How Relationships Can Influence a Merger or Acquisition
Starting a business in itself can be a mixed bag of risks and rewards. But what about working with a friend? With shared interests and strong ties, two companions entering the professional world together can be a natural fit. It can also add an extra layer of complexities. After all, there was a reason some of us were (perhaps rightly) advised not to room with our high school friends in college.
In the case of mergers and acquisitions, having an existing relationship with the other company in the process actually can make a big difference, unless you stage a hostile takeover (you can then bet that personal bridge is burned).
However, if you nurture the professional relationship, as well as the personal one, and keep open and honest channels of communication throughout, it can be one of the best decisions you make as a business leader.
An M&A Love Story
Toronto-based Genumark turned a long-lasting personal relationship with fellow Toronto distributor Rightsleeve Marketing into a successful acquisition. It was Genumark’s first foray into mergers and acquisitions, and its executive vice president of sales and strategy, Mitch Freed, said it 100 percent could not have happened without the friendly connection between the two companies—namely Mark Graham and Freed’s father, Mark, who started Genumark.
“Rightsleeve was started by Mark and Catherine Graham, who own commonsku, which is a workflow management platform that Genumark is actually on,” Freed said.
The Grahams shifted more of their attention toward their growing technology platform as time went on, and Genumark used an annual meeting between the two companies as an opportunity to informally plant the seed for the future acquisition.
“We became really good friends with them, and basically said, ‘If you’re ever selling the distributor business because you want to focus on this technology platform that you’re building, let us know,’” Freed recalled. “And that’s what happened essentially.”
That was about four years ago. Last summer, the Grahams followed up to ask if they were serious during that lunch conversation.
“It came out like sort of a, ‘Hey, remember when you asked me if we would ever sell the distributor business? Well, we’re ready,’” Freed said. “That was in June 2019, and we closed in October 2019.”
Between that initial conversation and closing were four months of near-constant communication, namely between Freed and Catherine Graham, who spoke on the phone just about every day. Sometimes, the conversations were long; other times, they weren’t. But both parties made sure the dialogue remained open.
Bryan Miller, president and CEO of DFI – Solutions in Print, Davenport, Iowa, asserted that the only way to mimic the success of Genumark and Rightsleeve is to keep up a reliable channel of communication and use that to set the tone for the future of the newly joined companies.
Miller’s job at DFI – Solutions in Print requires him to scout for companies within the printing industry that are interested in selling. From there, he crunches the numbers to see if the company is a good fit, but he also looks at plenty of intangibles—the culture, personalities, etc.
“Some of the things that make an acquisition successful are a similar business culture and complete honesty and transparency,” Miller said. “I believe telling the owner or ownership group the changes you plan to make post-closing is critical; it gets the transition period off on the right foot. Sharing some of the same business philosophies about putting customer service first would be critical in our decision-making process. It is important to meet everyone in the organization and to make sure you have the right person in the right chair post-closing.”
He added that one of the hardest parts of this process is when it comes time for the seller to finally give up control. For a lot of owners, that company is their baby. It’s the culmination of a lifetime of work and ambition, so, of course, there may be a bit of wariness before handing over the keys. If that person is also someone you consider a friend, you have to handle the situation with tact and compassion.
“I think one of the more challenging components to an acquisition is coaching the former business owners that it is no longer their responsibility to run and control everything within their organization,” Miller said. “It is always done with good intentions and a hard habit to break.”
Consider Your New Family
Once you’ve acquired a company, you have also acquired its employees. Congratulations! Think of it as expanding your business family. You are now the Mike or Carol Brady of the printing industry. It is your obligation to extend that same culture of openness and honesty that occurred during the acquisition process to employees. Start by providing as much information as you can to them about their careers going forward under your umbrella. If you’ve made any promises to keep things as close to normal as possible, it’s your responsibility to follow up on that.
“You cannot buy a business and change the comp plan after the deal is signed,” Miller said. “All the personnel are aware of the compensation prior to closing. There are many other things that change within an organization once we purchase the business. I think in our first few deals, not disclosing everything was a mistake. It was not done intentionally, but things pop up that you didn’t anticipate. Now we’ve developed a checklist, which has been very beneficial for both DFI and the seller.”
Don’t Cloud Your Judgment
Here is where the process becomes even more of a balancing act. If you have an existing relationship with the other party in a potential acquisition, you are in a unique position to speak more candidly and openly. But, you’re also in a position where you have to work hard (maybe harder than usual) to make things as equitable from a business perspective as possible. There is such a thing as being too friendly, after all.
Even if you and your partner company in this endeavor are super-close, sometimes it might be smart to use an intermediary. That’s Jim Anderson’s specialty.
“If you are the buyer—i.e., the one making the acquisition—your personal relationship with a potential seller could be incredibly valuable,” Anderson, founder and president of Corporate Development Associates, Scottsdale, Ariz., said. “If you are the seller, it could be a detriment—and cost you money—if you are too friendly with the buyer.”
Let’s revisit the dorm situation. Maybe you’ve known this person for your whole childhood. You were inseparable. But, changing your lifelong friendship that involved going to your respective houses to now sharing a glorified prison cell can be jarring. It’s a tale that’s all too common. This is why Anderson says it can be better to play it safe with an intermediary. If you actually don’t need one, you’ll end up with the fair outcome you would have come to regardless. If you did end up needing one, you’ll be glad you had one.
“I simply cannot recommend trying to navigate the world of M&A on your own,” Anderson said. “You may think you are a great salesman, and perhaps you are, but you are most likely a neophyte when it comes to M&A. You turn to your CPA for financial advice and your attorney for legal advice. Why should it be any different with a potential acquisition or, more importantly, the sale of your company?”
Don’t Buy for the Sake of Buying
Try to think of yourself as a child for a minute. Your parents just gave you a couple bucks to buy a toy. You know exactly what you want, but when you get to the store, it’s out of stock. You can buy something you don’t actually want or need (or even like) with that money because, well, you’re already there, or you can save it for something meaningful. The same applies to acquiring businesses.
Instead, take the time to find one that actually complements your business and its goals. Sometimes those perfect fits introduce themselves, just like the economic love story of Rightsleeve and Genumark. Since commonsku, a service Genumark already uses, was part of Rightsleeve, Freed was familiar with the business, so that’s one post-sale pain point alleviated before they’d even drawn up the paperwork. Also, Freed said Rightsleeve’s experienced and young talent promised long-lasting success and a worthwhile investment. Finally, since Rightsleeve focused on a client base that differed from Genumark’s, it fit like a puzzle piece.
“We weren’t buying the same company,” Freed said. “We were buying different expertise in different areas than things we do normally day-to-day. So, for those reasons, it made it a no-brainer once we all could agree on the terms of the deal.”
And none of that could’ve happened without the Freeds’ and the Grahams’ friendship.
“Certainly, for us, it was the only way,” Freed said. “We’re not out there looking for companies. We’re not a mergers and acquisitions company. We’re not backed by a private equity fund or a financial services fund. We’re a family-owned business, and we focus on our customers and growing our business generally organically. Without this relationship, there was no chance this would happen for us.”