Middle-Market M&A: The Secret to Realizing the Most from Your Deal – November 06, 2018 by Jim Boland

In many cases, today’s middle-market deals are executed to either grow revenue or as a reaction to industry consolidation resulting from competitive pressures. The market is hot for such transactions, with 20% of middle-market companies each year executing some sort of M&A activity.
However, last year a global advisory firm reported 70% of transactions failing to reach revenue targets. Harvard Business Review reports a 70-90% failure rate. According to a National Center for Middle Market report, seven out of 10 middle-market companies who have made acquisitions in the last three years do not consider them absolutely integral to their strategy, even though one out of five will engage in such activity this year.
So why aren’t these transactions successful? Due diligence within deals is certainly a priority for C-suite executives and private equity investors before and during the transaction. But what about after? The actual measurement of success for these transactions is often targeted revenue growth — sometimes expecting up to 25% growth — or cost synergies. Those measures will depend heavily on the buyer’s experience with integration planning and execution.
The fact is most teams responsible for integrating businesses have little to no experience doing so. Pairing minimal M&A experience with a high reliance on execution means traditional due diligence in a middle-market transaction is not enough. Buyers must consider the full deal lifecycle, placing great emphasis on execution and integration. 

Setting Up For Success Beyond Due Diligence

The most successful transaction teams will consider the following elements that together result in a holistic approach to integration planning and execution, regardless of the industry:


Financial Analysis and Synergy Realization

  • Perform an independent Quality of Earnings (QofE) to validate the deal thesis as a part of financial due diligence.
  • Outline financial synergies that need addressed between Days 1 and 100.
  • Ensure synergy management and tracking has a clear owner within the organization post-close. 

Customer and Product Analysis

  • Model out growth and cannibalization that considers new product or service development.
  • Carefully consider product/service segmentation as a part of the growth plan: Is service or SKU rationalization needed as a result of the transaction? 

Information Technology Due Diligence

  • Look beyond IT risks and assumptions discovered in due diligence to understand the scalability and value of the existing systems in place. Will they support the business moving forward?
  • Develop infrastructure and system migration, evaluation and implementation plans to account for any incremental investments post-transaction.
  • Running the business — What technology and infrastructure need transitioned or planned for transition to operationalize the business on Day 1? 

Data Quality Analysis

  • What is the state of the target’s master data governance? Duplicates and gaps in data for key inputs like vendors, suppliers, items, etc. can cause excess delays in the integration schedule during data conversion.
  • Are there barriers that will exist in the buyer’s chart of accounts or customer data structure that prohibit a smooth transition of data? 

Culture, Organization and Communication

  • Often the most overlooked item in due diligence, culture is the most critical piece of a successful transaction. Many integrations fail to realize the value of unresolved cultural conflicts.
  • Use a culture diagnostic to identify gaps in key collaboration and people management practices.  What about the way a target operates, communicates and connects will impact the buyer’s culture? Vice versa?
  • Determine a joint vision with a supporting integration plan to communicate people, process and technology changes. 

Executing well on a strategic, defined integration plan can make or break an acquisition. Focusing on integration planning and execution should be one of the top priorities for management teams, especially as middle-market companies continue to be candidates for growing M&A activity.
Please contact a member of your service team contact Jim Boland at jboland@cohenconsulting.com for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.