Michael's M&A Playbook: 9 Tips for Successful Performance Improvement Plans
There are different reasons for M&A transactions, but often, the acquirer believes that they can improve the financial results of the target company. To achieve them, companies develop a business case that includes operational and financial improvements. Those plans can range from minor operational modifications to significant synergies or a complete restructuring. Here are a few tips from my M&A projects that will help you to successfully calculate and implement those plans.
Tips for Your Next Performance Improvement Plan
Be careful with your business case assumptions and discuss ideas with the target - At the beginning of the M&A process, there is certainly a risk of overestimating synergies and underestimating necessary efforts for the operational and cultural integration. Most of the time, business cases during M&A transactions are too optimistic. Remember that you have limited information and access to key people during the due diligence phase. Ensure that you are not too aggressive with your initial assumptions. Be cautious in your estimates, and include a risk adjustment. I have seen risk percentages up to 25%, especially in business cases that assume significant cost savings. Another helpful idea is to discuss some of your ideas with the target company. Often, they have already considered some of them and can give you their experience.
The change management team needs to work closely with the due diligence and integration teams - Those are the same people in smaller companies, but in bigger companies, you may have different groups during the due diligence, negotiation, integration, and restructuring phases. Make sure that the teams exchange information throughout the M&A process. I have often seen finger-pointing between the pre-transaction (i.e., due diligence and negotiation) and the post-transaction teams (i.e., integration and restructuring), which never helps to perform better. Once the probability increases that the M&A transaction will be successful, start with regular meetings between those teams.
Work with HR to identify and retain key talent - Talent management is absolutely critical in all change projects. One of my management rules is that the right people in the right place can make anything work, which is especially true for restructuring projects. Work closely with HR and ensure that you identify and retain the talents throughout the restructuring process and afterward. Two helpful tools are incentive programs (with a link to the key metrics of your change project) and stay bonuses. Consider hiring outside experts if you don’t have the talent in-house.
Communicate actively with all stakeholders - Change is difficult and affects often many people. Make sure that you understand who the key stakeholders are and that you keep them up-to-date. Talk about why you change specific things and the benefits for people, teams, and the company. Be open to feedback and address concerns. Everybody will ask themselves how the changes will affect them personally. Don’t assume that everyone knows what is happening and for which reasons. Be proactive and clear in your communication. One of my communication rules is that you cannot overcommunicate during significant changes. If you are interested in successful change management, read more here in my article.
It's crucial to have tight control of the progress at the beginning - The earlier you understand what is happening, the better. Have frequent check-ins and start with weekly status calls with all involved teams. Ensure that you have SMART (specific, measurable, achievable, realistic, and time-bound) goals and get updates on all significant quantitative and qualitative aspects. If everything goes as planned, you can change it later to bi-weekly or monthly meetings. Depending on the size of your target and how much you want to change in the improvement plans, the team structure can be complex with people in different legal entities, time zones, and departments. Develop a status template that everybody uses and follow an agenda in your calls. Don’t try to solve everything in those calls. They are here to update everyone who is involved, and you can set up other calls to work on specific issues.
Continue updating your plans - You probably have started with your initial improvement plans and business cases early in the M&A process. Step-by-step, you will get more information where you can update the assumptions. After the closing, start a monthly forecasting process where you update the business case with actuals and new forecasts. Life is messy, and plans are always wrong. Make sure that the latest business case reflects up-to-date information. Do not fall into the trap of forecasting as management expects; forecast what the teams think to be realistic.
Focus on predictive indicators and not only actual results - Very often, there is a significant timing difference between the assumptions of performance improvement effects in the business case and the actual results. It doesn't automatically mean the results will not come, but they may arrive later than expected. Predictive indicators will help you to understand the timing effects better. Using a combination of leading and lagging indicators is generally a good approach to improve your reporting. You can work with your FP&A team on how you can implement this.
Apply the concept of sunk costs - If the financial outcomes and predictive metrics show that the results are significantly worse than the initial assumptions, don't throw good money after bad. Consider cash outflows in the past as sunk costs, meaning you cannot change the past, but you can make better decisions from now on. Reevaluate the situation, and make new plans based on updated information. It sounds easy, but many studies show this is not happening. Especially people who approved before the M&A transaction have (emotional) difficulties accepting bad news.
Motivate people throughout the process - Change can be a challenge for many people. When you work on performance improvement and restructuring actions, start with quick wins and include milestones. Achieving things is motivating very everyone and will show that there is progress. Be clear and data-driven but also optimistic in your feedback. One of the elements of leadership is to work with your teams to develop solutions. Make it clear that having a problem is not a problem; not solving it is.
Be Resourceful and Flexible in Your Approach
In almost all of my M&A transactions, life after the company's purchase turned out differently than we thought. The most crucial success factor is reevaluating the situation and developing new ideas. Organize brainstorming meetings or workshops, and discuss various approaches and solutions. There are many ways how to achieve goals. Stay positive. You can make it work!
There are many other things that you can do for a successful performance improvement in the post-merger phase, but I hope that these tips will help you. Feel free to contact me to discuss specific mergers and acquisitions examples.
Do you need help with a business case template/performance improvement template? Here is a link to a free income statement and cash flow model where you can include performance improvements.
