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January 1, 2024

M&A is a never-ending web of complexities and challenges. While the potential for growth and transformation is promising, the chances of failure are extremely high. To increase chances of success, acquirers must learn how to be adaptable and work with the target company for alignment. In this article, Brock Blake, Co-Founder and CEO of Lendio, shares their approach on how not to bomb your first M&A deal. 

“The more diligence you do, the better. But there’s a lot you won’t find out during diligence until you actually get the deal done.” – Brock Blake

Common Challenges

Lendio’s first three acquisitions weren't very smooth. They were filled with integration challenges that caused delays and value leaks. This is why Brock believes that no matter how much diligence is done, there are things that will only be uncovered during post-close. Sellers often present their best side during deals. Teams must not lose sight of the strategic objective of the deal, and remain agile in solving problems. 

Furthermore, once an LOI is in place, there's a tendency to become emotionally invested in the deal. You see its potential to solve problems and naturally want to move forward quickly. However, it's essential to remain disciplined and leverage these time periods to gather all necessary information.

Deal Approach

Because of all their learnings, they now approach deals in a completely different manner. By asking these questions first before proceeding with the transaction, they eliminate any chances of deal fever and help the team focus on what’s really important.  

  1. What's the problem we're trying to solve? - Is this a made-up problem or is it a predefined problem within the organization that exists? 
  2. Is there a good culture fit with the leadership team? - Can the acquiring team envision working with the target leadership and employees?
  3. What are all the reasons not to do this deal? - Based on the list of all the reasons to do the deal, create the diligence list to validate the thesis and assumptions. 

Alignment With the Target Company

Alignment pre-LOI is extremely important. Before signing anything, Brock maps out his vision and communicates that clearly with the target company. He also uses the deal structure to ensure commitment from the incoming team and increase the chances of deal success. If they have skin in the game, they will be motivated to see the combined company succeed. Here are some of the strategies Brock uses:

  1. Sellers Financing - Whenever possible, he avoids using third parties to finance the deal. He’d rather have the seller finance the deal and ensure that the acquired leadership is invested in the success of the deal.
  2. Earnouts - For extra motivation, they use performance-based earnouts. Brock believes that this is a win-win because if the acquiring company is paying an earnout, it means they have accomplished the entire deal rationale. 
  3. Equity Compensation - In some cases, they give out equity to key employees who are valuable to the company. This will motivate them to stay and see the company grow.
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