We work with middle-market companies, many of which are clear outperformers – more profitable than peers, with great employees, and better growth prospects. Some attributes of good businesses can be captured in a snapshot – profit margin, return on invested capital – these are one-dimensional “scalar” quantities. They each give us a nice understanding of a key performance metric. But most business decisions cannot be boiled down to one stand-alone metric. The M&A decision process is an example of complex decision making under uncertainty involving multiple metrics and goals.
So, whereas some business attributes can be neatly summarized in one measure, other attributes are harder to capture in one dimension. These are the vectors of business – Where is profitability headed? What has changed over the past year to strengthen the business’s competitive advantage? These are the topics that require more thought to describe and support, but can be as or more important than the “scalar” financial metrics seen in your P&L or balance sheet. It’s the difference between a company that’s positioned for growth and a company positioned for failure, a company capturing share and one losing share. It’s the difference between where you’ve been, where you are, and where you’re going as a company. Often, the metrics are interrelated – we’re profitable because we add value, we add value because we invest in service, we invest in service from our profits.
Vector concepts capturing multiple threads to the company’s story and state are useful in thinking about alignment, e.g. how aligned are the exit time horizons of the founders with each other and with the business strategy? By considering these business elements in groups, inherent trade-offs and reinforcing attributes may stand out. Should product strategy be revised to suit the owners’ exit goals? Should near-term profitability be sacrificed to build a stronger long-term business? In any tough business decision, there are, almost by definition, competing business goals involved. The “snapshot” approach to reviewing financial metrics won’t address these competing goals sufficiently for many of even the most routine business decisions. In the complex world of M&A, the tradeoffs are tougher, often influencing who the potential acquirers may be, and shifting value from the buyer to the seller or vice versa.
M&A involves multiple dimensions – the deal process (timing of close, pacing with bidders, valuation, structure and terms), the strategic dimensions (fit with buyers, whether or not to transact, alternatives to any given deal), diligence (legal, accounting, environmental, IT, etc.), shareholder interests, and executive roles and compensation. Advising on these complex issues takes an integrated approach. Only the simplest of issues can be dealt with in a vacuum – the rest require consideration of related issues by advisors who have been through it before.
“Where is your company headed” is a complex question which we address using an integrated approach, employing multiple business metrics, in a way which “tells the story” for potential acquirers and creates a framework for M&A decision making. This approach has led to considerable success for our clients.