time and money to make an M&A or joint venture successful wants to be certain the people crucial to success are just as motivated as they are. Key players need to be engaged by mid- to long-term incentives tied to organization and individual performance.

That’s it—six key factors to maximize the effect of your management team on the value of your

1. Build a team for the future.
2. Measure everything and demonstrate an understanding in what makes the most
    difference to the business.
3. Hit the numbers and show consistent progress.
4. Show you learn from mistakes.
5. Have good advisors, good decision-making processes and good governance.
6. Make sure key players are motivated by the organization’s success.

If you’re going to sell your business or you’re putting together an acquisition team, you’ll need
experience building management teams and advisory boards, establishing key performance
indicators and developing a culture of continuous improvement. It’s all part of the psychology of

Do you want to discuss this in greater detail? Contact Koliso.

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