Expansion through acquisitions can be a compelling strategy to accelerate growth, but you will only be successful when you start your integration planning early and stay dedicated to executing your integration plan after the transaction closes. With proper planning and execution of your integration strategy, you may see the deal value increase by 6% to 12%, according to estimates by McKinsey & Company.1
Both the planning and the execution stages of an M&A integration are essential — this article will focus solely on the planning phase while a second article will cover the post-acquisition integration phase. Most experts agree that planning should start as early as the due diligence phase of a transaction. Below, you’ll find a guide to creating your integration plan.
Assemble an Integration Team
Engagement from your management team is paramount for a successful M&A deal. When leaders buy into the acquisition strategy, they help foster support and energy throughout the integration planning and execution process. Instead of waiting until after the acquisition, create an integration team as soon as you have found a potential business to buy. This will allow you to continue concentrating on running your business while the team focuses on the integration process.
The integration team should include your Chief Financial Officer, Chief Operating Officer, Human Resources Director, and Chief Technology Officer, as well as members of each of their divisions. A strong integration team will lead efforts to identify synergies, maintain positive communication with potential target companies, and create an overall integration plan so that you are ready to hit the ground running after the close.
As part of the integration plan, the team should develop a defined timeline with milestones mapped out and assigned to members of the team. Empower these team members to take control of their assignments and hold them accountable for achieving plan goals. Establish weekly meetings to check in with the team so that everyone is aware of the progress that is being made and any necessary adjustments can be easily identified.
Map Revenue Growth
Revenue growth is typically the driving force behind an acquisition. When evaluating an acquisition, you should determine how the acquired company will foster revenue growth. If there isn’t a path to growth, you will need to focus on cost savings to create a more profitable enterprise. Ideally, the acquisition will generate both growth and cost savings.Questions you and your team need to ask and answer include:
- Are there additional ways your team can grow the revenues of the target company that the current owner hasn’t pursued? Consider which of your current customers would be interested in purchasing the services or goods you are acquiring and to which additional end markets you can sell these goods or services. Identify any easy cross-selling opportunities as well as where your customers intersect. Lastly, discuss with your team what you think are achievable revenue goals for the business.
- What are the marketplace hurdles facing this company, and how will your team overcome them? Determine if the marketplace has been subjected to new oversight from regulatory agencies. Identify any key players in the marketplace making moves that will impact your ability to grow the target company.
- Will the target company’s sales team be able to help you grow?
- How can you incentivize the sales force of each company to execute on your growth plan?
- How does the target company price its goods or services?
- How does the target company purchase its materials?
- What will the target company need from you in order to run smoothly after the close?
It is important to thoroughly analyze the various growth opportunities for the target company in order to realize the maximum benefit of the acquisition. The questions above should be fleshed out by your integration team prior to completion of the acquisition so any changes can be planned out and ready for implementation on day one.
Investigate Expense Increases/Decreases
It is critical that you understand the cost structure of the business you acquire. Confirm that the business you are seeking to acquire is scalable and that you can operate it more efficiently. Identify the synergies you would like to achieve and any additional expenses you may incur. Common questions you should ask include:
- Are you eliminating back-office staffing at the acquired business? Confirm your human resources department can handle managing the additional workforce. If so, this is an area where you can eliminate salary expenses. Evaluate whether your accounting department can benefit from the expertise of the business you are acquiring and whether you will need the acquired employees to manage accounts receivable and payable. If not, these are likely positions you can absorb to create further cost savings.
- What is the current benefit structure of the business you are acquiring? Be aware that your company may have a richer benefit program for your employees. Review the employee census of the business and see how much it will cost you to add these employees to your benefit plans. Look at your medical benefits, vacation policies, retirement plans, and any other benefits you provide your current employees.
- Will there be vendor redundancies? If so, evaluate any opportunities to consolidate and improve your purchasing power.
- Will the acquired business facilities allow for your projected growth? You may need to look at relocating the business to a new facility. If the space is too large, switching to a smaller facility could assist in cost savings.
- Do you need to make any changes to the facility to meet current safety standards? If so, determine how much needs to be budgeted for these changes and have a team ready to start making changes as soon as possible.
After you have reviewed the cost savings or increases related to the acquisition, create a pro forma budget to make sure the business is still achieving the level of profitability you were expecting.
Plan for Information Technology
Determine what needs to be done to merge an acquired business’s systems and platforms with the platforms you use. Your current software platform providers will likely have experience in completing integrations from whichever platform the seller uses to your platform. Check with your vendors to see if they can provide support during this process. If your software company doesn’t have prior experience in merging the IT platforms, you will need to determine how to export the data from the acquired company’s software and import it into your systems.
Bring experts from your existing IT team and business systems team into the decision-making process to discuss how to migrate the other company’s data, such as the company’s vendors, customers, employee records, financial records, and other material information. Be aware that it might not be possible to extract the data from the acquired company’s IT platform into a usable backup or for migration into your software platform. In these cases, you may choose to keep a license for the acquired company’s platform for a set number of years to ensure the company’s records are available as needed for regulatory or tax purposes.
Assess Human Resources
As discussed above, analyze the employee census of the company, how employees are compensated, and the benefits the business provides. Be prepared to compare these benefits to those your company provides. Create an analysis of the impact these will have on the business’s financial performance once you acquire it. Adjust any forecasts for these differences to get a realistic performance expectation. Review your workforce and identify employees who can absorb added responsibilities — this will help you determine which positions at the target company are unnecessary.
Develop a Communication Strategy
Plan welcoming orientation sessions for your new employees. Encourage team members to be inclusive and discuss any benefit changes, the organizational hierarchy, and your growth plans for the business. Employee uncertainty is always a concern during an integration, so have these orientation sessions ready in order to keep employees excited and encouraged about their new career path.
The more you can engage with employees prior to the acquisition, the stronger their bond with you will be. It is unrealistic to meet all the employees prior to closing, but aim to meet as many key people as possible. If the leaders of the target company show enthusiasm about the acquisition, their colleagues will be excited as well.
Always Be Prepared
Integrating a new business into your existing company is a challenging task. However, if executed properly, it can provide a great return for your company. As Benjamin Franklin famously said, “By failing to prepare, you are preparing to fail.” Taking key steps to establish a team to lead your acquisition strategy and creating a timeline of events and milestones will solidify the acquisition process and set your company up for success. By developing a coherent integration plan, your team will recognize that integration doesn’t start when the legal documents are signed but instead begins with learning about the company and comprehensively analyzing how the business will fit into yours.
Your integration team will also allow you to continue to focus on your core business and ensure that it is still meeting its own growth goals. Rely on your team to take care of most of the integration work. Focus on keeping the seller engaged in the process and aim to prevent any fundamental personnel changes that would hinder the projected growth of the company you are acquiring. Make sure you have clear acquisition goals and consider hiring an investment banker to help you streamline the process to ensure your acquisition is as smooth as possible.
1. “How the best acquirers excel at integration,” by Rebecca Doherty, Oliver Engert, and Andy West, McKinsey & Company, January 1, 2016.