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In today's ever-evolving business landscape, companies need to stay ahead of the curve by constantly innovating. One way they can achieve this is through acquiring smaller companies, which can provide access to game-changing technology, bridge knowledge gaps, and accelerate growth. However, acquiring smaller companies comes with its own set of challenges. In this article, we explore the intricacies of smaller deals with Kevin Griffin, Executive Director of Corporate Development at JLL.
“There are no easy deals. They all come with some level of complexity, but if you've established that level of trust from the beginning, you will have a lot more success working through those issues later on as well.” – Kevin Griffin
Proprietary deals are always better, but as sellers are seeking to maximize the value of their business, auction processes are becoming inevitable. Here are some of the complexities of both processes:
Pros and cons of an auction process:
A competitive auction process can lead to inflated pricing due to the number of bidders. Also, tight deadlines result in rushed decision-making and communication breakdowns that could impact retention rates.
On the other hand, investment banks bring a level of sophistication and analytics that can add value and structure to the deal. Everything will be prepared neatly for buyers, unlike deals with inexperienced sellers.
Pros and cons of proprietary deals:
For smaller deals, Kevin favors proprietary deals because they foster more open communication with the seller. The transparent communication with the seller builds trust and understanding, which are both essential for a successful transaction. However, dealing with smaller companies can also be challenging due to a number of factors.
- Inexperienced sellers - There is a lot of hand-holding and education involved when dealing with inexperienced sellers.
- Financial records - Smaller companies may not have as organized and clean financial records as those prepared by investment banks or public companies. There will be more work required to filter information and ensure correct analysis during due diligence.
- Emotional attachment - Considering the seller’s journey upon founding the business and their culture, smaller deals are always more emotional. Those emotions can certainly heighten during negotiations and signing.
- Retention - Talent retention can affect the purchase price value proposition. Understanding what type of retention package will get employees to stay on board post-close is crucial, especially for a services-based company.
- Valuation and deal structure. On smaller deals, even a small mistake in underwriting can create much bigger issues. Be extra thorough and diligent, especially in the legal aspect.
Negotiations
A big part of dealing with smaller companies is educating the founder about the M&A process. The key is to be open and transparent when communicating, especially during valuation. Most sellers have certain expectations derived from peers, and they must understand the rationale behind the valuation.
Furthermore, money is not the only factor when negotiating a deal. There are also other things that matter to the seller, such as how their employees, often family members, are treated post close. The more transparent your relationship with the seller is, the better.
Best practices to retain people
When acquiring a smaller company, ensuring that key employees stay on board is vital to post-close success. Smaller companies have fewer talent pools, making retention even more important. Creating an inclusive environment where employees feel valued, offering competitive salaries and benefits, and highlighting opportunities for growth can go a long way in retaining key employees.