Property sales have always served us well as an analogy to explain mergers, acquisitions and the different roles people play. The investment banker as an estate agent. The due diligence accountant as the building surveyor. The lawyer following a similar process of agreement of terms, signing, completion, warrantees & indemnities. 

In this analogy, we are the architects brought in (by the buyer) to help design and build a future for buyer of the property. Most buyers bring us in quite early while they are still considering the purchase: to help them define their vision for the future, estimate costs, and identify risks they need to keep an eye on. For old houses, or complex deals, the seller might go further than using engaging an estate agent/investment banker. They will also pay for their own detailed building survey, to make it easier and quicker for potential buyers considering making a bid - “Vendor Due Diligence” in the world of M&A.

Unfortunately the analogy is both accurate and highlights a fundamental flaw in how we think about deals.

With the sale of a property, on completion you hand over the keys and walk away with no remaining interest. That’s rarely the case for most business owners and founders.

Firstly there’s the earn-out period, typically 3 years, where you’re expected to continue to run the business and deliver results. Flipping this into our analogy, you’re far from walking away, but signing a high $-value three year lease on the property you’re selling. Your vision for the future, and the benefits you want to create together with the buyer, now become crucial for the value of the firm. It also highlights how the balance of risk and value is different: the buyer needs to know that you’re going to be a good ‘tenant’: will you keep on top of costs, deliver revenue growth, maintain your attention on the business?

Secondly, in the early days it always used to surprise us that people pay $-millions for a business when they could just hire some of their key people: redeveloping the business organically at a fraction of the cost. With experience we have learned it is not that easy - it’s how the people work together, their processes and relationships which define the value in the business, not just a few high performing individuals. The time it takes to develop these organically is a major barrier, and why buying is often preferable to hiring.

This exposes the fundamental mismatch in the acquisition - on the one hand, the buyer is paying for a business where the value is in the people, processes & relationships. On the other hand the buyer isn’t ‘buying the people’. These people are free to leave the firm at any point.  It’s like the buyer is paying for a house, but that the real value is the family that lives there! It’s not the tangible and intangible assets on the balance sheet that create value, but the group of people who know how to use them. It’s the target not the acquirer that’s in the best position to understand what should come next.

All this leads to one thing: when selling a business you need to think  much harder about the post-deal than when selling a property.

And intelligent buyers know this. They’re looking for firms where business leadership in the target have a clear view of what they want from the buyer and where they want to go. They want business leaders who understand what the post-deal world will look like, the organisation they will put in place, the role they want the buyer to play and the synergies they’ll create together.

If you recognise this as a valid point, why do 90% of acquirers plan and lead the integration?

Sincerely,