December 2010 Archives

I now want to discuss how to acquire small firms from a transaction point of view. 

One of the real problems for small firms is that there is no way out for the founders.  The firms usually cannot continue without them, and cannot afford to provide them a retirement.  Therefore, they must work until they can no longer sustain their activities and close the firm upon their retirement. 

On the negative side - small firms rarely are worth (as a cash deal) what the partners need to retire.  Moreover, they do not want to sell into a situation where they must exert all the effort to pay for their retirement, i.e. they will not take a great deal of risk in the sale.  I'll come back to this topic at the end of this entry.

So how do we make them successful if we should decide to acquire such a firm?

As stated in the previous entry on this topic, you as the acquiring company, will have to build your Customer Intimacy capabilities and assure its success if the acquisition is to provide you unique IP and offers for your portfolio in order to provide stronger execution and differentiation.  Therefore, you must have your operational processes and procedures in place and working to take advantage of these acquisitions, and make them successful quickly. 

Here's how to accelerate the "time to value":

Focus on True Solutions™ Creation - you must be able to quickly (within a few weeks, and this effort can start during the acquisition process) create the Service Chains for the new acquisition.  This will assure that the new IP and/or differential is positioned correctly within your portfolio, and that the new deals drive the account impact you want. Furthermore, this will assure that your methods for up-selling, managing the account for Trusted Advisor actions and harvesting (pulling through products) are being used effectively. Finally, it will assure that the talent your already have can work more seamlessly with the new offer(s).

Develop a Comprehensive Go to Market Strategy  - You must have your "getting into meet executives", Idea Selling, and selling talent trained and ready to take on the new offers.  As we have discussed before, selling True Solutions in the Intimacy Engine business model is a specialized set of activities, and these must be working effectively and able to take on the new offer(s) immediately.

Accelerate Talent Development  - You must take the new employees through your methods that support the Intimacy Engine immediately. They must quickly become part of the well oiled machine that you have. Remember, Intimacy Engine is more like the Army, where the boots on the ground make the decisions and these newbies must do it your way, or you will lose the advantages the acquisition provides.

Deploy Account Management for Building Partnerships, Trusted Advisor and Harvesting Ability - You must have your integrated account management model working to again take advantage of the new differential you have, or it will not be the multiplier that you want.

Integrate Talent Management and Review Processes - As people are added to the organization through acquisitions (or any new talent for that matter), you must be able to put them into your talent management, career paths and review process if you are going to get the most out of them, and they are going to be a good fit within the organization.

If you do this correctly (and again, we see all the above abilities as R&D investment, like those for a new product line), you will be able to quickly take advantage of the new differential and talent and start driving value creation activities to generate substantial revenues with the acquisition right away.  In that you are getting small acquisitions, it is important that you greatly increase their revenues within the first months of having them.
 
Now let's address the question of how to structure a deal with these particular entities that are really looking for way to retire (not right away, but they need to know they can get out of the house at some point).   As we stated, they need more than they are worth today, but cannot take all the risk of the growth for the pay out.  We suggest that it is a continuum of growth risk that drives valuation and payout ability. As you get more comfortable with your ability to grow them quickly, you will be more willing to take the risk of growth upon yourself.  This will allow them to be able to put together deals that will lead to actually receiving more than their company was worth at time of deal. Isn't that why you acquired them in the first place? So what becomes important is getting the first few deals done.  One way we have seen is for the acquirer to guarantee (this is again is a continuum) the payout over a number of years.  Let's say the firm is worth on paper $10 million today, but the partners will need $17 million to retire. Then the issue becomes how much risk will you take for the difference as it is paid out of time.  Of course, your size helps with the guarantee.  Remember, they will not take a great amount of the risk; therefore you must have the above abilities to enable you to take the risk (at least enough to get them comfortable).

This is a key sticking point in negotiations, especially in small firm acquisitions, and I hope we've shed some light on how to make such an acquisition successful.

I am often asked what the role of acquisitions is in the effort to move through the Customer Intimacy Engine™ journey more quickly - can it help with building critical mass in developing customer intimacy capabilities? 

First, let's discuss the importance of critical mass for the success of the effort.  As you create True Solutionsin specific market segments, you'll begin to have success selling the solutions (assuming you have an appropriate portfolio strategy and are leveraging the power of Service Chains). As success builds, you'll of course have to be able to implement these solutions, and build Trusted Advisor relationships to enable the harvesting of the accounts. 

These actions will require not only the appropriate talent (both numbers and ability), but the talent must also be able to perform as planned.  This critical mass will be the difference in meeting your expectations and failing to launch.  Please try to view that getting your organization ready for action - we might term this your customer intimacy workforce - requires that your R&D spend will be just like with a new product.  You wouldn't take a product to market that you could not manufacture in the volume necessary for success.  Also, remember how many companies view talent today - they wish to minimize the number of people as much as possible as one measure of success.  Therefore, getting this correct and getting support for the hiring (and there may be significant hiring) is crucial.  

This is further complicated by the number of True Solutions™ you are taking to market and the number of market segments you are working with.  Like many issues in the journey, the best approach is somewhat counter intuitive. 

Let's divide the acquisition strategy into two categories:

  1. Acquiring products to strengthen your pull through opportunities, that is to say, getting more products that can be pulled through your Customer Intimacy Engine™ model.  Although this is an important topic that can positively affect your Customer Intimacy Engine™ business, most companies have good processes in place to manage these acquisitions.  Therefore, we'll skip this category.

  2. Acquisitions of professional service capabilities to assist accelerate the development and execution of your Customer Intimacy Engine™. Professional service people have many of the skills you need to build and deliver the front end of your True Solutions (sometimes the entire True Solution, depending on the solution itself).  They have not worked in the environment you are creating.  Therefore, the creation of critical mass - that does exactly what you want the way you want it done - must be created by you.  That is to say, you must bring in resources and develop them (form them; train them; lead them; manage them; coach them; reward them) into the force you need.  Therefore, large professional service acquisitions early in the journey can be detrimental to the effort of building the force you need. Large acquisitions could swamp your teams, methods, approaches, etc.  Let me make a quick comment if you must make a significant acquisition (there could be political reasons for this or need to show significant revenue quickly) it can be accomplished but you must undertake the following to an even stricter degree. Then, you might ask: "Is there no value to Professional Service Firm acquisitions?" Yes, there is, and it can be very powerful.
In the 17 years we have been working these issues, every company we have assisted required the development of offers (True Solution) that they did not have the expertise to create and deliver.  Therefore, acquiring small Professional Service Firms with specific expertise to assist in filling you're your portfolio can be very important. But, and this is a critical caveat, these are acquired differently.  Usually companies do acquisitions to gain immediate revenue and/or margin (taking out a competitor and cutting the overhead).  These approaches focus on large deals (most M&A people believe it is just as difficult to get a large deal as a small deal, and large deals make better market valuation impart).  As stated, these are small deals where you are buying expertise (IP and people) more than revenue, even though these firms do have revenue and clients that can be leveraged right away.  The acquisition target is chosen because it can enable you to provide better offers that allow you to work above the Safety Line more quickly than your competitors, thereby allowing you to build intimacy more rapidly and move more of your customers through to the account harvesting phase more quickly.   But acquiring these firms has their own difficulties, and integrating them quickly creates their own challenges.  I'll discuss these challenges in the next entry, which will focus on the successful acquisition and integration of professional service firms.

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This page is an archive of entries from December 2010 listed from newest to oldest.

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