Too often dealmaking is seen as the end of process instead of the start. So how much attention should be given to the post-deal planning, asks Andy Coyne.
The champagne flutes have been packed away; the mutual back slapping ended in the early hours. You're now master of the company - now what do you do?
Because now the hard work really begins: employees have to be told what's going on and persuaded to buy in to the new management; suppliers and clients have to be brought up to date and instilled with confidence; and, perhaps most importantly, changes have to be implemented that will help the business prosper and pay back the debt.
Now many firms launch their post-deal career with a 100-day plan - a programme to keep the excitement, adrenalin and good intentions of the deal rolling with changes within the first three months.
Peter McLintock, head of corporate at law firm Hammonds in Birmingham, says: "Over half of all mergers and acquisitions in the private equity arena fail to achieve anticipated improvements and synergies.
"There are a number of reasons for this - from management failing to appreciate the extra burdens of taking on debt far in excess of that carried pre-acquisition, and the pressure that puts on cash flow, to managers seeing the toils of the buyout as the hard work and taking their foot off the gas once it is done.
"In fact, the original deal is just the starting point in the investment life cycle and managers' efforts should be focused on integrating the new regime."
James Grenfell, of Orbis Partners, believes 100-day plans are now an essential part of the deals process: they show the management has put a business plan together and intends acting on it.
He adds: "Most business plans end up in the cupboard, A 100-day plan reminds you that you need to deliver. It's making something happen, putting a marker down, delivering and making a strategy happen, particularly when you are going through a change process because it gives a timetable.
"They're important because they're about making things happen rather than thinking strategically. In fact it's not a bad way of running your business anyway, with three monthly checks on management tools."
Stephen Kitts, corporate finance partner at law firm Eversheds in Birmingham, agrees and believes this is one reason why advisers cannot walk away when the deal is done: "We will work alongside the client to agree a strategy with them. Funders will be keen to know that risk areas are addressed," he says.
Where private equity firms are involved in the deal, help is readily at hand. As Kitts says: "What a private equity firm has to do is to look to gain capital value and it will put non-executives in to do that."
Not surprisingly, Martin Draper, regional managing director at private equity firm LDC, agrees.
He says: "Post-deal we would join the board on a non-exec basis and get the 100 day plan going. People are expecting change so now's as good a period as any for that. Increasingly people are looking at us to add value to the company."
Draper argues that private equity firms can be of vital importance to new management teams in the post-deal period.
"It's not a question of them overlooking things because it's not exactly rocket science. It's just things we can bring to the table, starting with communication of message to the employees, getting the concept of ownership across in conversations to suppliers and finding ways of accelerating growth," he says.
Phil Burns, joint managing partner of rival private equity firm Clearwater Corporate Finance, adds: "It's all about seizing the momentum created by the management buyout (MBO) and using this to achieve accelerated progress, while at the same time maintaining a stable business platform despite the change in ownership and funding - not an easy balance.
"If MBOs fail they normally go off the rails in the first 12 months, so an intensive period of short-term goals and tasks is an obvious step to minimise risk.
"It also gets you into the right habits for communicating to the wider stakeholder base you inherit as part of the MBO - the PE house, the bank, etc - and buys them into the detail of your business plan."
Grenfell adds: "The creation of the plan needs to start early in the process, well before the deal, when investors are starting to form their relationship with the management team. It ensures that, from the outset, people have the right level of focus and it reminds the management team of the promises they have sold to the backers."
Kitts argues that one problem is that many people don't realise how much work goes into the pre and post deal process.
He says: "Anyone who hasn't done a transaction before underestimates what is needed in getting the deal done. And even those in the management team not involved in the deal find it a huge distraction.
"But the great attraction of doing an MBO is putting a group of people in control of their own destiny and playing a more mature role in the strategic running of the business.
"The incentives for the management team are substantial if they get it right."
Andrew Millington, corporate finance partner at law firm Mazars, says new management teams can achieve those incentives if they follow a few simple post-deal pointers.
"The initial 100 days is all about building trust in the new management team. One of the first priorities is to settle down financiers with the deal. Making sure a member of the team is responsible for these relationships and puts reporting procedures in place is a good way of reassuring nervous investors that their money is in good hands," he says.
"Similarly, focusing on securing the easy wins in the business plan quickly builds confidence in the new management team. Part of the skill in planning is to make sure that the initial targets are not over ambitious.
"Investors make their investment purely on the basis of the business plan and making sure the plan is followed reassures them they're getting what they paid for."
John Edwards, head of transaction services at accountancy firm, Wenham Major, suggests a lack of strategic thinking can be a problem for new business owners.
"The principal reason that MBOs fail is not the terms of the deal or inadequate due diligence, but the lack of a post-acquisition strategy," he says.
"The incoming team will be seeking to enhance the business, especially so in circumstances where the business has been underperforming and profitability deteriorating.
"A detailed post-acquisition strategy will provide both a blueprint for action and a yardstick against which progress can be measured. It's all too easy to be swept along by the euphoria of ownership and to become mired in the day-to-day detail of running businesses."
Edwards suggests that for those that fail to plan reality can hit hard.
"Warning bells should begin to sound for all concerned where an instinctive programme of cost-cutting and liquidation of assets is implemented to the detriment of a strategy for growth. For some businesses this will be the beginning of a downward spiral that's difficult to halt," he says.
And he takes Kitts' point about retained advice. "Some of the most successful MBOs are where the managers retain their advisors to guide them through the inevitable teething problems which will occur and, perhaps most importantly, help them to manage their relationship with their investors," he says.
Tony Dunn, corporate finance partner at accountancy firm, Grant Thornton, suggests the post-deal lull is something that has to be guarded against.
"Transacting can be very stressful and many management teams will relax and possibly even take a holiday immediately after the transaction has been completed. However, this is often a key period in determining if the transaction is going to succeed and it is vital for a management team to be more focused than ever," he says.
He subscribes to the 100 day plan idea.
"There are significant changes required post-MBO to ensure that the business is positioned to deliver the plan. These are typically not made if they are not actioned in the first 100 days, as people will either get set in their ways and lose the motivation or the goodwill of the employees, often at a peak at the time of an MBO, may diminish," he says.
Like Dunn, Gareth O'Hara, a partner at law firm Wilkes Partnership, has advised on a number of MBOs, but is less worried about a post-deal hiatus.
"Most management teams have taken on a personal financial obligation and if that isn't a motivator, what is? Psychologically, there must be a post-deal period where there's a bit of a lull, but a fair few MBOs fail and fear of failure is quite a driver," he says.
Matt Waddell, Midlands head of corporate finance at accountancy PricewaterhouseCoopers, says: "I say to clients that getting the deal done is an end in itself. It has a finality about it, but in reality the management team may think they have been working hard, but now the hard work really starts.
"They have got to start delivering on their promises in the business plan. The guys have been running on adrenalin for a while and are on a high after completion, but now they have to get back to the daily grind."
Waddell has a word of warning.
"There is a long-term view and that is accepting that if you have done a management buyout, you have bought the business because the trade wasn't interested in it. So from day one you have to get into the mindset of thinking about what put the trade buyers off," he says.
One firm which has come through the MBO process successfully is Staffordshire's Trinity Design. It underwent an MBO with Dains Corporate Finance acting as lead adviser. Two years on, the business continues to flourish.
The MBO was led by managing director Simon Key. He says: "The MBO was seamless to our customers and the expert advice ensured the business had a sound financial platform to build on and grow over the next few months.
"Any changes to the customer side and supplier side of the business were gradual, but more immediate changes were apparent to the staff and management structure, as the deal was timed to coincide with a seasonal increase in business so momentum was natural.
"Wide-ranging changes were required including location, implementation of a financial control system and a three-year business plan, which were part of the funding documentation and transfer between invoice discounting facilities."