Posts tagged with: integration failure

Portfolio Integration Failure is Private Equity Top Concern

Integration Failure

A 2014 Deloitte survey of private equity groups raised an area of concern that has always been costly to buyers and sellers but not addressed. In this survey, 54% of the private equity groups see the failure to integrate upon acquisition is an area of concern. They said:

“the inability to integrate effectively ranked not only as the most critical area of concern when pursuing a transaction, but also THE top concern for companies striving to achieve success in an M&A deal.”

And 87% of these survey participants identified the risk of integration failure as their 1st or 2nd most important concern.

Why is portfolio integration so important to private equity groups?

In pursuing a deal, the assumption is that portfolio integration will ensure that the goals, assumptions, and returns that the acquisition promised you, are achieved.

What does not get addressed is the planning and process of integration to achieve those goals, assumptions and financial returns. Acquirers over simplify the integration. They assume that integration involves visiting the acquisition for a week/month for six months and then they’ll naturally be acclimated and assimilated into their processes and culture.

The costs of not addressing integration before and after the deal

  • The cost to buyers – the deal implodes before you break even on the investment
  • The costs to sellers – the deal implodes before you achieve your earn out

In terms of survival, the best research we’ve found says:

  • Businesses under $5M at sale – only 3:10 deals survive three years
  • Business over $5M in Lower Middle Market at sale – only 5:10 deals survive three years

But that means up to 50-70% of all transactions result in a net loss! That’s a high risk to incur on every deal for both buyers and sellers.

Areas of Integration

That high risk of integration failure is avoidable. Successful integration includes a range of activities over an intended timeline leading up to the transaction and through a transition period. Start by opening a discussion in advance of the transaction to scope out differences and changes to address throughout integration. The basics start with:

  • Corporate culture differences
  • Employee retention and integration
  • Economies of Scale
  • Geographic Differences
  • Cross-selling Opportunities
  • Reporting structures
  • Accountability

Tradeoffs

Buyer and Seller should agree on who should be involved in the integration process. When the seller is engaged in a positive way, he has a voice to ensure company success, team integration, and he can be a champion of the deal for everyone. However, when the seller is engaged in a negative way, because he may be opposed to the plan terms and outcome, he may unintentionally sabotage the plan.

Seller Sabotage

Seller sabotage is real. But it’s rarely intentional. Without a transition plan and integration plan, the seller maybe just can’t let go. There may be too much friction between how she ran the business and how the acquirer or private equity group will run the business.

Most owners figure they can plan for their reinvention ‘after they get the deal done’, which is too late. Without a reinvention plan of purpose and passion pulling them forward, they fall back to what they have always known and their role in the ‘business family’ they have always had – which immediately handicaps integration success and their total return on the transaction itself.

Your integration plan can mitigate or prevent seller sabotage. Incorporate an integration plan into every transaction and transition plan.

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