If your company is generating more than $1 million in earnings, there’s a chance private equity groups and strategic buyers will express interest in an acquisition. In some cases, this acquisition will require your company to be integrated into another one.
Post-merger (or post-acquisition) integration is one of the key factors determining whether an acquisition will succeed or fail.
It can be tricky, though, because a successful integration is just as dependent on less obvious factors than it is on the synergies that make an acquisition so attractive.
In this blog, we’ll explain the importance of preparing for a successful integration beyond realizing synergies, and fill you in on some of the do’s and don’ts we’ve seen during and after the transactions we’ve facilitated at MidStreet.
Let's get started.
Why Prepare for Integration?
You may be wondering why post-acquisition integration should be a concern of yours if you’re going to sell your business.
Some business owners aren’t quite ready to retire when they decide to sell their businesses. For some, it can be more appealing to sell a majority stake in the company to a private equity group or strategic buyer and let them grow the company over the next few years.
Specifically with private equity buyers, rolling over some of your equity from the sale into the new company could allow you to see a second and even third payday in the future when the company is sold again for twice its original value.
If this is the route you’d like to take, a successful integration is crucial for you to get that second bite of the apple.
Even if you’d prefer to exit the business and retire after the deal is done, that doesn’t mean post-acquisition integration shouldn’t be a concern of yours.
The employees, reputation, and legacy of your company are likely still important to you, so preparing for a successful integration process remains something to prioritize.
While it is called “post-acquisition” or “post-merger” integration, working towards a successful integration process begins long before the company is transferred to its new owner.
For the purposes of this blog, we’re going to focus primarily on the operational functions of your company that will need to be integrated rather than putting a focus on recognizing revenue synergies, cost synergies, scalability, etc.
To learn about how companies recognize synergies through acquisitions, check out our blog “What Is a Roll-Up Strategy?”
To help you prepare for a successful integration, let’s take a look at some of the important aspects of your company you should prepare to be integrated with your buyer.
Integration of Company Cultures
The integration of company cultures is the single-most important component of a successful integration process.
When two companies have significantly different core values, priorities, methods of communication, etc., it can be virtually impossible to integrate them without creating hostility or losing employees.
This is especially true when a much larger company acquires a smaller one. Larger companies tend to prioritize efficiency and technology, and generally have a more “corporate” way of operating. This can create problems when they acquire a smaller company with employees who aren’t used to a corporate environment.
Oftentimes, employees in the company being sold are already concerned about the acquisition before the integration process even begins. If the acquiring company steps in and introduces an entirely different company culture, it could be the last straw that causes employees to take their talents elsewhere.
Unfortunately, business owners and executives can be blinded by how attractive an acquisition looks on paper and fail to consider the crippling impacts a culture clash could have on the company.
Consider this example:
Company A is being acquired by a strategic buyer, Company B.
Company A has a work schedule that includes flexible hours and built-in remote work-days. Their company culture could be described as modern and familial.
Company B (the acquiring company) has always operated with a traditional 8 AM – 5 PM schedule, and does not offer their employees the option to work from home. Their company culture could be described as traditional and corporate.
Despite these cultural differences, there are some great synergies Company A can offer Company B, and Company B moves forward with the acquisition.
As ownership transfers and Company A starts operating under the branding and culture of Company B, some key employees find their new work environment far less appealing than they did when they worked for Company A.
They are no longer given the opportunity to work from home, and because of the elimination of a few redundancies, their familial culture starts to deteriorate.
After a few months, several of these key employees decide to take their talents elsewhere.
This causes huge problems for Company B as several of these employees were crucial to the success that made Company A so successful.
Before long, it becomes apparent that the culture clash had ruined any chance of a successful acquisition.
Even though the synergies lined up on paper, and the potential for increasing the company's value was extremely attractive, both parties failed to consider the importance of company culture in an acquisition, which ultimately caused a failed acquisition.
Recognizing these kinds of cultural differences before moving forward with a deal can allow both parties to plan for a successful integration, or decide if the deal is even worth pursuing.
An experienced M&A advisor can help with this by sourcing candidates whose industry, culture, location, etc. present strategic benefits and synergies for a successful merger.
Integration of Software
Another important (potentially difficult) part of the integration process is aligning the different software used by each company.
The two company’s ERP systems, accounting software, CRM software, HR software, etc. will all need to be merged, usually to match the software used by the acquiring company.
Integrating this software can be a drawn-out process after any acquisition, but there are a few ways to successfully approach this, including but not limited to:
- Custom Integrations: Programmers match the API code of a company’s software with the ERP system they’d like to integrate with. This will likely require substantial IT resources and will take some time to accomplish.
- Integration Platform as a Service (iPaaS): This is a cloud-based solution that creates and implements software integration. Using iPaaS, a company can customize workflows and connect them to cloud-based applications without installing or managing hardware. This type of service can be costly, but is valuable in its ability to eliminate data silos and integrate software across several departments.
- Native Integrations: Native integrations are applications that automatically integrate with others via application programming interfaces (APIs). Once these programs are integrated, data flows between the apps and become more available to users in different departments, i.e. using native integration of payroll and HR software.
Which of these options (if any) are right for your software integration efforts will depend on the type of software used by both companies, and how deeply integrated the software needs to be.
Integration of Branding
Deciding on how to integrate the branding of two companies can be difficult. On one hand, the company being acquired has their own branding recognized by their customers, and getting rid of that branding altogether could risk losing customer trust.
On the other hand, it may be easier to grow the newly acquired company under the established brand of the acquiring company. If a company was acquired for its customers, this can be riskier than if it was acquired to fulfill operational needs.
There’s also the option to combine the branding of each company into one new brand campaign. For example, when United Airlines and Continental Airlines merged, the new branding changed to Continental Airlines' logo, but kept United Airlines' name.
This kind of rebranding is typically done with large, public mergers and acquisitions, but it can also be a solution for smaller acquisitions if done correctly.
Integration of Payroll
It may come as a surprise, but successfully integrating two companies’ payroll systems and benefits programs can be a much more daunting task than you’d expect, and failing to do so can cause a ripple effect you’d prefer to avoid.
As we already mentioned, employees of a company being acquired can already feel scared or concerned about a change in ownership. They’ll be worried about losing privileges they’ve enjoyed, the success of the acquisition, or even losing their jobs.
Imagine you’re an employee of a small company being bought as an add-on by a private equity platform company. You’re already concerned about the changes that may be coming, and then when you get your first check after the acquisition, it’s lower than what you were paid under the previous owner.
This isn’t because the buyer decided to make pay cuts, it’s just the result of a poorly integrated payroll system that hasn’t been completely worked out yet.
But you don’t know that, and neither do your coworkers, and the whispering begins.
It may sound far-fetched, but it happens more often than you’d think.
The best way to prevent this is by preparing to integrate payroll systems and benefit programs long before the transfer of ownership, and communicate with employees about how long the integration process is expected to take.
Expectations for the seller’s responsibilities should be determined and understood by both parties long before the integration process begins.
There are two main factors determining how to handle the expectations for the seller after a deal is done:
Is the seller rolling over equity into the purchasing company and staying on in a managerial/consultant capacity?
Is the seller exiting the company entirely?
If the seller will be staying with the company in a management role, expectations for their responsibilities should be agreed upon before the transaction is completed.
It can be easy for a seller to put all their focus on getting the deal done and neglect to consider what they’re signing up for post-acquisition.
But as the excitement and anticipation of getting the deal done subsides and the seller fulfills a new role in the company, they may regret some of the things they agreed to regarding their new role and responsibilities.
When this happens, it can cause huge problems that prevent a successful integration.
To prevent this, sellers should be intentional about how they negotiate their employment agreement, and only agree to fulfill a role they’re comfortable with.
In cases where the seller doesn’t stay in the company after selling, they’ll still be required to fulfill certain training requirements set forth in the purchase agreement.
Sellers who are exiting the company should understand the extent of the training period they agree to. Neglecting to fulfill the training requirements won’t only hamper the integration process, but can also cost the seller thousands of dollars (if they cause a breach in the deal’s reps and warranties).
During an integration phase, it may be beneficial to designate certain integration efforts to some of your employees in leadership roles.
It’s fairly common for key employees in a company to head integration efforts in areas relative to them.
For example, your HR representative may be the best candidate to lead the integration of payroll and other company systems they were responsible for before the acquisition.
As responsibilities shift and change hands, it’ll be important to communicate with your staff about the changes taking place, who they should report to after the acquisition, etc.
Prepare with the Right Professionals
Because there are so many moving parts during and after an acquisition, there will inevitably be changes that take months to fully implement, even if both parties have done their best to prepare.
The best way to mitigate the risk of departments falling apart or losing employees during the integration phase is to communicate expectations, timelines, and changes as openly and honestly as possible.
If employees know beforehand that it will take some time for software, payroll, etc. to integrate, there won’t be as much concern when/if obstacles occur.
This isn’t to say everyone will be completely understanding, but it does reduce the possibility of employees feeling blindsided and help them keep their trust in you as well as the buyer.
An experienced M&A advisor can help you prepare for each of the items listed above. They’ll screen the potential buyers for your company to help prevent culture clashes, and walk you through the stages of preparation before your company is sold.
At MidStreet, we’ve helped business owners sell to strategic buyers and private equity groups, both of which often require some level of post-acquisition integration.
If you’d like to learn more about the successful integrations we’ve seen, contact us today. We can always get you started with a free business valuation.
From there, we can determine if we’re the best M&A firm to help you sell your business, and help you achieve your exit planning goals.