Transparency Is Critical For M&A Success

David J. Morse.

For David J. Morse, president at acquisition specialist/consultant Growth Paradigm LLC, transparency is critical when finalizing M&A deals—and helps pave the way for a smooth transaction. Growth Paradigm works with Rosewood Private Investments to acquire manufacturing companies that Morse oversees (and sometimes runs, as with CNC cutting solutions manufacturer MultiCam, where he serves as chairman and CEO). Over the past two years, he acquired and integrated two companies and inked deals for several distribution centers in North America and Europe. In a recent interview with Chief Executive, he shared four steps that can minimize the risks inherent to deals and integrations:

Avoid Unhappy Surprises. “Tell them what your goals are, tell them how you’re going to invest in them and bring them into the conversation, because it’s the year or two down the road where things get shaken up, when you’re doing things differently than you promised or you pitched. Start with modeling out the three-year plan and how the different companies will fit into that plan. Obviously, you’re not going to disclose all of your moves, but you need to be transparent with the general plan so that nothing’s a surprise.”

“That’s where most of the failures happen—when you’re trying to merge two different types of cultures.”

Make a People Plan. “Put milestones and metrics in place for every leader, have roles and responsibilities defined for each person and, between yourself and the company you’re acquiring, make sure you know the plan. If you have a founder and you need to protect him for three years, put him into a three-year agreement so that he sticks around. Secure your top executives so that you know you’ve got them on a go-forward basis.”

Vet the Cultural Fit. “You need to understand the culture you’re acquiring, or acquiring into, to make sure there’s a good fit. That’s where most of the failures happen—when you’re trying to merge two different types of cultures. You can have a high-growth company on one side, but the other side may solely focus on support and customer-centric activity [rather than] on a growth culture. If you hear signs of a ‘not my problem’ attitude, or things like ‘we’ve tried that before’ or ‘we can’t do it because…,’ to me, those are pretty big red flags to a culture. It doesn’t mean they can’t be fixed, but they’re usually fixed by replacement.”

Find the Red Flags. “Every company being sold has a book, either done internally or through an investment banker, and it’s not unlike selling a house, where they are going to highlight the things that are most likely to help them sell. I’m not saying they’re misleading or lying, but they will highlight the things that make them shine. Put someone on your team who has experience growing a company, has seen a company like this and can go in there and look beyond the deck and see some of the ‘gotchas’—like the healthcare plan, 401k plan. Look at how they build their products; look at the safety inside their facility. Look at the culture and how they treat people, with benefits and management styles. Interview a list of top employees in the business—they’re not always managers. When you consolidate all of that information, it will give you a pretty good picture of the kind of company you’re stepping into. The number one red flag is if you feel a sense of dishonesty or you don’t trust the data that’s being presented, then you should probably walk away.”