In our recent M&A Chat interview with David Lewis, when reflecting on his extensive experience in the worlds of finance and M&A, he notes he would tell his former self, “know what success looks like before you get into due diligence.” This seemingly simple advice is, in fact, not always common practice — especially with the ever-increasing trend of “green” practitioners putting their heads down and relying heavily on old M&A checklists and playbooks.
David’s push for a solid philosophical business foundation leads to prospecting the right accounts, so practitioner time is spent more efficiently, resulting in the achievement of a high hit rate. In addition, because deals move quickly, it is critical for all stakeholders and team members to be aligned around the deal thesis and specific success benchmarks, thus allowing teams to be both prepared and competitive when the right opportunity arrives.
With this in mind, alignment and shifts in your target selection are both major paths to knowing what deal success looks like before getting to due diligence.
Why You Should Ditch Checklists and Embrace Scorecards:
One prominent strategy for cultivating a strong foundation is to move from checklists to scorecards when selecting targets. Of course, selecting a target depends on the deal type and mandate from the top. For instance, if you are engaging in a roll up strategy, target account base, operating synergies, and retention are critical. If you are initiating a build vs. buy strategy, the target’s products and current team, as well as considerations for successful integration, are paramount. In either case, moving from a checklist mentality to a more comprehensive and thoughtful scorecard process is extremely beneficial to overall success.
Specifically, Lewis recommends leveraging a M&A project management platform, such as Midaxo, to generate a scorecard aligned around the deal thesis and overarching strategic goals. This scorecard is then regularly referenced and used from the day one call with the target all the way through due diligence. Teams revert back to the scorecard the more they learn about the target. Within this system, alignment around, and focus on, the deal thesis is inherently created. As a result, the shift from a checklist to a target scorecard increases the rate of clean and successful integrations and deals. In addition, this best practice allows for complete risk assessment.
Not surprisingly then, scorecards work to combat one of the biggest issues of due diligence, namely lack of alignment. This alignment relates to both the deal thesis and the timing of the deal process; if your teams are not aligned, your timing is most likely off as well. Lewis suggests regularly tying back to the initial scorecard during diligence weekly or biweekly stand ups to increase and reinforce alignment and focus. If a score changes, this change needs to be highlighted and explained during the meeting. Again, this increased communication around the same benchmarks and pivotal aspects of the deal will allow for a smoother due diligence process, and we know the faster the due diligence, the better chance you will be a competitive acquirer.
The M&A process, like most business processes, must be regularly re-evaluated and adapted for ultimate success. One shift to improve your target selection and ability to extract maximum deal value is to embrace target scorecards and align your teams around them.