By James J. Caruso, CPA, CGMA

Merger and acquisition (M&A) transactions can be tricky if not handled with care. But if you are new to the experience or have had limited exposure to the ins and outs of these deals, you may need a guide to find your way. I have participated in nearly 60 M&A transactions in a previous role leading a transaction advisory practice for a CPA firm and in my current role as a CFO. Here are my top 10 lessons learned to help you get your footing.

Avoid over-investing in a dedicated internal acquisition team.

Even if your company is acquisitive, transaction activity is by nature episodic. Stay lean and leverage third-party firms for due diligence workstreams. The key is to work with the same providers consistently, and demand that they avoid turning over staff on their engagement teams. With a dependable, extended virtual team that fluxes with demand, you will have a replicable and efficient diligence playbook without the fixed cost burden.

Continue tracking financial results of the target company after financial diligence is completed.

Sometimes months will elapse between the last fiscal period evaluated in the quality of earnings and the closing of the transaction. If results deteriorate, do not hesitate to renegotiate the purchase price or walk away completely. This may sound obvious, but it can be hard to do at a point in the transaction where there have been significant investments of time, money, and emotion. Remember, these are sunk costs, and they should not be part of the go/no-go decision.

Internal people with ongoing operational and functional roles should be involved in diligence.

These same people should be involved in integration. Their knowledge and perspective will bring context to both diligence and integration. Likewise, if people know they will be accountable for integration and post-acquisition performance, it brings greater objectivity to their diligence. It avoids a hand-off between diligence and integration. Because after all …

Integration should be planned for early.

Make this a part of diligence, not after closing.

Execute integration plans as soon as possible upon closing the transaction.

Resistance to change is the default condition, but after a transaction people expect change and are mentally prepared for it. Use the acquisition as a catalyst. If you allow the status quo to continue for too long, people get complacent. Then, a year or more down the road when you finally decide to restructure roles, change processes, or implement new systems, employees no longer associate the initiatives with the acquisition; the actions are perceived as disruptive. You will encounter much more resistance than you would have right after closing the acquisition. Another consideration: post-acquisition integration initiatives are a great way to learn who can adapt to a new environment and who cannot. Why not find out sooner rather than later?

Avoid an adversarial relationship with the seller if you intend to retain the founder of the target company.

Your equity sponsor can be a great buffer in purchase price negotiations. However, in parallel with these discussions, management needs to build its own rapport with the seller. Engaging with the seller in integration-related discussions will help create an effective working relationship going forward.

Clearly communicate roles, responsibilities, and expectations if you are retaining principals of the target company.

Even if the acquired company will continue to operate as a separate business unit, the role of running that unit will be different than when it was a standalone business. Which decisions will be at the business unit level, and which will require corporate approval? Which functions will be subsumed into corporate functions, and which will remain decentralized? Align expectations with incentive compensation plans.

Avoid a long transition period if you are not retaining the principals of the acquired company.

A long transition period may provide peace of mind, but keeping the former principals around too long is an obstacle to integration and effecting changes in process and culture. Employees remain loyal to their former bosses and are resistant to change. You live with the risk that they, too, will walk out the door on their former boss’s last day. Sometimes the founder is paid to continue running the business for a transitional period, but is no longer fully engaged. This can cause confusion, resentment, and a leadership vacuum. Better to “cut the cord” quickly and limit transitional roles to consultative arrangements without operating responsibility.

Do not yield to founders who want to prevent access to their broader team during diligence.

Many may be hesitant to disclose a pending acquisition, even to their closest colleagues. Do not acquiesce to this. Cultural fit is a critical success factor in any acquisition, and you cannot assess the target company’s culture by dealing only with the owner. Insist on access to key managers, and consider engaging a firm to do human capital diligence.

Don’t underestimate the challenge of changing culture, even if a new leader has replaced the former owner.

It takes time, energy, and patience to change entrenched ways of doing things, and to adapt to a new, larger, more professionalized environment, particularly if the employees have spent years working in a smaller founder-led business with no institutional lenders or investors.

No two transactions are the same, and a much longer list of best practices is required to ensure success in every situation. But if you keep these 10 lessons in mind, you will dramatically improve the probability of success.

James J. Caruso, CPA, CGMA, is CFO of Simplura Health Group in Yardley, Pa. He can be reached at jcaruso@simplura.com.

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