Secrets to Building an M&A Function

Steps to Build an M&A Function

Starts with the why

It's crucial to get the why. When you're an in-house corporate development function, it's not just M&A. It's also investments, it could be joint ventures, it could be business development deals, and it's really important to answer. 

• Why are we trying to do M&A?
• Why are we trying to build a corp dev function? 
• What are we hoping to achieve that's different from the organic business, where the organic business has its own path and trajectory, and requirements?
• What's the goal of the inorganic side? 

And it could be anything from making the current product better and there are these holes that we think will take too long for us to build, so we'd love to acquire companies that could fill those holes. 

It could be that we want to enter an adjacency, and that's only going to happen via M&A, it could be international expansion. I found that the corporate development function is best used to help an existing management team look around corners and answer all of those things. 

Pay attention to what's happening outside the company, be the eyes and ears, and then help take a business from where it is today to potentially somewhere different over three years. Not every company thinks about M&A through that lens, and answering the why helps it make it much easier to build the function. 

Number one is answering the why and aligning with the management team, the CEO, the CFOs, and the company's management team on what we hope to achieve. 

From there, I'd look at building a team because you're coming to what I describe as a strategy for what the function does. What kind of targets are we looking at? What kinds of deals do we want to do? What spaces do we want to go into? 

That's an iterative process that takes a few months to work through and get alignment on and it changes based on what's happening in the macro environment.

Who's involved in Building the M&A Strategy

Everyone should be involved to ensure we're on the right page.

• CEO
• CFO
• COO
• Chief Product Officer
• Engineer lead
• Sales lead

It can also depend from company to company. You might have a CEO who's got a very strong and overpowering vision that says what they want to do and what you're going to do. 

In other places, that might be the product person or the sales leader. And in third place, it might be more collaborative.

So it really depends on what's the voice inside that management team.

To get a sense of that, you need to spend time with the leadership team and understand the business in a lot of detail, understanding the market segment they're in and the industry.

It's like flushing out the vision. What's their vision for where they should be in three to five years? How do they see the M&A muscle or the corp dev muscle as a part of that? 

Some of them are formal, some of them one-on-one, and some of them in group settings. It depends on whether you're building a function from scratch or you are inheriting an existing team and a current function as a new leader.

The first hire

Your first hire is always an athlete. From there, there are two paths you could go down:

• You could hire a senior person who's an athlete who can serve as your right-hand person, or 
• You could hire someone earlier in their career who's going to be able to build models, do research, help you prepare materials.

You want to hire someone with really high intellectual horsepower who can go across sectors and pick up things quickly. 

In the corp dev function, there is the thesis building part of the job, the deal sourcing, execution, and then integration. Building integration is perhaps one of the last things you do and you do that only when you're a serial acquirer with the need for a dedicated integration function. 

While you get there, you might hire just one person to do integration or your company might have a PMO and they might take care of integration work for you.

Building the M&A strategy to prep for origination

Building out an M&A strategy after you've answered the why is building out a market map, that is an iterative process. It'll vary from company to company depending on the surface area of the organic business and, to a certain extent, the size of the balance sheet. 

So I'd recommend starting with the core product. What does it do? Who does it serve? And then build a market map of adjacencies that are sensible for the company to expand into potentially. 

And then have a conversation around areas to expand into. Which of these make the most sense and filter down from there.

Doing M&A for your existing product is a little bit easier because there's a product, it has a roadmap, and what holes to fill. It's got customers, so thinking about where you could go through M&A for the existing product, it's probably a handful of areas.

You want to make sure you're not spending your time spinning wheels in things that don't make any sense or that are not likely to get support from your board, from your management team. So you narrow those down into digestible four to six areas and be thoughtful about what may make sense there. 

Who's involved with the market map 

Market mapping involves your management team, the people running the business, the people running product, the people building, the people selling the product. And I think you have to have a sense of the external environment and where the world is headed for that particular segment. 

You might want to have a sense of where is this market headed. What does the world look like three years out? 

Depending on how cutting edge the business is, if you're really at the frontier of innovation, having a pulse on the external market is important and that comes from having relationships with people outside the company.

So the investment banking community, the venture capital and private equity ecosystem, and other founders, that'll help shape the market map. 

Approach prioritization

For internet software or other tech businesses, it always starts with the product or the tech. If you use that lens, it becomes easy to filter, especially coupled with the view of where's the world headed and what has tailwinds behind it. 

So if you've got your list of a few hundred companies, I take a step back from there and say, it's not just about doing M&A, it's also about potentially making investments. It's about potentially doing a partnership. There might be a business development transaction that makes the most sense. You have to be open to all of those things.

When you have your swim lanes, your four to six areas that you think make the most sense, you prioritize companies that are innovating, that have built good businesses, that have tailwinds behind them and you get to know those companies, again, over some time to see what might make sense. 

Certainly, you have to think about the size of the business, the financial metrics, the efficiency with which the business is being run, margins, cash burn, and the quality of the team, particularly the product and engineering team that's building the product. How much investor capital maybe has been raised that you in a transaction would have to do and justify paying for? 

Building the pipeline

It starts by building relationships, both with the people in the ecosystem. 

You have to know people and what they're doing. You have your list of 20 to 30 names that are interesting to you for a variety of reasons. Perhaps you might want to invest in them and help them build, or you might want to do a partnership. 

I don't think it always starts with M&A. Often, there may not be a joint vision for the future. So you may get to know a company over time and you just stay friends, and there's no transaction at the end of it.

It's a bit more of an art than a total science, but it's internal relationships. It starts with that warm intro from someone who perhaps knows the company or even a warm intro from an ecosystem player, like a banker or an investor. 

Sometimes if you can't find a channel for a warm intro, it might be a cold outreach. More times than not, people are open when it's like 30 minutes over Zoom, it's fairly easy to squeeze in. It's just getting to know them and their business and sharing your business with them. Sometimes depending on the platform that you're at, people may already know your company. 

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"The best founders are always open to building their own network, particularly with people in their industry or adjacent industries, and just comparing notes. - Bani Bedi."

Reporting and Key metrics

In my experience at most companies, the management team is certainly involved and the board is involved. Updates look like:

• The market map
• The pipeline
• How that funnels down into the 20 to 30 names 
• Who you've engaged with
• What may have come out of it

It's important to recognize that different from banking or a more transactional world, it's hard to measure success for the in-house Corp Dev function.

It's not as simple as saying, in 2023, you got three deals done, that's a win because you got the deals done. All those deals could fail and then it's not a win. Or you got no deals done, and that's a terrible outcome.

Measuring success often comes from the impact you've had on the business, both in terms of potentially doing the deal and elevating people's thinking. Influencing the direction of the build process, perhaps doing a partnership somewhere. So it is a bit more of a high judgment exercise to decide if the function is successful or not, it's not purely metrics-based.

Deal Process Success

Lookbacks are a good idea, especially when you are serious about the function and you are getting to be more of a serial acquirer rather than a one-off here and there.

You should be looking back a year or two after the deal, did the thesis play out? did the team stay? did we get the growth that we wanted or the synergy that we wanted?  

You're educating yourself over time as a company, here's what we thought we do. Here's what happened. Here's what we learned from that process. That's how you measure success. 

Corporate development is not an inexpensive effort. You're spending a lot of capital to acquire companies. Some of the things to look at:

• Is the capital being used well? 
• Are they having the impact that you think they can have? 
• Is the team that you've built high judgment and doing the right thing for the company or 
• Is it just a bunch of deal junkies who just want to get deals done? 

I've seen models where the corporate development team is accountable for everything until only the deal is closed and some teams are involved for a lot longer in the process through integration and potentially even a little later. Ultimately, it's recognizing that your Corp Dev team is not running the business.

If you're acquiring a large company with a sophisticated management team, that's going to act as a subsidiary. It's that management team that's accountable for the business that they're running. 

The Corp Dev team needs to have some accountability. 

• Did you set things up the right way? 
• Did you do your attention pool the right way?
• Did you hire the right people? 
• Did you level them the right way? 
• Did you get them the right resources to be up and running on day one? 

That's where the integration function is so critical, whether it's a part of Corp Dev directly or dotted line or whatever, but thinking through those pieces is really important to getting an acquisition to work.

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Every company at the end of the day is different. Culture, business, and the personalities of the people are different. And every target is also different. So every company has to develop their own model for Corp Dev. 

Developing the Diligence Muscle

You hire the right people. You have a strategy for what success looks like, and then you execute to a high bar. There's a lot of education involved, especially with a team that's never done it before.  

Usually, it starts out with a preliminary list of questions that says if the answer to any of these is a no, we're probably not going to want to do this acquisition. 

When you work with a business unit repeatedly for some time, I found that you do build that muscle. We've looked at four or five companies when you do the fifth or sixth one, they know exactly the questions to ask and what to do. 

So then you're done with the education piece. You're still working together, but it's not like the first time someone's doing an acquisition. I found that as I've worked with business units repeatedly, it does get 

There are playbooks that you share. I've been in environments where we'd have a presentation on what corporate development does, what the function looks like, this is what an M&A process looks like.

And every six months or every year, you spend an hour or two giving that presentation to the management team or business unit leaders so that the education is fresh and any new people who've come in know it. 

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When do you need an IMO?

When you get to a point where you are doing a deal a year or two deals a year, you fall into this bucket of being a serial acquirer. Your deal sizes might be different than the large companies of the world.

And at that point, it makes sense to invest in an integration function, whether one or two people or larger from there. Oftentimes, many companies use a PMO, not an IMO, where you are doing integration, but you're also responsible for other things that look like, where the functional jobs are similar to integration.

So international expansion, for example, your PMO might handle global expansion, which also cross-functionally touches the same things. You're touching HR, legal, fin ops, all of the same things to set up a new office in Europe or Latin America or something.

So M&A integration can have ebbs and flows. So if you marry it with another function that has ebbs and flows or where it can take a step back if a deal comes in, then you are using your resources well. 

Integration Sucess

It is iterating, reiterating, and emphasizing the importance of the integration function. And that it is a high judgment activity. 

It's not a night and weekend job for people who already have day jobs.It is investing in that function the right way, building out a playbook.

I've worked with external consultants or experienced practitioners to help us build out a playbook. Invest the cycles when we're not doing a deal so that we're ready when we are doing the deal. 

Large companies help you with the integration, they'll do your integration for you because you haven't built that function out or your capacity.

It is as important as doing the deal correctly because that can be a go-to-market challenge. There can be other issues where you don't capture the value you intended to. 

You have an integration plan of intent that you discuss and you sign before the deal closes. I like to have weekly check-ins by function to ensure you stay on track with your integration plan of intent. 

You could use a third-party resource, but my instinct in direction is to do it in-house because it's then a repeatable function. 

Tips for maturing the process

It's really helpful to capture these playbooks in materials. So it's not just knowledge that sits in someone's head. And then if you lose that person, they take the knowledge with them. So you build your integration playbook, your Corp Dev introduction materials, diligence lists, and look back docs.

You codify that knowledge so you can access it for the next deal or third one. It's helpful to just be disciplined about putting things down on paper and then referring back to them when you need to.

We have monthly business reviews, quarterly business reviews, and presentations to the board. Very disciplined in building the function where you're spending time. What are the learnings, etc. 

Offense vs. Defense Strategy

Whether it's offense versus a defense or proactive versus reactive, good Corp Dev teams have a point of view, a plan, and an agenda for their own function. 

Your banker inbounds or other kinds of inbounds coming your way. And you say, here are my four or five priorities, and I want to filter my inbounds and engage with those that match. That's what I describe as your defensive function or your reactive M&A muscle. 

I would say your offensive function, or your proactive muscle is when you say, I've got my four or five priorities. How can I network in the ecosystem to find that dozen or two dozen companies that match those priorities? And how can I build relationships with those people over a period of time? 

So that two years from now, maybe there's a transaction. So it's been very deliberate about sourcing and building relationships with the right kind of companies where one plus one equals three might happen.

"The way you prevent deal fever is by ensuring your Corp Dev team is not measured by getting deals done but by the impact, they're having on the business. It is better 100% to walk away from a bad deal than to do it and think you'll fix it later. - Bani Bedi."

This is why I don't think you can build a team only with deal junkies, like just need to get deals done. That's a very transactional model. A successful corporate development model is much more relationship heavy, it is much more long-term focused. 

There might be a year in which you don't do any M&A, but you had a tremendous impact on the business by influencing a build, partnership, and staying away from bad deals. So how you measure the success of your Corp Dev team is really important. 

You do a bad deal and it can not only have you used hundreds of millions of capital and sunk it into a bad deal, but you also wasted cycles and time and energy of 50 people within the company who've invested in that bad deal.

A year or two has gone by, that's how long it takes to recover from a bad deal. It can be a giant distraction, and the time and energy you're spending on that, you're not spending on building or doing something else that is useful. 

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