As any corporate development officer knows, it takes a village to do a deal. Corporate development teams are small by design and need to leverage a large volume of resources to execute a transaction. It’s not unusual to see a team that is 90 or 95% external to corporate development. The leader of the deal process needs to construct a team that brings the right skills,expertise, and capacity to execute the deal effectively. Leveraging vendors effectively can increase the quality, speed, and capacity of a deal making company. But failing to effectively integrate, the team can have the reverse effect, slowing the deal process, reducing quality, and creating dangerous gaps in work. In this article, we will discuss how to effectively use vendors in an M&A deal process.
Internal vs External Vendors
Choosing where to use vendors is a critical element and force multiplier for your team. Outside vendors are often seen as a gap-filling resource. But we know this is not the case. Lawyers and investment bankers have long been viewed as a standard part of the deal process because they bring a level of specific expertise that is not found or available in-house.
The same mindset should be applied to other vendors. Corporate development must ensure their internal resources have the right capabilities and that their time is used effectively. The deal leader needs to be willing to have the hard conversations to bring the right resources to bear.
A blended team of corporate development, internal operators, and external vendor experts usually yields the most effective and efficient team when properly structured and integrated. Creating a standard process and playbook for deploying these resources often makes the discussion with business leaders easier.
Mapping Vendors Against Your Process
Deals require you to deploy a range of different expertise against different topics. Since investment banking and legal topics are more commonly understood, I’ll leave them out of this analysis. These include but are not limited to:
Even this list of topics is far from exhaustive. And often the topics ‘cross streams.’ For example, pricing analysis combines market/customer insights with financial analysis. And for corporate acquirers, the integration path gets overlaid against all of these topics multiplying the complexity of evaluation (ie. not just the quality of the target codebase but how easily it can be integrated with the acquirers codebase). For many of these topics (particularly the ones in bold) there is a natural use case for outside vendors bringing unique expertise and methodologies to the process.
Since deals have an inherently fast pace, it is best practice to identify and vet vendors in advance of a live deal. In the heat of the LOI process, you don’t want to be burdened with diligencing a vendor and doing reference calls. You also want time to map out how the vendors will integrate into your overall deal team. Having a stable list of vendors ready for use will make deploying them at ‘deal speed’ much easier.
The Dollars and Sense - Evaluating Real ROI of Vendors
Vendors cost money and may initially be seen as an incremental (and potentially unneeded) expense. This is usually an incorrect and short-sighted assumption. Vendors need to be viewed as a combination of a replacement for internal resources that have a better and higher use (for example, taking a salesperson offline to review a target pipeline methodology) and (b), a more effective tool for managing much larger risks and driving much bigger opportunities.
Vendors' costs need to be viewed in the context of the risk mitigation and value creation they bring to a deal. For a $50M acquisition, even a modest improvement in speed of integration, a timeline of go-to-market, retention of employees, clear development roadmaps, etc., can pay for a lot of vendor resources.
There are also a number of different economic models for vendors that can help align incentives and impact. These models include:
1. Hourly based
While you pay regardless of the outcome, you have the ability to manage spending and throttle back and forth based on how likely the deal is to happen.
2. Success-based
This best aligns with the value delivered, but (a) some vendors are hesitant to take execution risk, and (b) you need to expect to pay a substantial premium if the deal happens.
3. Project-based
Here, you pay a clearly defined fee for a specific and well-defined deliverable. This tends to work best where the deliverable is most clearly understood in advance. Good examples would be code reviews and quality of earnings analysis.
4. Multi-deal and retainer deals
Where you know you will do repeat transactions and are willing to commit to a vendor (giving them more certainty of a larger stream of revenue).
Evaluating Vendors
The right vendor is not just an expert but also a fit for the size/type of deals you do. In building your vendor stable, you need to consider a range of factors in selecting a vendor, going well beyond their expertise. You should consider:
1. Cost
Cheapest is not always best, but you want a vendor whose pricing is appropriate for your deal size, industry, and the type of work you need them to do. The right vendor to do a deep analysis of AI tech for multi-billion dollar deals is not the right vendor in most cases to do a code review of a small traditional SaaS business.
2. Expertise
Your vendor should not only have expertise in the topic but ideally also in the industry sector in which you and your targets play. Sales ops are radically different in consumer products and biotech businesses.
3. Deal experience
Not all vendors are experienced with the type of analysis needed for an M&A transaction and the pace at which they run. They also need to be comfortable with the level of ‘on the fly’ coordination that is needed between their work and other parts of the deal process.
4.Capacity
Given the pace and often sudden acceleration of deals, you need vendors that will have capacity when you need them. This is an argument for choosing vendors that are small enough to prioritize your work but big enough to have available resources.
5. Synergies of recurrence
Choosing vendors that understand your process, needs, and organization will also streamline their work and improve integration with your team.
Lessons on Integrating Vendors - Ensuring Maximum Value and Seamless Process
While the work of a vendor is valuable in isolation, most of the value of their work will come from its integration and coordination with your team and other workstreams. Some keys to achieving that broader value include:
1. Preparation and clear expectations
- Set clear expectations for the vendor's workflow and timing of deliverables.
- Make sure the vendor (particularly if this is your first deal together) understands not only their work but your process, priorities, culture, etc. This includes understanding your business goals in general and for this deal. For example, if you are planning to scrap the target brand, a market insights vendor should not spend time evaluating the strength of the target brand.
- Allow time for prep calls and clear alignment before the work launches.
- Internal and external team members must be connected and allowed to communicate directly.
2. Over-communication
- Avoid silo thinking by having clear and regular communications between different workstreams and make sure the vendor is part of those (not limited to ‘internal teams’)
- Insist that the vendor shares work in progress rather than waiting for a finished product. This may be uncomfortable for vendors used to owning more of an end-to-end project.
3. Agile process
- Vendors must be able to to adjust their plans based on new information during the diligence and integration planning process, which may affect the use of project-based pricing or require addendums.
4. Partnering up teams
- When a topic is covered by multiple teams (BU internal, CD team, Vendor) it is important to proactively create a topic team. Otherwise there will be a tendency for each group to work in isolation. For example, the QofE is much more valuable if it also informs the financial projections. This is similar to the challenge of getting integration and diligence teams to feed information back and forth.
- It's important to create points of integration/collaboration/communication when multiple teams are covering the same topic to avoid working in isolation. Integration and communication between teams like QofE and financial projections is crucial.
Closing
Leveraging and integrating vendors into your deal process effectively can be key to providing not only key resources but also higher quality results - from identifying risks to developing a more effective integration plan. Check out the M&A Science podcast [insert link] to find more best practices for upping your M&A game.
