Heads up for ECM, BPM & BPO software executives by Mark Edwards, CEO - Document Boss
Boss M&A Whispers Blog: When Methodology Overrides Objective
Administrative Overload for Venture Capital Organisations
The sheer number of acquisition opportunities that investors and trade buyers are likely to be presented with can create quite an administrative overload. I recently spoke to one US based Venture Capitalist organization that, last year, looked at 20,000 companies. They invested in just 12! If my maths is correct, that means that they invested in just .06% of the companies that were presented to them. Most Investment companies have a proactive, telemarketing team (although they don't go by that title) that will continually call owners and majority shareholders to gather information (over time) and to try and establish a connection with companies in their area of interest.
The sheer volume of M&A processing these companies undertake, on a weekly and monthly basis, leads them to adopt template guidelines in their selection criteria. The vast number of businesses being qualified also necessitates employing "junior" executives to undertake the initial stage sifting. In Investment companies, these junior executives are often called "Originators"; their job is to sift the mass of opportunities and pass companies that meet certain criteria forward to their more senior colleagues.
The sifting by junior executives can also happen with trade buyers, where the selection criteria, although not quite a tick box list, is not too far removed from one. As I have repeated ad nauseum, the problem is, that buying a company and understanding its true value cannot be achieved merely by a simple multiplication sum. Unfortunately, too many people behave in a way whereby their selection methodology overrides their true objective. They approach buying a company in a way similar to the way most people approach investing on the stock market; they judge what they are able to measure and miss what is often important because of the sheer volume of numbers they handle, coupled with their limited level of experience and skills. It is too difficult for them to quantify, so, instead, they use ‘rule of thumb’ guidelines, based mainly around financial performance.
Putting the Accountants in Charge of the M&A Process
Another factor is that a high percentage of the people advising in the M&A process - and quite often making the decisions - come from a financial background. For some reason it's seen as wise to put the accountants in charge. Sure, they should play a part, but not dominate. For me, it's a bit like appointing a physiotherapist to manage professional football teams and allowing them to pick teams based upon which players they assess to be the healthiest and most robust. It's hardly a winning strategy that any football teams that I am aware of would adopt.
Much of what I have observed over the years has come from my direct interaction with investors and buyers. I have found that the questions people ask, reveal a lot about their thinking. The information most commonly requested by potential buyers - often before they even understand what the company does - is EBITDA, revenue and profitability figures. I am not saying an analysis of the company’s financial performance should not be part of the process as that would be ridiculous. However, when companies are constantly trying to make an almost exclusively financial match against pre-determined performance criteria as their main means of decision making, you know something has to be wrong.
Where are the Experienced Executives?
Where are the experienced executives with real, in-depth sector knowledge? I have had too many conversations with well-educated, junior investors who have little more knowledge than the company pencil sharpener. They sound well-informed for about 5 minutes, until their veneer-thin knowledge starts to peel away and they revert back to the same old cliches of EBITDA, revenue multiple calculations and templated selection criteria, all of which have little real world practical value.
Strategic acquisitions need executives who have a lot of practical experience and common sense, who can be flexible in their thinking and can make an evaluation from many different perspectives. A company is a multi-faceted, living, breathing organism, populated with living human beings. Therefore, when calculating its true value, there are many other elements that come into play and purely bean counting won't cut it!