When sourcing M&A deals, corporate development dealmakers must ask the right questions and dig deep to uncover potential risks. Without the proper insight into an acquisition, your deal is likely to fall through: Reports show that 70–90% of M&A deals fail, while about 10% of the largest M&A transactions never complete at all.
Check out the top 7 questions to ask when sourcing an M&A deal and learn how the right technology can help you successfully complete a transaction.
1. Why are they selling?
Business owners decide to sell their businesses for all kinds of reasons. Sometimes owners want to retire; sometimes they have health issues. But whatever the real reason (or reasons), owners don’t always reveal the whole truth behind their decision to sell. An owner might say that they simply want to retire, but the real reason could be intensifying competition or an uncertain future for the business.
It’s important that you perform a complete business assessment to uncover hidden motives, such as diminishing returns or an increasing lack of supply. Technology such as DealCloud’s DataCortex solution integrates with third-party datasets to provide key insights into company health.
It’s also important to note that what one business owner might experience as obstacles or detriments might not pose the same difficulties for you. For instance, a company might need an influx of cash to remain competitive. The business owner may not have that liquidity, but your organization might have the money and the resources to turn the business into a success — making it a perfect M&A deal.
2. What’s the company’s relationship with its customers?
Strong relationships between a company and its customers can often help to smooth over any potential disruptions caused by an acquisition. However, extremely tight relationships between customers and exiting stakeholders can actually cause disruption.
When it comes to high-value, high-touch industries, partners and other stakeholders may have strong personal relationships with a company’s customers. When a valued stakeholder is exited during the M&A process, customers sometimes choose to follow their trusted partners out the door. Likewise, if company employees have strong relationships with their customers and the employees decide to leave, the customers may follow.
Start by determining how loyal the company’s customers are: Are they likely to make a single purchase and then never return? Are there indications of market saturation, and is the company verging on diminishing returns? Or does the company have a lot of return customers, in which case the potential for reselling and remarketing is high?
3. What are their most important differentiators?
A company’s key differentiating factors are a huge part of what makes it valuable. If a business doesn’t offer anything unique, it will quickly be swamped by the competition.
Key differentiating factors can include technology that no one else has brought to market, or even a unique company culture that meshes with specific types of business, such as startups. If a business doesn’t have any differentiators — or if those differentiators can be easily reproduced by the competition — then that company’s value is greatly reduced.
You should also consider whether a company’s key differentiator is still as strong as it used to be. For example, a company may pride itself on its remarkable engineering team, but if that team has been experiencing churn, it could diminish the quality of work that the company provides its clients — making this M&A deal less than optimal.
4. Who is the company’s biggest competition?
Every business has competition, but just how strong is that competition? Does the company lead among its competitors, or does it trail behind? Is the competition catching up? If so, are there ways to mitigate any competitive threats once the organization has been acquired? If not, does the deal still make sense?
Researching a business’s competition gives you unique insights into a company’s position in the market as well as into the industry’s overall health. For instance, you may notice that a lot of companies are selling or folding, or that the market is drying up. Or you may discover that your acquisition has been running the competition out of business. You’ll need to dig further to uncover the answers.
5. How does the acquisition suit the company’s strategic vision?
Business owners have long-term strategic visions for their organizations, and in most cases, that vision should continue to be followed throughout the M&A deal process.
Explore how the acquisition fits into the company’s original long-term plans. If an acquisition is something the business owner has always considered or even aimed for, they’ve likely prepped the business for it, and the company’s value and assets should be clear. In some cases, funding may be all the acquisition needs, and you may just be expected to be a hands-off funding agent.
But if an acquisition doesn’t fit the company’s strategic vision or isn’t something the owner has considered before, the company’s elements could be disrupted. A startup, for example, could have an independent, autonomous company culture that’s central to business operations but likely to resist acquisition. The company’s integration will need to take this into account.
Once you learn how you fit into the company’s strategic vision, you’ll have a better idea about what value the company expects you to deliver.
6. How do you see the acquisition impacting your organization?
The integration phase is the most dangerous in the acquisition process, and some companies will be impacted more severely than others.
There are several factors that can negatively impact an acquisition. Culture clash is one of the most common reasons for acquisition failure, as is poor integration of processes, systems, and resources.
Another potential reason behind a failed acquisition is market reaction: If the market perceives the deal negatively, it could hurt both organizations. For example, mega-mergers of telecommunications companies are often regarded with skepticism by customers of both organizations.
Be prepared to address the impact of the acquisition during the early stages of the deal. Since the business owner knows their business best, they should be able to anticipate some of the major impacts an acquisition will have on the organization. Their insight will help you successfully integrate the asset into your current portfolio and avoid any major disruptions.
7. How resilient are the IT systems and processes?
You need to know that the wheels will keep turning once you buy the company. Some businesses may need help to ensure their IT systems and processes are up to date and compatible with your own. Other businesses may already have strong systems and processes that you’ll need to embed into your existing portfolio.
Here are some questions that can help you determine the strength of a company’s current tools and processes:
- Are the IT systems and processes resilient enough to survive a changeover?
- Are the IT systems state-of-the-art SaaS solutions, or are they built on outdated legacy applications?
- Will the systems integrate easily with your other portfolio companies to support synergies, or do they need to be refreshed to industry standards?
- What processes does the organization use?
- Does the organization have agile, cross-functional teams, and how well will those teams structure transition?
In M&A, knowledge is power
The best way to approach an acquisition is to gather as much information about the company as possible — and then keep digging deeper.
You need a tool that can help you collect and analyze crucial information for M&A deals. DealCloud provides third-party data wells, comprehensive data management, and corporate development deal management capabilities — so you can ask the right interview questions and get the answers you need to successfully complete your deals.
Schedule a demo of DealCloud’s purpose-built corporate development platform today.