How many passengers listen to the flight attendants while they run through pre-flight instructions? After dragging carry-ons through the aisle, searching the overhead bins for openings and jostling to find their seats, travelers are probably only focused on getting settled before the people in front of them recline their seat. The last thing anyone cares about is someone telling them what to do, especially when they’ve have heard it hundreds of times before.
But anyone who does take the time to listen to their directions will catch the flight attendants advising passengers to take a moment to mark where each exit is located. In the event of an emergency, that knowledge will ensure a successful outcome. These instructions provided at the start of every flight are no different than the instructions every person involved with mergers and acquisitions should follow at the start of a transaction. How many of us mark our exits at the start of the transaction process? Just like on a plane, how often do we just assume the door next to where we are currently seated is in fact the best exit for us to pursue?
Deal teams focus on getting the deal done, often with limited thought about the elements that could make exiting easier. Understanding the different exit options can help provide new criteria to evaluate the quality and upside to potential earnings streams. Financial buyers are most likely to begin due diligence by evaluating the various exit options available to them, while strategic buyers looking to build out their existing product line or expand market opportunities may resist a discussion about how to exit. Strategic buyers, after all, are in it for the long haul — or are they?
Even strategic buyers require constant renewal, and mergers and acquisitions can help fill out a product portfolio, allow entry to a new market or drive a shift in a company’s culture. As markets evolve, pressure builds on existing product lines and margins are reduced, which requires new ways to improve results. Divestitures and spinoffs play a similar role in allocating capital to the highest value opportunities. It is very hard to see the future, so understanding options at each step can provide greater agility.
Equity firms, hedge funds and buy-out shops may be better prepared to assess exiting the business during due diligence, but often the pace of the transaction causes them to focus on completing the deal first. Evaluating exit options upfront provides a buyer with greater negotiating leverage as they identify opportunities that can allow wider bidding. Areas of hidden value can include how the company is organized, how the assets are being used to support the business and how future investments are applied.
An example of successful application and evaluation of potential exit strategies is when a buyer moves into a new market by purchasing a smaller and more nimble company. To protect the value upon completion of the transaction, a subsidiary structure can allow independence on product, service and sales capabilities while giving the parent company control through shared services like finance, information systems, procurement and regulatory affairs. As the market matures, this structure provides greater flexibility if a decision is made to exit the business.
Understanding where the organization, or even a specific function, is located along a maturity curve identifies the appropriate actions needed to strengthen core capabilities and gain the greatest value. Companies and products go through a period of rapid growth that slows as the market matures and new competitors enter the field. Understanding how the current firm is positioned along this maturity curve will determine the level of new investment required and the ability to sustain sales growth and financial margins over time.
Keeping the end in mind during the due diligence and transition management will position an organization for greater success. Expanding the analysis to include organizational structure and maturity can lead to greater financial rewards than simply looking to close the transaction at the best price.
So, next time we board a plane, let’s all pause for a moment and listen to the flight attendants. We might learn something more than how to leave the plane quickly.
Russell Clarkson had a follow up conversation about his recent article. Watch the video below!