How do you ensure a successful M&A transaction? This question is not unique to managed services, although our profession seems immune to learning the truths of history when it comes to why M&A deals succeed and why most do not. We’ve talked about M&A in the managed services profession for many years, only to see the same failed methods being attempted over and over again.
Yes, there have been a few successful M&A transactions in our space, and these should be examined and copied. But, the vast majority of deals have less than optimal outcomes and are easily avoidable. I want to explore one of the most natural methods you can use to avoid common M&A pitfalls.
Money is Not The Key Ingredient for M&A Success
Before I get a ton of emails on this topic, you do need capital to be in the M&A business. We do not live in a world where you can buy a valuable asset with no money down. The real estate financial crisis of 2008-2009 should have made that abundantly clear. My point is that money may fuel a lot of M&A activity, but it does not guarantee a successful outcome.
Perhaps that also part of the problem. M&A brokers and professionals tend to count their success in numbers of closed deals. Getting to the closing date and executing a purchase agreement is the goal for these people.
We Need a Different M&A Success Metric
For me, I count the longevity of the transaction, accounted for in several ways, but indeed the length of the deal post-closing, the longterm success of the surviving entity and overall financial performance of the company are great metrics for determining M&A success. You cannot determine M&A success based on how many failed M&A deals you’ve put together; this is not a metric for success.
Integration is Fundamental to M&A Success (Pay attention to this section!!!!)
When I look at an autopsy of M&A deals (even those deemed successful because they closed), a lack of integration is typically the cause. What this means is you can still have a deal that reached a closing agreement, and may even have survived for a period of time afterwards, but ultimately fails because there was no integration strategy or no integration success.
Integration strategy comes first. You need a plan for how to incorporate an acquisition into your MSP business. An integration strategy requires a detailed analysis of your MSP practice first (yes you heard me correctly) before you can even contemplate acquiring another MSP business.
It is surprising how many well funded MSPs are out there who have less than stellar policies and procedures; without this you have no business pursuing M&A deals. This is like a stranger in a new city becoming a tour guide. Integration is critical to being able to approach a MSP and convincingly saying we can buy and integrate your business.
Even mergers will involve a winner and loser; meaning duplicate systems, people, and processes will have to be dealt with during the post close “integration” phase. Without a dominant process already in place, no M&A deal has a high likelihood of success. If you are a potential MSP seller, this should become your number one area of due diligence