Strategic Decisions - More Art than Science?
For decades, psychologists have conducted various studies, analysing the strategic decision-making process of senior executives. The main conclusions drawn from these studies, are that business leaders very often make strategic decisions based upon intuition - or “gut feel” - and that the decision-making process is more of an art than a science.
This type of decision-making is far more typical of business leaders than business managers. Whilst leaders are happy to follow their instincts, more often than not, managers like to have clearly defined parameters, a pre-determined structure and processes. The other major difference between leaders and managers is that leaders are visionaries who inspire and have followers, whereas managers implement and have subordinates.
When examinining the decision-making process involved in making an acquisition, there are a number of issues worth exploring.
Acquisition Rationale - Poor Decisions Made by the Wrong People
As M&A specialists, Boss Equity has a good idea of the level of decision-making required to make strategic acquisitions successfully. My personal viewpoint is that in the acquisition qualification phase, the wrong information is often scrutinised by the wrong people. The knock on effect of this is that poor decisions are made.
To clarify: one of the most common complaints I hear from the higher profile organisations in our sector, is that they are inundated daily, by brokers presenting companies for sale. They bemoan the fact that, much of the time, it is clear that, before the approach is made, very little thought was given to the strategic fit for them. Consequently, the vast majority of these "opportunities" are non-starters.
The sheer volume of companies for sale that are continuously being presented to larger organisations, triggers a variety of reactions by the potential acquirer which, although understandable, do not serve them well in identifying the very best acquisition opportunities.
The scenario usually goes something like this:
· Teasers are given to "Managers" rather than "Leaders" for early stage qualification
· Managers make "safe" decisions, while "Leaders" want to make the "right" decision but will take calculated risks
· Opportunities to acquire, where the target company is outperforming the acquiring company, are often disregarded as exaggerated and are dismissed without further investigation
One of the most beneficial outcomes of gaining feedback from organisations is hearing the reasoning behind their decision not to investigate an acquisition opportunity further. This is a critical step for us as we are looking to qualify early and identify the perpetual tyre kickers from the serious buyers.
At times, some of the thinking makes us scratch our heads in amazement.
"We are not interested as the revenue to head count ratio is not what we would expect"
If only M&A was that easy! Just divide the revenue by the staff and, “Hey presto!” there is the analysis. Incredible! I wish I had thought of that twenty-five years ago! DOH!
"This company is highly profitable and is performing too well for us so we have qualified out".
So, what they are saying is, “Please bring us companies that are less profitable than we are as this company could make us ask ourselves some difficult questions or make us look bad by contrast.”
"We are currently extremely busy with year-end sales; perhaps we could reconsider in a few months when we are less busy".
In other words: “Please come back to us when we have less to do - If everybody else has turned it down.”???!!
The above examples are partly for entertainment. However, there is also an implicit sub-text here. There are three main reasons why companies qualify out M&A opportunities in such an off-hand manner:
1. They are not interested in acquiring but are simply being nosey and want to try and identify the company. This is something we squash immediately.
2. The opportunities are being qualified by the wrong people within the organisation. If you are serious about making acquisitions, then it is a task best undertaken by your organisation’s leaders and visionaries - not your "Managers".
3. The company hasn’t precisely defined their M&A Strategy and therefore does not have a system in place to facilitate effective qualification of opportunites that are presented to them.
Fine-Tune Your M&A Strategy for Success
A true M&A strategy will enable a company to quickly identify a "Potential fit" versus a "Definitely not for us". It will also incorporate a process for separating the two with confidence.
However, despite assurances to the contrary from the many management teams we meet, the majority of companies do not have a finely tuned M&A strategy. Yet they expect their acquistions - a major undertaking - to be a resounding success!
It's the reason 70-90% of all acquisitions fail - And it's why you need to create your own, clearly defined route map, well in advance of making any acquisitions.
It's like going orienteering without a compass - Just don't do it!
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Boss Equity has helped multiple companies, increase their sale price at exit.