A stated M&A strategy is only a hypothesis. To validate it, present the leadership team with actual potential targets that fit the criteria. Their reactions will reveal their true appetite and expose any misalignment between the written strategy and their operational instincts, saving time and effort.
In rapidly changing industries, a standalone M&A strategy is insufficient. Combine it with a corporate venture capital (CVC) program to evaluate whether to acquire current technology or make smaller investments in emerging, potentially disruptive companies, providing valuable market intelligence for future M&A decisions.
Instead of a linear process, treat M&A as a spiral. Constantly revisit and adjust deal structure, diligence findings, and integration plans. A discovery in one area (e.g., diligence) should trigger a reassessment of the others (e.g., deal structure), ensuring a cohesive and de-risked outcome.
When establishing a new M&A function, the primary challenge is getting senior leaders to move beyond broad statements and make concrete strategic choices about which opportunities to actively ignore. This focus is crucial for effective execution and prevents wasted energy on opportunistic, unfocused deals.
An earn-out is a tool for alignment, not just a financial hedge. If a target company is on track to miss its earn-out targets, a savvy acquirer will proactively renegotiate the terms. The long-term value of retaining and motivating the key team members outweighs the short-term financial gain of a missed payment.
When selling to a PE firm, entrepreneurs must realize the buyer's unit of optimization is their entire portfolio, not the single acquired company. A PE firm acts as an asset manager allocating resources across investments. This means decisions about your former company will be made in the context of their broader portfolio performance.
While often seen as aligning interests, giving sellers equity in the parent acquirer can backfire. It dilutes their risk on their specific business unit's performance, as their compensation becomes tied to the entire company's success. This can reduce focus on hitting their own unit's targets.
A key part of buy-side M&A is conducting 'reverse diligence,' where the buyer transparently outlines post-close operational changes (e.g., new CRM, org charts). This forces difficult conversations early, testing the seller's cultural fit and willingness to integrate before the deal is finalized.
Go beyond standard performance-based earn-outs by structuring payments with 'kickers' that reward sellers for specific de-risking actions. For example, if there's high customer concentration, offer an additional payment for diversifying revenue away from the main client, aligning them with the buyer's risk mitigation goals.