5 Things You Should Include in Your M&A Playbook

Five Things is a series of thoughts on the art and science of finance, analytics, and corporate development, with occasional forays into leadership, communication, and other topics for the well-rounded professional

I have often remarked that running an M&A process is an exercise in "project management in its lowest form." Traditional, by-the-book project management (you know, the kind that is managed by those super-organized, lean six sigma-types) just doesn't cut it in most of these situations because:

• It is usually being run by people with skills more suited for strategy, finance, and negotiation activities vs. project management rigor.
• The timelines, requirements, and deliverables are largely outside of your control, subject to the whims of others, and can change constantly (especially on the buy side.)
• Deal-makers love to "change the game" - it's part of the game!

Given this, my plan of attack is simply to 1) think one or two steps ahead, 2) write your plan down, but lightly, and in pencil and 3) communicate, communicate, communicate.

That being said, I still am a big advocate for developing an M&A playbook for your organization. Using the "seat of your pants" method or the "we've always done it this way" approach will not cut it in an ever-evolving organization and environment. You need to write it down and you need to do the work to get alignment!

A good M&A playbook will help your organization execute the right deals at the right price and will optimize the use of internal and external resources. So here are my thoughts on 5 things you should address in your M&A playbook:

1. Break down the discrete steps, decision points, and approval rights of a deal

The first thing to do is to build a common understanding of the (usual) phases of a deal process. For instance:

• Target engagement
• Due Dilience
• Negotiation & Signing
• Sign-to-close

For each of these steps, define when the stage begins and when the stage ends, what activities are "usually" done in this phase, and the decision points - who needs to say "yes" to move forward? For example, Target Engagement could end when the Business Sponsor approves a non-binding bid or LOI.

2. Define the "who"

The key items here are:

• Who are the sponsors and decision-makers?
• Who will be represented on the "core team" and what are their responsibilities, including project management, acquiring resources, etc.?
• Who are the key resources that will be needed for certain phases (e.g. due diligence)?

3. Lay out roles and responsibilities

Here is where you go beyond the "who" in a given phase to define what each individual or group is specifically responsible for. What is Finance doing? What about Legal? How about sSrategy? Be specific!

4. Outline the required elements for evaluating a deal

I have found it helpful to lay out a specific outline that defines the elements of a comprehensive and effective set of information and analysis to aid the project sponsors. Having this template (it can literally be a PowerPoint template) in place assures that your sponsors will get information and analysis that is consistent deal-by-deal, as well as relevant, comprehensive, and predictable.

5. Discuss the requirements around pricing and financial evaluation

The leaders involved in a deal should (as clearly as possible) understand the financial yardstick(s) that will be used to evaluate and price a deal. Misunderstandings here can lead to killing deals that should have been brought forward or bringing forward deals that should be quickly killed.

Your financial criteria should talk about what measures are importance (IRR, NPV, EBITDA multiples, EPS/ROE/ROIC accretion/dilution, etc.) and what hurdles would need to be met for an "acceptable price" (e.g. "IRR must be 15% or higher", "cannot dilute EPS by more than 2 cents in the second year").

Anyone who has practiced in M&A long enough knows that the "rules are made to be broken" axiom often comes into play. If a deal is attractive enough, breaking a financial hurdle can be forgiven. Don't let that detract you from having the discussion around measures and hurdles. Rather, put some language in your playbook that lays out the considerations and criteria for breaking the hurdles, like strategic importance, anticipated market perception, or extra-high-confidence synergies.

In Conclusion

Getting your M&A playbook in shape is a decent-sized effort, and getting everyone aligned is sometimes an even-bigger effort. In addition, the upkeep of the playbook is not to be taken lightly as your organization evolves and gains more experience in M&A. BUT there is still great value in the playbook in supporting some of the potentially largest-impact decisions your company will make.

And to the victor go the spoils:

Until next time. . .

[Insert closing catch phrase here] Work hard, work smart, and keep in touch!

With 20+ years of experience helping firms make strategically and financially sound decisions that drive profitable growth, Joe Krekelberg has held finance, corporate development, and actuarial leadership positions in multiple industries. He is located in the greater Minneapolis-St. Paul area and can be reached at [email protected].