How M&A Deals Are Like Marriages and What To Do About Failed Expectations

 

This month, the Principals of Revitalization Partners assisted by a Partner of a Private Equity firm, an operational restructuring manager and an Investment Banker, presented a panel discussion at the Seattle meeting of the Association for Corporate Growth with the title listed above.

The concept came from a study by Grant Thornton entitled “Defining What Is Vital For Deal Success.”

 

TRULY STAGGERING DATA …

Some of the data presented in the study is truly staggering when you consider the amount of money available for M&A transactions and the valuation multiple that are found in the market today.

From strategy to implementation, there is a significant opportunity to capture greater value from M&A transactions.

The survey supporting this study showed that only 14%of survey respondents found that their deals exceeded their initial expectations for income or rate of return.

Only 36.8% agreed that efficient M&A execution was a well understood core competency of their company.

 

DESPITE RECORD HIGH VALUATIONS …

Despite valuations being at an all time high, competition for deals continues to increase.

As a result, it’s more important to understand the due diligence process and realize that in addition to understanding the strategy behind the deal, understanding the impact of the financial, operational and most importantly, cultural compatibilities are critical to a successful transaction.

The survey showed that companies can attain much greater clarity at the beginning of the process. Only 38.2% of respondents indicated that they were very clear on precisely what acquisition targets they should pursue and only 32.5% were clear on what they should be paying.

As a result, M&A transactions often fail to add shareholder value.

 

STEPS TO AVOID FAILURE …

When evaluating a deal, there are several steps to take to attempt to head off a failure:

1. Ask hard questions and test your team’s financial assumptions
2. Scrutinize deal protection terms and, in hostile situations, defensive measures
3. Learn why management seeks to pursue (or oppose) a transaction.
4. Carefully review any analysis prepared by management or financial advisors and verify Key assumptions.

 

WHEN ASKED TO RATE SUCCESS …

When asked to rate their success at identifying specific risks, survey respondents confirmed that a handful of issues were overlooked.

  • Overall, 39,7% rated themselves strong at customer retention;
  • 42.7% rated themselves high on employee retention and
  • 39.7% thought they were good at financial reporting compatibility.

 

 

MAJOR REASON EXPECTATIONS NOT MET …

Finally, we get to the major reason that most M&A transactions end up not meeting expectations; that of cultural issues.

There are a few tenets that are required for successful cultural integration.

1.  Never ignore or understate cultural issues. According to Peter Drucker, “Culture eats strategy for breakfast.”
2.  Address the cultural compatibility early in the process and develop a strategy for addressing problems.
3.  Conduct cultural due diligence; Look at multiple cultural dynamics and organizational beliefs.
4.  Understand why you are buying the target company and value those reasons and their culture.
5.  Reinforce commonalities and focus on things that you both share and value.
6.  Address differences, openly discuss issues and integrate where possible.
7.  Look beyond the obvious. You may have similar missions and values, but differences in degrees of hierarchy and attitude can derail the process.

 

ALL DOWNSTREAM REACTIONS …

All these downstream reactions to a merger can have a negative impact on both top and bottom lines which can undermine the initial deal valuation.

The challenge after the close isn’t always making 1 plus 1 equal 3; it’s sometimes insuring 1 plus 1 still equals 2.

And lastly, if you are considering or involved in an acquisition or merger and have concerns about the issues, look for help.

Members of Revitalization Partners have supported transactions on behalf of companies and private equity groups on both the buy and sell sides and are currently involved in a buy side transaction.

 

Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for our clients. And now, we’ve written a book to help our readers understand the issues facing their businesses. You can find this compilation of our business thoughts at:
https://revitalizationpartners.com/we-could-write-a-book/ or on Amazon.

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

When is a Lie a Lie?

 

There has been a lot of press recently regarding people in positions of power, who have lied to advance their agenda, gain more power or take advantage of someone else to enrich themselves.

The concept of lying and deception has gained a lot of attention, however, this issue has been a problem since the beginning of time.

Lies can range from being a “little white lie” on a resume to a massive deception such as the Madoff Ponzi scheme where over $50 billion was stolen from clients.

However, the consequences of getting caught lying are not always in the forefront of someone’s mind when the lie occurs. The truth is, there are almost always repercussions for lying, even for little white lies.

 

SIGNIFICANT CONSEQUENCES …

From a business perspective: lying, deception or misrepresentation can have significant personal and financial consequences.

Take for example the famous Enron case, where several high-powered corporate executives are now in prison as a result of creating a massive deception and for misleading shareholders and creditors.

Another example is the Martha Stewart case, where she spent time in jail for lying about a stock transaction. 

Or, the little white lie a CEO tells in the board room about how well a company is going to perform in the next quarter, who then find themselves out of job when the results do not materialize.

The best way to relate to why lying has broad negative consequences is a quote by Nietzsche, a German philosopher:

I am not upset that you lied to me, I’m upset that from now on, I can’t believe you”.

 

 

 

ADVERSE HEALTH EFFECTS …

Telling falsehoods can not only impact one’s personal and financial situation, it’s also bad for your health.

According to Linda Stroh, a professor emeritus at Loyola University, even seemingly insignificant lies will take a toll on your health.

It takes a lot of negative physical and mental energy to maintain a lie,” said Stroh. “This is energy you could’ve spent working on creative solutions for your business or enhancing your products.”

A host of physical problems can emerge from a lying mind, too.

Studies show that the more you lie, the higher your stress level, heart rate, and blood pressure rise.”

 

 

THE EXPECTATION IS …

There is no question that when it comes to business, the usual expectation is that C Level executives and managers will tell the truth.

While this is the standard, one must go beyond accepting what is presented as the truth.

In fact, the concept of “trust but verify” is one that should exist in every board room and in every company and is one we use in our business dealings every day.

 

 

IT’S NOT ENOUGH TO …

We find in our business, that just accepting someone’s word when we hear their explanation regarding problems facing their company or, who is at fault for them, is not enough.

In fact, we find that the initial information we hear is often not accurate.

When we ultimately discover the truth, we find that the executive is either not aware of what is really happening in their business, or they are trying to cover up incompetence, or sometimes outright fraud.

We also find that a number of warning signs were evident for others to see. 

In reality, in most situations, there are boards of directors and outside auditors involved, that have a duty to view the business objectively and challenge management for accurate explanations.

They have a fiduciary obligation to shareholders or creditors to be aware of the warning signs and to take action to deal with the issues, particularly if the company enters the “Zone of Insolvency”.

Our approach is to quickly understand a company’s problems and to develop a plan to address the issues and is founded in this essential principle of “trust but verify”.

Likewise, it is extremely important for anyone in a position of authority as a chief executive, board member, or outside advisor to use this concept as a method to exercise their legitimate duties to hold everyone accountable.

 

Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for our clients. And now, we’ve written a book to help our readers understand the issues facing their businesses. You can find this compilation of our business thoughts at: https://revitalizationpartners.com/we-could-write-a-book/ or on Amazon.

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

 

The Cost of Winter Storms: Should We Believe the Economists?

 

We hear it every winter, especially this year in the Pacific Northwest, winter storms cost the US economy billions of dollars.

This year, the extended winter freeze that has pounded entire regions of the US is projected to chill the overall economy.

AccuWeather estimates a total cost to the economy of up to $14 billion. And while much of that will be recouped, up to $5 billion could be lost permanently.

 

CUTS A WIDE SWATH THROUGH ECONOMY …

This hit, states AccuWeather, is projected to cut a wide swath in the economy including business, schools, auto sales, significant insurance claims, flight and other travel cancellations, increased consumer costs for heating oil and natural gas, decreased demand for gasoline, and lost wages for non-salaried employees.

Several cities and states have to factor in extensive foul-weather road preparation and cleanup costs.   So, when so much business can be done over the phone and online, these estimates leave some scratching their heads.  

Does the total cost of snowstorms really add up to a permanent loss to the economy of as much as $5 billion?

 

THE SHORT ANSWER IS …

The short answer: Yes, it can.

But, it’s not that simple.  First, the media knows that by pointing out that something costs “billions of dollars” it will get people’s attention.  If a reader could get a hold of part of that money, he and his family could do very well.  After all, it’s a lot of money.

But given the $19 trillion US economy, it’s chump change.   It’s .026% of the country’s annual output.  

On a per capita basis, it’s $15.22.   On a more conceptual level it would be honest to write that all of the winter storms in the country would cost you $15.22. 

And for the average person, it would be much less, since income is unevenly distributed.

These numbers at least communicate the magnitude of the effect on the economy in a way the average person could understand.

 

WHERE DOES THIS MONEY COME FROM?

That said, where do these hundreds of millions of lost dollars actually come from?  

According to Doug Handler, an economist at IHS Global Economics, one of the biggest hits the economy takes is in the form of lost wages for hourly employees.

While salaried office workers get paid even if they can’t make it to work and can likely even work from home, hourly employees aren’t so fortunate.

And it’s not as if all these workers can simply make up the money on another day.

The economy also takes a hit from lost sales at places like restaurants or retailers.  Some of that consumer spending gets made up at a later date.

 

MORE THAN DELAYED PURCHASES …

If you are, for instance, planning to buy a car, a snowstorm will merely delay your purchase. But if you had planned to eat out the night of the storm, it’s not certain that you will still buy that meal another time.

Another big contributor to lost economic activity is cancelled plane flights. It’s costly to cancel and reschedule flights, and in many cases, some trips will not be rescheduled at all.

But even in the case of sustained periods of very bad weather, like what we saw across the country this winter, estimating the economic effects involves a lot of guesswork.

Economists know that output will fall in the first quarter of this year in a way that isn’t consistent with broader economic conditions, and they also know that snowfall levels were much higher, and temperatures were much lower than usual in some of the most productive areas of the country.

 

MORE ART THAN SCIENCE …

Economists also make use of qualitative and quantitative survey data from the Federal Reserve and private groups to connect the dots.

But in the end, it’s impossible to know for sure how big a role weather plays in the economy.

As Handler says, “it’s more an art than a science”.

For those of us in the Northwest, let’s just dig our way out and realize that climate change is only beginning to cost us real money.

 

Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for our clients. And now, we’ve written a book to help our readers understand the issues facing their businesses. You can find this compilation of our business thoughts at: https://revitalizationpartners.com/we-could-write-a-book/ or on Amazon.

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Why Small Business CEO Successions Often Fail

 

We often receive calls from companies that are in various stages of business decline and are asked to help them deal with their issues.

Our approach is to understand why the company is in decline and to identify the events or issues that contributed to their downturn.

Invariably we find, particularly in family businesses, that a founding CEO has decided to leave for whatever reason and hired a replacement that ultimately mismanaged the company and caused its decline.

 

NO MATTER WHAT YOU BELIEVE …

The stories we hear are very similar:

A CEO, who is long past retirement age, decides to hire a replacement. The company was doing fine prior to the retirement however the company is now losing money.

A husband/wife management team decides to hire a more experienced manager to run the business and hires someone from a “big company”. The new manager does not have the experience to manage the smaller business and makes decisions as though the company is the large corporation he came from and the company is now on the brink of bankruptcy.

A founder/entrepreneur decides the business needs a more experienced CEO and hires someone from the outside to grow the company. Without an agreed upon plan to grow the company, within a year the business is in decline and losing money.

A family business with several generations of family members has a first-generation family CEO who decides to retire. A younger, unproven family member is promoted to CEO. Several years later the business is in a severe decline.

 

ALWAYS SIMILAR RESULTS …

We could go on and on with many stories, however the end results are very similar.

Making the wrong decision to transition to a new CEO can be very costly and in fact could destroy a business.

We have reflected on this issue numerous times and have asked the question:

 

WHY DOES THIS HAPPEN SO OFTEN?

To start to answer this question we should look at the trends.

According to a Financial Planning Association/CNBC study released in 2015, 78% of small business owners plan to sell their business to fund their retirement, but less than 30% have a written succession plan.

The survey also found more than half of small business owners sell their businesses to employees or family members.

Family-owned businesses represent more than 90% of all enterprises in the United States. Of those, 30% are second-generation businesses, 12% are third-generation businesses and 3% are fourth-generation businesses.

Of the 70% of family-owned businesses that fail to transition, 60% fail due to communication problems and lack of trust, while another 25% fail to transition due to lack of preparation of the next generation.

 

THE TREND IS DISTURBING …

This trend is disturbing, particularly since a departing CEO is usually dependent on their successor to generate income that will support their family after they leave the company.

We find in many cases the successor CEO does not have the skills or experience to comprehensively manage the business.

They are not equipped to handle the many challenges of operating in a changing market place; not able to clearly define and communicate the goals required to achieve an acceptable level of profitability and manage and motivate their team to achieve the stated objectives.

The consequence of not having a well thought through succession plan will not only put the departing CEO’s personal wealth at significant risk.

It could also lead to the demise of the company and create substantial personal liability for their family, given that in most small companies, the family personally guarantees the debt of their business.

 

MAJOR MISSING ELEMENT …

The major element that we see missing in most companies is a plan for management succession.

Invariably a small business founder/family CEO will step down for a variety of reasons.

Accepting this as a reality is the first step in planning for a successful transition. Defining the skills, experience and management style required of the successor CEO candidate along with a timeline to implement it are some of the important elements of a carefully considered plan.

While we often see the consequences of poor succession planning, we have successfully helped companies deal with the resultant problems.

Our advice, however, is to be proactive in planning for succession and hopefully avoid the problems that might occur before they happen.

 

 

Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for our clients. And now, we’ve written a book to help our readers understand the issues facing their businesses. You can find this compilation of our business thoughts at:
https://revitalizationpartners.com/we-could-write-a-book/ or on Amazon.

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

 

And the Shutdown Continues

 

Two weeks ago, we wrote about the effects of the shutdown on small and medium businesses.

Today we’re writing about the effects on all of us as people.

Over the years of writing blogs, we have shied away from writing about politics. There are, in our political system, room for all sorts of views regarding politicians’ positions.

 

NO MATTER WHAT YOU BELIEVE …

Whether you believe there should or shouldn’t be a wall on the US Southern boarder is a matter of individual opinion.

But, for those of us watching the drama of the government shutdown unfold, we must begin to believe that members of the government are behaving more like children than elected representatives.

And the impact of that behavior has the potential to impact the rest of us in ways that we can’t imagine.

 

MOST GOVERNMENT EMPLOYEES …

Most government employees work at modest paying jobs that don’t allow for the bonuses and equity that we often see in the civilian sector.

In many cases, such as with TSA inspectors and air traffic controllers, the work is often critical and repetitive.

In other cases, such as food inspectors and FBI agents, their decisions often mean the difference between life and death.

Many federal workers have missed their first paycheck. While some earn six-figure salaries, an average employee’s weekly take-home pay is about $500, according to a labor union for government employees.

 

THE PERILS OF AIR TRAVEL …

As I write this, a member of Revitalization Partners is on a trip requiring extensive air travel. His flights and any that you may take are under the control of air traffic controllers that monitor and direct several aircraft at a time, often in very crowded airspace.  Generally, these controllers are focused and highly professional in a stressful job.

But do you want the controller managing your flight having the additional stress of wondering how he will pay for health care for his family or whether the bank will foreclose on his home?  Those few seconds of concern have the potential for unimaginable tragedy.

Or maybe, as you arrive at the airport, the overworked TSA agent misses a weapon in an inspection because they are wondering if the food bank will be open after their shift.  Hundreds of Transportation Security Administration workers at multiple airports are calling in sick rather than work without pay.

Members of the Coast Guard, which is funded through the Department of Homeland Security, have missed their paychecks.  Would you want them to turn back just a little early if you were the one they are searching for?

 

WHAT ELSE IS BEING EFFECTED …

And what else are we dealing with?

  • The Department of Housing and Urban Development has sent letters to 1,500 landlords asking them not to evict residents in housing assistance programs – including those with Section 8 vouchers – for which funding has lapsed.
  • The Interior Department has stopped accepting new Freedom of Information Act requests.
  • The White House directs the Internal Revenue Service to issue tax refunds during the shutdown, reversing previous policy. Workers called back from furlough to process those refunds will not be paid until the shutdown ends.
  • The Agriculture Department said that benefits under the Supplemental Nutrition Assistance Program, formerly known as food stamps, would be fully provided for the month of February, but then end.
  • One of the Hubble Space Telescope’s main instruments has stopped working and engineers are unlikely to fix the problem during the shutdown. Nearly all of the employees at NASA have been furloughed.
  • A report from Syracuse University says at least 42,000 immigration court hearings have been canceled since the beginning of the shutdown.

 

WHOSE SHUTDOWN IS IT?

The point is that while we can blame the politicians and commiserate about their childish behavior, this is not their shutdown.

It is ours … all of us.

There are those few who take the time to demonstrate, but for the rest of us who keep our voices, emails and tweets firmly shut and go about our business, this shutdown and its results, belongs to us.

 

Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for our clients. And now, we’ve written a book to help our readers understand the issues facing their businesses. You can find this compilation of our business thoughts at:
https://revitalizationpartners.com/we-could-write-a-book/ or on Amazon.

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

How the Government Shutdown Affects Business

 

We all know that currently, at least part of the United States government is closed. But in addition to about 500,000 workers out of work, an additional 300,000 are working, illegally, without pay.

During the last government shutdown, a Federal Court authorized a payment to those employees who were forced to work without being paid of twice the amount they were initially owed by the government.

As of this writing, several lawsuits have been filed by Federal employee unions to restore payments to those required to work.

 

BUT WHAT ABOUT …

But what about those businesses and the employees of those businesses that are partially or completely dependent on the government.

These businesses range from government contractors who may never recover the money lost to restaurants that are close to government buildings and depend on those employees for their business.

The shutdown goes further; potentially much further into the business ecosystem.  For example: While the IRS will continue to collect funds, it will not answer taxpayers’ questions. 

And for those businesses and employees that are waiting for tax refunds, while the IRS has stated that they will issue refunds, they have not stated how long it will take during the shutdown. 

On the bright side, if you are due for an audit, no audits will be conducted during the shutdown.

 

WHAT IF YOU ARE TRAVELING, HIRING OR BORROWING?

If a business has an employee that is waiting for a passport, delays are expected, especially where passport offices are in government buildings that are shut down. 

And if you need to hire new employees, that may be a problem.  One of the casualties of the shutdown is the federal E-verify system that determines the eligibility of an individual to work in the United States.

Hoping to get an SBA loan for your business?

Lenders cannot submit loans into the approval que for SBA loans and will not receive loan numbers during the shutdown.

SBA loans are on hold until the shutdown ends.

In past shutdowns, federal workers received back pay.

However, this is not assured because it requires Congress and the White house to pass a law mandating back pay.

 

THE “TRICKLE DOWN” EFFECT …

Consumer confidence is the unknown issue given the shutdown.

For example, a paper provider that does business with a government contractor may lose that business during the shutdown.

If the time-frame extends, the paper company may have to reduce expenses through layoffs, impacting employees that are unrelated to the government. 

And that “trickle-down effect will increase over time.

If a government contractor or even an unrelated business is depending on an IPO or a share offering, the process will be delayed as the SEC cannot process applications.

 

THE HIT TO GDP …

The shutdown could trim at least $6.5 billion a week from the nation’s economic output, economists at Standard & Poor’s suggested. 

“A shutdown affects not only Washington and its employees, but also has ripple effects across sectors throughout the country – from shopping malls to national parks, from contractors to hotels,” said Beth Ann Bovino, chief United States economist at S.&P.

Given that 800,000 Americans have less money to spend and a major part of the government is not spending money at its normal rate, the effect, over time, can be disastrous. 

In addition to the consumer impacts, there are impacts on all sorts of businesses.

 

DEBT SERVICE EFFECTS …

We have written in the past about the high level of corporate debt.

That includes issues like real estate debt for the mortgage holders of buildings rented to the government.

The inability to service debt all sorts of debt from companies that do business with and rent to the government; as well as the impact on consumers unrelated to the government, can begin to impact banks that have made those loans.

Without cash flow from loan payments, new loans begin to dry up.  And the impact continues to spread.

Hopefully this shutdown will be short lived.

If not, the financial impact of this decision will spread well beyond the government employees affected.

 

Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for our clients. And now, we’ve written a book to help our readers understand the issues facing their businesses. You can find this compilation of our business thoughts at: https://revitalizationpartners.com/we-could-write-a-book/ or on Amazon.

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.