Buying to Build: Best Practices to Power Your M&A Strategy
Whether small and synergistic, or large and transformative, acquisitions can act as a meaningful growth driver for companies seeking to expand product offerings, team, customer base or geographic reach. Summit portfolio companies are no exception. Over the course of the last five years, Summit-backed businesses have completed more than 700 acquisitions1 and M&A activity has continued across our portfolio in recent quarters, as companies work to operate from a position of strength in the face of macro headwinds. In some cases, companies develop an M&A strategy focused on completing a single transformational acquisition; in others, the approach is centered around a high-velocity acquisition model, executing more than a dozen acquisitions per month.
Regardless of the approach, we work closely with portfolio companies to help allocate adequate resources, develop thoughtful processes and adopt systems for improved efficiency as they work to build an effective M&A engine from strategy and development to integration. So how do you build for both scalability and speed? Below are several of the best practices we’ve seen help drive M&A success.
Resources: Building the Right Team
Building a high-performing, dedicated group to support your M&A approach is critical to success, whether you’re aiming to close two acquisitions a year or two every week.
At the outset, members of the C-suite – or even board directors – may be actively involved in identifying and executing on acquisition opportunities, but this approach does not often scale well over time. To build a scalable, repeatable process, you’ll need dedicated resources. The typical first hire is a team member with relevant transaction experience. Depending on the scale and velocity of your strategy, you may consider building out your business development (“BD”) group with additional team members – for example, in-house legal or finance resources – who can serve to drive documentation and diligence, accelerate pace and mitigate expenses.
Once the money is wired and the acquisition is closed, the integration process begins. Integration is the second chapter in a two-part story, and it can often mean the difference between creating or reducing equity value for the core business. We believe having the right integration leader is paramount to the success of the process. We recommend seeking an individual who is process oriented, able to manage through influence (versus ownership) and willing to take a hands-on, in-person approach with your acquired businesses. This integration lead will likely need to work and collaborate across functional teams; identify these team members early and clearly communicate requirements on their time.
Process: From Opportunity Identification to Integration
With leadership and relevant resources in place, your team can turn attention to developing a thoughtful and repeatable process to identify, execute and integrate acquisitions. Below are a few best practices that can help support success at each stage of the process.
Identify:
- Build a multi-channel sourcing strategy. As my father used to tell me: “The more lures you have in the water, the more fish you’re likely to catch.” Assistance from financial partners, intermediaries and industry contacts can help fill the funnel for your internal team.
- Create compelling, targeted pitch materials. You can improve the effectiveness of your sourcing strategy by developing pitch materials that resonate with sellers. What archetypes are you likely to encounter at potential targets? Materials that work with someone who is looking to use the transaction to fund their retirement will likely not be effective with an owner who wants to be part of the company’s future growth.
Execute:
- Align and standardize: To move opportunities efficiently through your funnel, we recommend investing time up front to standardize your materials to approve transactions. This step will help ensure that all involved parties – board directors, management team members, your BD organization – are aligned and able to evaluate potential transactions in a more timely and consistent manner.
- Effectively leverage third parties: Even with an established BD team, it’s likely you will need to leverage legal, accounting or other external resources to get an accurate picture of the target. Find a firm you like, discuss your strategy with them, and negotiate flat-rate commercial terms for pre-defined products. Based on our experience, they’ll appreciate the transparency, and it will mitigate the working capital impact on your core business.
Integrate:
- Establish a project management office (PMO): At Summit, we’ve found that rigorous process management is a hallmark of successful integrations. Led by the integration leader and staffed with representatives from functions across the core business, the PMO can help instill that rigor, meeting regularly to keep team members accountable to the integration plan. The PMO can streamline communication and facilitate “a single source of truth” for how the integration is progressing.
- Define and communicate the integration plan: Sellers will typically want to know exactly what will happen to their company and their team after the deal closes. A clearly defined approach to integration, including what will happen to whom and when, can help build buy-in and ensure sellers work in good faith with their new owners. We recommend aligning up front on an approach that includes what will happen on day one, one month in and even six months later.
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Systems: Invest to Add Efficiency
Finally, consider investing in solutions to add efficiency and automation to your processes. In our experience, there are two mission-critical systems: a scalable CRM and a platform for sharing data during the acquisition process. Your BD team needs to have a central repository for information they gather on targets and the ability to seamlessly share data with those targets once a letter of intent is signed.
Post-acquisition, project management tools – for example, Smartsheet2, Monday.com or MS Project – can be helpful in facilitating the integration process. These tools are useful in supporting decentralized execution and holding team members to defined deadlines.
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We’ve found that these resource, process and systems best practices have provided foundational support to our portfolio companies’ M&A strategies across a variety of industries, from insurance services and payments to healthcare services and technology. In each case, however, we’ve found the last – and arguably most important – practice is to clearly define success for your overall M&A process. In many cases, this might be a quantitative measure (e.g., the effective multiple paid 12 months after acquisition), and often this north star metric helps teams to develop other, leading indicator metrics for the BD and integration organizations. In each case, however, measuring performance against your chosen metrics early and often will help fuel the success of your M&A.
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The content herein reflects the views of Summit Partners and is intended for executives and operators considering partnering with Summit Partners. Published on April 1, 2024.
(1) Past performance is not a guarantee of future results. It should not be assumed that any trend illustrated herein will continue.
(2) For a complete list of Summit Partners portfolio companies, please click here.
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