The best six tips you will ever hear to make better deals

If you combine one company with another company, you want to make sure that you add incremental value. Often, companies are undertaking deals for strategic reasons that are difficult to quantify, like entering a new market. And, often enough, teams forget to focus on what really matters, which is to create incremental value. Incremental value can be added from different sources, let us look at the most common value drivers:

Value driver 1 - Products and Services: Improving and expanding products and services offered to the consumer can create incremental value. Offering new products and services generates more revenue and, most likely also profits.

Value driver 2 - Customers and Markets: Expanding to whom the buyer and seller sell, entering new markets, and new customer segments, generates incremental value. Conquering a new market in a new segment or geography can unlock new revenue streams.

Value driver 3 - Economies of Scale: Classic value driver. Reducing the costs based on the same revenue volume, will realize synergies. Often enough, economies of scale can be realized in production of products, but also in creating shared services for support (Sales, General & Administrative) functions.

Value driver 4 – Intangible value: Two companies together, can create more intangible asset value as one firm. Incremental value can be created from synergies in brand recognition, goodwill, patents, trademarks, copyrights, proprietary technology, or customer lists.

In order to find the substance behind those value drivers, you want to investigate as much as you can. Because adding incremental value is what really counts when signing a deal right? Experts recommend to plan with adding at least 50 percent incremental value, but the real magic happens if deals are creating 200 percent or 300 percent incremental value.

Do not listen to your advisors. This does sound counterintuitive right? But listen to this: Your typical advisor is hired in order to sign and execute a deal. Therefore, the advisor will do everything within his or her power to pursue the deal, right? We may be exaggerating here, but the message is clear. Your M&A consultant benefits from deals that are signed and executed, not from deals that are cancelled. Here, it may be interesting to lean into a concept voiced by Warren Buffet. Warren Buffet suggested to hired one consultant that only receives a premium if the deal does not get done. 

The generation of extra sales are what separates good deals from fabulous deals. Research from Ashridge Business School, London, shows that deals that are driven primarily by revenue synergies perform better than deals that are primarily driven by cost savings. Therefore, we want to remember that focusing on the chances of creating extra sales, from cross-sales, from better market positioning or similar, can unlock substantial potentials when selecting and planning a deal. 

When planning a deal, you want to create an acquisition and implementation plan as early as possible. As soon as you have eliminated the biggest uncertainties, you can start with the acquisition planning and implementation planning. The key success factor is to involve the buyer of the asset that is being sold as early as possible. Involving the buyer in the planning process for the acquisition will add more certainty to the planning. And, even more importantly, will increase the chances that the acquisition plan can also be executed later when the buyer leads the action. By letting the buyer buy into the process, you are creating commitment and security. Convincing right? 

You are conducting a deal, because you are making a bet that something positive will result from it. But what if something goes wrong? What if an assumption does not turn out to be right? What if you cannot realized the synergies that you have planned on paper? Looking at the numbers, you want to plan a margin for error. You want to make sure that the deal still looks good even if something goes wrong. Plan in different scenarios and plan for things that go wrong. Proper risk management can save your business case. Plan a margin for error. 

It is 2022 folks. Plan and execute your deal with digital tools. Do not rely on Excel spreadsheets and custom solutions. Rely on systems and tools that are built for M&A. Dealing digitally allows you to plan and execute a deal much quicker and more secure. This can save you loads of money. Tempting right? 

What are your tips and key success factors to make better deals? Drop us your thoughts at hello@smartmerger.com.