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Building an empire through strategic M&A is a deliberate process that demands expertise, precision, and the ability to navigate complexities. In this article, Adam Coffey, Founding Partner at The Chairman Group, continues to share his expert insights into building an empire through strategic M&A by discussing M&A best practices to increase your chances of success.
"If you're good at buying but not integrating, you'll stall out and have chaos. If you're good at integrating but buy the wrong companies, you'll still create chaos. You have to get good at both sides." – Adam Coffey
Finding and closing proprietary deals
Effective deal sourcing starts by evaluating your resources—time or money. If you have money, hiring a buy-side advisor ensures streamlined acquisitions by managing strategy, outreach, and target identification.
For those with time, tools like Dun & Bradstreet Hoovers or Grata can help build a funnel, with Grata offering premium automation and Hoovers being more budget-friendly. If resources are tight, leverage Google or engage interns to compile lists.
Relationships are crucial in deal-making. Selling a business is personal, so trust and tailored outreach matter. Handwritten letters or envelopes boost response rates, while multiple touchpoints—six to eight—help establish rapport. Proprietary deals focus on avoiding competitive auctions, building trust, and fostering smoother negotiations.
Mastering Financial Diligence for Sound Investments
Diligence confirms the financial health of a deal and safeguards against hidden liabilities. Key steps include verifying revenue sources to avoid misclassifications, such as mistaking PPP loans or tax credits for revenue, and ensuring the seller’s accounting method aligns with your evaluation standards.
Address discrepancies with a clear framework: proceed without repricing for variances under 10%, negotiate adjustments for 10-30%, and walk away—maintaining goodwill—for discrepancies over 30%.
Sellers often attach emotionally to the initial LOI numbers, requiring careful handling of financial gaps to preserve relationships. Diligence ensures your investment is sound, mitigating risks like working capital issues or other hidden liabilities.
Designing sustainable deal structures
An effective deal structure balances risk and growth potential. Adam advocates for a 2-to-1 debt coverage ratio, ensuring that no more than half of their company’s earnings are used for debt service. This approach provides a buffer against economic downturns or revenue fluctuations.
Creative financing tools, such as seller notes and rollover equity, play a key role in bridging financial gaps. For instance, standby seller notes with deferred payments can strengthen the financial profile of a deal. Similarly, rollover equity allows sellers to retain a stake in the acquiring entity, aligning incentives and fostering long-term collaboration.
Adam dispels the notion that capital scarcity hinders acquisitions. “There is no shortage of capital,” he asserts. The real challenge lies in identifying high-quality opportunities and structuring deals strategically. With trillions of dollars seeking investment, proper planning and financial design ensure success.
Mastering integration for long-term success
Successful integration is as critical as the acquisition itself. Analyzing operational differences reveals potential synergies that drive integration planning and ensures alignment across teams. Adam recommends building a dedicated integration team to ensure smooth transitions and scalability.
Starting with a buy-side advisor and a business development professional, Adam’s approach involves progressively adding resources, including an integration manager. Over time, this team develops institutional knowledge, facilitating seamless transitions and scaling M&A activities.
Integration expertise compounds with experience. Over time, consistent execution enables rapid scaling, with each acquisition building momentum for the next.
Strategic exit points and PE partner selection
Exiting at the right time is crucial. Achieving optimal value during an exit requires understanding natural thresholds within the private equity (PE) landscape. Firms in different tiers target companies of varying sizes, with key exit points typically at $4–7 million, $10–17 million, and $40 million in EBITDA. Navigating these tiers strategically allows businesses to maximize valuation through multiple arbitrage.
Choosing the right partner is equally important. Thorough due diligence on potential PE buyers—including speaking with founders who’ve exited and those who’ve experienced separations—provides critical insights into a firm’s values and approach. A good partner brings capital, expertise, and alignment, ensuring shared success post-acquisition.
Conclusion
Strategic M&A is both an art and a discipline, requiring meticulous planning, relationship-building, and execution. By mastering deal sourcing, crafting sustainable structures, emphasizing integration, and planning strategic exits, practitioners can create transformative growth while navigating the complexities of the M&A landscape. As Adam highlights, success begins with vision, action, and an unwavering commitment to excellence.