STRATEGIES FOR A SUCCESSFUL M&A TRANSACTION

If you are reading this, chances are it is no surprise that consolidation through mergers and acquisitions is one of the biggest trends shaping the PEO industry. What may surprise you, however, is that up to 75% of acquisitions fail to achieve stated objectives of post-acquisition sales growth, cost savings, or maintaining share price. While PEO industry consolidation creates significant opportunities for buyers and sellers in terms of financial rewards, market expansion, and product and service delivery enhancements, there are important factors both parties should consider and strategies they should employ to ensure successful outcomes.

I have been participating in M&A transactions since 2012 across various industries, and I currently lead diligence processes and operational integrations at PrestigePEO. In my experience, while every transaction is unique, there are consistent themes that foster a collaborative process and produce desired financial outcomes for both parties.

VALUE ALIGNMENT AND SELECTING THE RIGHT PARTNER

Shared vision and aligned values between parties are paramount. When choosing who to partner with, buyers and sellers should first define what they hope to accomplish through the transaction.

A seller must answer foundational, sometimes life-changing questions: Would they like to retire from the business quickly post-close? Do they envision a specific transition or succession plan? Or would they like a “second bite at the apple” and even greater financial opportunity, perhaps in a higher-growth environment with access to deeper resources? Likewise, a buyer’s goals should have some alignment with the seller. Is the buyer looking to create value by accelerating growth in a particular market or industry? Are they seeking immediate cost synergies with an acceptable risk of client loss? Or is it a combination of these (or other) factors? Ultimately, candor about deal motivations prevents misalignment and frustration.

Both parties should also consider their utilization of representation. Whether partnering with a PEO broker, M&A firm, investment banker, or other advisor, cultural and personality fit matter (particularly for a first-time seller). This is an opportunity to build a transformative relationship with a person or firm who will create value through their industry knowledge, advocacy, and business acumen.

As with all important relationships, when it comes to selecting the right M&A partners, buyers and sellers are best served by investing sufficient time and effort. By realistically defining intended outcomes, interviewing extensively, and vetting references, this is the earliest opportunity to lay the groundwork for a successful transaction.

LEANING INTO THE DILIGENCE PROCESS

Benjamin Franklin appropriately observed that “diligence is the mother of good luck.” Although the diligence process is notorious for being rigorous and exhausting, proactive engagement from buyers and sellers is essential to a well-run integration and the strongest possible financial results.

A typical diligence process takes anywhere from 30 to 90 days but may be shorter or longer depending on factors including business size and complexity, risk profile, buyer and seller readiness, and deal structure. While it is the buyer who will typically lead the seller through a series of workstreams (e.g. tax, legal, HR, business, operations) and potentially a Quality of Earnings process (a QoE analysis is used by buyers and sellers in M&A and generally conducted by an independent firm to evaluate the sustainability of a company’s reported income by adjusting for non-recurring items to show true financial performance and value), the seller should also use this time to learn more about the buyer’s operations, team, and integration plans. Holding in-person meetings during this stage is a good opportunity to get a feel for company culture and regional geography, as well as to learn more about one another’s management teams and explore post-closing staffing structure.

Just as candor is essential when choosing the right deal partner, it is similarly important during diligence. This is the stage of the process where data discrepancies and unforeseen risks may come to light. Cost, revenue, and financial synergy opportunities will be reviewed and discussed in more detail. Each party will want a proactive partner that works through issues to find creative solutions that preserve the intent of the deal.

The diligence process is a fast-paced marathon comprised of a series of sprints. By being prepared and embracing it collaboratively, it will pay literal and figurative rewards to both parties and lay the groundwork for a well-executed integration.

THE INTEGRATION PLAYBOOK AND MANAGING EXPECTATIONS

In one of the first (non-PEO) deals I closed, I was dispatched by the buyer to physically change bank account ownership at the seller’s longtime bank immediately after the contract was signed (before the days of Docusign). The seller, who had assumed they would continue to operate “business as usual” through a transition period, was shocked and hurt. Had the parties discussed material integration plans prior to or in conjunction with closing, the damage this action caused to their relationship could have been avoided.

Parties should ideally run an integration process free from surprises. The buyer can draft an integration playbook or project plan that encompasses key aspects of the transition along with metrics where appropriate. The playbook should consider areas including but not limited to internal and external stakeholder communications strategy and timeline; sales and revenue strategy; accounting and tax strategy; compliance and legal considerations; operations; human resources and staffing plans; insurance and risk management; and technology. Similarly, the synergies identified during diligence that are related to deal value, financial goals, and operational transition items should be addressed and incorporated, with timeframes and transparency.

Identifying transition and integration roles and defining their responsibilities is critical, as is dedicating a person or team to run the integration process. Material elements of the integration playbook should be shared with the seller as much as it is practical so that expectations are managed and post-closing surprises are prevented.

IN CONCLUSION

As with most aspects of business and life, preparation is the key to success in M&A transaction outcomes. By thoughtfully selecting partners, engaging in thorough diligence processes, and working from a comprehensive, measurable integration plan, buyers and sellers will defy the odds and obtain the best possible results for their employees, clients, and shareholders.