Get the First Deal Right: Top 4 things to ensure first deal success
Posted on: August 1st, 2017
As Billy Joel says “Get it right the first time, that’s the main thing”. This is particularly true of the first acquisition in a roll-up.
The first deal is the keystone acquisition, the one that provides the foundation for the future. Without a strong foundational base, it’s hard to make a roll-up successful through buying other companies.
When you don’t have your books, systems and people organized, acquiring more companies can become a fiasco, where little things become big glaring issues, exponentially harder to manage through. Getting the first deal right gives you the ability to roll up faster and more profitably.
The correct keystone acquisition gives you the power to realize more value from future acquisitions through bringing better management and focus to subsequent add-ons. The notion that you can get bigger and scale your way out of nagging operational issues is half-baked logic.
Here are 4 things to ensure first deal success:
- Compelling Acquisition Rationale – Just because a deal can be done doesn’t mean it should be done. A lot of folks think every deal is a good one, as long as they can get it financed. This is a wrongheaded approach. Your first acquisition should have a compelling rationale behind it. It should be crystal clear how you can improve the business and make it better. If it is not crystal clear and easy to explain, you do not have a compelling acquisition rationale.
- An Ounce of Planning is worth a pound of Cure – Make sure you have a plan and have the right people and resources in place before you close. When you have this lined up, you will be able to proactively plan out the integration. It’s better to identify road blocks before the closing, and develop solutions to them, as opposed to kicking it to post closing where they take longer to fix.
- Grass Roots Diligence – Often a buyer thinks financial diligence and operational diligence is enough. It’s not. You need to understand the grass roots of the company- key employees, key customers, and corporate culture and employee attitudes. The collective actions and behavior of the company at the grass roots will provide clues as to whether the company is a keystone acquisition, with foundational and scale-up value. Spend the time to make sure your deal is keystone as opposed to Fred Flintstone quality!
- Liquidity Cushion– You should always factor in a liquidity cushion when funding your deal to make sure you have the financial wherewithal to get through any turbulence. If you’re fully leveraged and with little liquidity, it’s hard to maneuver through tough times. Even if the extra money for the liquidity cushion is expensive, it’s worth it. The opportunity cost of not having this policy is illiquidity, work out or even bankruptcy, so be smart and have some cushion.