Unpacking the impact of a target's Go-to-Market (GTM) approach on the M&A process

The (go-to-market) GTM strategy of a company impacts nearly everything in the business - from positioning to sales and marketing to product implementation to customer service - and so has a profound impact on the economics of the business.

And therefore, for acquirers considering the acquisition of a product or technology company, the target's GTM strategy should be factored into the M&A approach.

Acquirers may have to think differently about how to diligence, value, structure and integrate acquisitions based on the acquirer's GTM, the target's GTM and how they'll integrate the two after the acquisition.

The McKinsey article here is also a great overview of the different GTM approaches, but with an emphasis on the product-led-sales (PLS) model.

We recently helped a corporate acquirer diligence an M&A target with a PLS model and designed the M&A approach specifically keeping the GTM in mind.

The comments below describe three different common GTM models and the M&A considerations for each.

GTM models and M&A considerations

1) Product-Led Growth (PLG)

PLG is a business strategy that focuses on using the product itself as the primary driver for acquiring, retaining, and expanding customers. In a product-led growth model, the goal is to create a product that is valuable and user-friendly and that encourages users to try, adopt, and pay for it.

Key characteristics of a product-led growth approach include:

1. Self-Service Onboarding: The product should be designed to be easy to understand and use without requiring extensive training or assistance.
2. Free or Freemium Models: Offering free plans or freemium models allows users to experience the product's value before committing to a paid plan.
3. User-Centric Approach: Understanding user needs, and behaviors to continuously improve the product and drive growth.
4. Low-Touch Sales: Instead of relying heavily on traditional sales teams, the product's value proposition and features should be compelling enough to facilitate sales with minimal direct involvement.
5. Data-Driven Iteration: Using data analytics to understand user behavior and engagement, which informs ongoing product development and enhancement.
6. Customer Success and Support: Offering resources and support that enable users to derive maximum value from the product, enhancing retention and customer satisfaction.

Multiple SaaS companies that I either currently use or that I've trialed use this approach. Familiar examples include Calendly, Notion and Canva.

Key focus areas when evaluating a target with a PLG strategy:

1. User-Centric Approach: PLG companies typically prioritize user satisfaction and customer success. Understand the target company's customer base, how they acquire customers and retain customers, and how customers engage with the product. Assess how this approach aligns with the acquiring company's existing customer-focused strategies.
2. Cultural Alignment: PLG companies often have a distinct culture that values user-centricity, rapid iteration, and data-driven decision-making. Assess the cultural fit between the acquiring company and the target PLG company to ensure a smooth integration of teams and values.
3. Product Synergy: Evaluate how the target company's product fits within the acquiring company's product portfolio. Consider how the products can be integrated, cross-sold, or leveraged to create new value propositions.
4. Data and Analytics: PLG companies rely heavily on data to drive decision-making. Assess the quality and availability of data within the target company, as well as the acquiring company's data infrastructure, to ensure a seamless transition of data and analytics capabilities.
5. Scalability and Infrastructure: PLG companies are built for scalability. Assess the target company's technology infrastructure, scalability challenges, and the potential impact on performance as the user base grows.

2) Sales-Led Growth (SLG)

Sales-Led Growth (SLG) is a business strategy that prioritizes using a dedicated sales team as the primary driver for acquiring new customers and generating revenue. In a sales-led growth model, sales efforts play a central role in attracting potential customers, closing deals, and driving business expansion.

Key characteristics of a sales-led growth approach include:

1. Proactive Outreach: The sales team actively identifies and reaches out to potential customers through various channels, including cold calling, emails, networking, and presentations.
2. Lead Generation: Generating and qualifying leads is a key focus of the sales-led approach. This may involve lead scoring, market research, and using various tools and techniques to identify prospects.
3. Customized Sales Process: The sales process is tailored to each customer's needs and pain points, often involving personalized product demonstrations, proposals, and negotiations.
4. Direct Sales Interaction: Direct communication between the sales team and potential customers is a fundamental aspect of the sales-led growth model. Building relationships and addressing customer concerns are crucial.
5. Complex Products or Services: Sales-led growth is particularly effective for B2B (more complex) products or services that require a deeper understanding and explanation due to their complexity.
6. High-Touch Sales: A well-trained sales team may be heavily involved in guiding customers through the buying process, providing in-depth information and assistance.
7. Relationship Building: Building and nurturing customer relationships are key components of the sales-led approach, aiming to create long-term partnerships.

Examples include: Salesforce, Oracle, and SAP

Key focus areas when evaluating a target with a SLG strategy:

1. Sales Pipeline and Revenue Quality:

• Analyze the target company's sales pipeline and assess the quality of its leads, prospects, and existing customers. Are there any concentrations of customers that could pose a risk if they churn?
• Evaluate the predictability and sustainability of the revenue generated through the sales process.

2. Sales Team and Management:

• Assess the capabilities of the sales team and sales management. Will they integrate well with your existing team, and are their practices and culture aligned with your organization's values?
• Consider how you'll manage any potential redundancies or overlaps in the sales teams after the merger.

3. Customer Relationships:

• Understand the target company's key customer relationships and assess their long-term potential. Will customers remain loyal after the acquisition?
• Determine if any contractual obligations or commitments are in place with customers that could impact the deal.

4. Sales Strategy and Processes:

• Evaluate the target company's sales strategy, processes, and methodologies. Are they scalable and adaptable to your organization's needs?
• Consider whether there are opportunities to optimize sales processes and leverage best practices from both organizations.

5. Sales Performance and Compensation Metrics:

• Review the target company's sales performance metrics, such as conversion rates, sales cycle length, and customer acquisition cost. Include compensation and incentive structures for the sales team. Identify areas for improvement and optimization.

3) Product-Led Sales (PLS)

PLS is a hybrid between PLG and SLG. In a PLS approach, the product itself plays a pivotal role in driving the sales process. This strategy is often used by companies whose products are self-explanatory, easy to adopt, and provide significant value to users right from the start - but also target high-ticket B2B and enterprise customers as a key driver for growth.

Key characteristics of a product-led sales approach include:

1. Self-Service Orientation: The product is designed to be intuitive and user-friendly, allowing customers to explore, adopt, and use it without extensive assistance. This generally appeals to the SMB (small and medium businesses) segment.
2. Inherent Value: The product offers immediate value to users, encouraging them to continue using and possibly upgrading to premium features or plans.
3. Minimized Friction: The sales process is streamlined, with minimal or no barriers to entry. Users can typically start using the product with a free trial or freemium version.
4. Low-Touch Sales Involvement: There is a sales team involved (the sale is not entirely self-service). But the sales team's role is more supportive than aggressive. They provide information, answer questions, and assist users, but the product's value does most of the selling.
5. Upsell and Expansion Opportunities: As users experience the product's benefits, they may naturally seek more advanced features or additional capabilities, creating upsell opportunities. This is where the sales team steps in, and tries to convert users with more advanced use cases to a premium model.
6. Data-Driven Insights: Sales teams leverage data on user engagement, behavior, and product usage to identify potential leads and guide their outreach.

Examples include: Slack, Hubspot.

Key focus areas when evaluating a target with a PLS strategy:

We had to design a different approach for the M&A target, given the difference in the business model compared to the PLG and the SLG models.

1) Comparable transactions:

A common valuation approach for a target is to find comparable M&A transactions and apply a multiple to the target in play.

Pure play transaction multiples are easier to find.

But with targets using a PLS model, we had to do more upfront commercial diligence and go much deeper - to parse out the business models before attributing multiples and valuing the business.

2) Data integration and analysis:

The data and tech stack becomes critical in the context of integrated product-led sales approaches since the customer segmentation tends to be "user action inference driven" not simply a demographic metric.

As part of diligence, the acquirer has to evaluate the target company's data infrastructure, analytics capabilities, and ability to merge data from various tools and platforms. This ensures that the buyer can effectively monitor and optimize the integrated customer journey.

Furthermore, since IT is almost always a centralized function, the acquirer has to ensure that it (the acquirer) too has the right data teams capable of delivering on the target's business model.

3) Forecasting synergies:

The finance and commercial team has to develop a nuanced understanding of how their combined effects will impact revenue, customer engagement, and operational efficiency.

Commercial teams have to analyze customer behavior, conversion rates, and the effects of cross-functional coordination deeper.

Acquiring a target with a PLS model might reveal opportunities for cross-selling and upselling to the acquirer's existing customer base. Forecasting synergies could also involve estimating the potential revenue increase from these strategies, as users from both companies may be interested in complementary products or services.

There may be also cost synergies with consolidating the salesforce towards one that can effectively sell in the new operating model.

4) Integration strategy:

In M&A transactions involving companies with hybrid approaches like product-led sales, the integration strategy should account for aligning cross-functional teams, technology stacks, and customer journeys.

If the acquirer follows one of the other models (PLG or SLG), and acquires a company with a PLS model, an integration plan should address how to unify product, marketing, and sales functions, and optimize technology tools for seamless data sharing.

This is important to ensure a consistent and positive customer experience throughout the transition.

Otherwise, the acquirer risks confusing/alienating customers from the target if they deploy a one-size-fits-all customer segmentation model.

Conclusion:

The GTM model holds significant implications for M&A. Different stages of the M&A process (diligence, valuation, structuring, integration) have to be designed keeping this in mind.

Companies with compatible GTM approaches often find smoother integrations and more accurate synergy forecasts and can leverage shared customer-centric delivery and sales methodologies.

On the other hand, differing GTM models might require extra careful navigation, emphasizing the need for thorough due diligence, valuation and strategic planning.

Recognizing the impact of GTM strategies on M&A can help leadership teams to better anticipate challenges and capitalize on M&A opportunities, and realize synergies and long-term growth.

#mergersandacquisitions