I am going to pass on a valuable secret acquisition weapon to you! While you don’t see me issuing press releases and publicly announcing who is buying who, I’ve been involved in scores of confidential buy/sell transactions over the past two decades. I love matching family companies with other family companies and making great culture fits where everyone makes money and is happy!
What I came to realize was that too many marketers were wasting needless hours contemplating, studying and even structuring and massaging acquisitions that simply were not good fits. Their desk was being cluttered by every Tom, Dick or Harry broker sending out multiple solicitations, so all of sudden growing marketers were faced with scores of opportunities. The families would spend hours talking about deals, going around in circles. I knew I needed to do something to get them clear and unstuck.
I’ve been a believer in rating matrixes, using them in credit and project prioritization for years. So my solution to get them unstuck was to help each family create a rating matrix to filter acquisitions. Since each company’s sweet spot and strategy is different, and strategy is fine-tuned and even redirected over time, each matrix is customized to exactly match what the company truly needs to catapult to the next level. And best of all, you don’t need me to do it! Here’s how…
First, in general, the components of the matrix should include preference in geography, sectors/specialties, size, business core values/culture fit, physical assets (with specifics), technology, and people assets (with specifics). You can add or subtract, making the matrix fit your exact needs.
The act of purposefully creating the matrix as a family team allows for meaningful dialogue and unveiling of differing views and preferences. The team approach gets those differences out on the table where they can be dealt with effectively and consensus and agreement built. It’s far better for these discussions to happen in a board room building the matrix prior to any emotional pressure of an eminent acquisition while everyone still has cool heads!
For example, I was working with a family where suddenly a mixed wholesale and retail opportunity had presented itself through a broker. This family had sold off some retail years before so was totally out of that sector. While half the family loved the idea of a retail presence, the other half was not thrilled with going back into a situation with so many employees again. This raised healthy discussion over the family’s objectives and different ways their volume and profit potentials could be achieved.
As the family gains clarity, I’m a stickler for including some sort of Return on Assets (ROA) component. Any acquisition should incrementally add to ROA and not dilute. I’m not opposed to buying distressed situations, but the forecast must show the end result increases the overall ROA on the combined operation. If the acquisition lowers the ROA, the acquisition will effectively lower the overall value of the family’s holdings, making their pre-acquisition assets LESS valuable than before the purchase. Obviously, this defeats the objective of creating family wealth!
It’s a good idea once the family has created the matrix to have trusted outside eyes review it before putting it into active use. This can be your outside CPA, a trusted banker, myself, or other professional you trust.
In the case I mentioned with the retail discussion, the broker had taken super aggressive license with add-backs. In fact, as we reviewed the package, an expert on my team said he would be embarrassed to present a package with add-backs listed by the broker. So as we reviewed the retail assets for the family, the true cash flow was far less than what had been represented. (By the way, we never do that in a Meridian package. We believe in being forthright since most of the people we sell to remain our clients over the years.
I mention this situation with the crazy aggressive add-backs because you must be really careful with how you rate opportunities if using a “doctored up” solicitation package as your basis. But at least using your matrix, you’ll have a preliminary score. Your matrix score may later be lowered (or sometimes increased) during your due diligence process. The important point is your matrix allows each opportunity to be scored and compared objectively, so your decision making will come from an empirical data system, not just emotion and gut feel.
With the matrix in place, and your 1-5 rating system, each opportunity should be scored by at least two people (CEO and CFO are typical). If only one person scores, you miss the valuable dialogue. Some families have a 2-3 member team do initial scoring, and then based on a minimum threshold, involve more family owners only if a potential acquisition meets the minimum threshold score. This two-tier system has proved useful and helpful to families.
I often get questions about weighting the criteria. I like using a weighting system for your criteria based on your family preferences. Again, use the team to create your weighting factors so that everyone is “bought in” to the methodology because they created it. That stops most arguments before they begin (not that any family has squabbles – LOL!)
If you have questions about creating your own Acquisition Matrix, please feel free to call me at 817-594-0546. In the meantime, hoping you make this your best year ever