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November 29, 2021

How to Structure Teams Approaching M&A Diligence

Every company that does M&A has varying team sizes and many attributing factors as to how their deal team is currently constructed. Ken Bond, Head of Corporate Development at Cetera Financial Group, has experienced scaling a small M&A team and building an M&A function. In this article, Ken will be sharing how he structures teams as he approaches diligence. 

"As long as you've got enough of a hypothesis on exactly what the integration is going to look like, and you feel comfortable on your financial model, then you can proceed to LOI." - Ken Bond

According to Ken, your team size strongly depends on the volume of the deals in your organization. If you're operating at a high volume of deals, you may not want to bring a huge M&A team as you approach a target company. 

He believes that every deal pre-LOI is unlikely to close, so he tries to minimize the impact and distraction on his organization by bringing in a very small team as they approach the target company. It's usually just him and the legal department while engaging the integration team to help them structure the transaction. 

As soon as an LOI is signed, they go full scale with each of their functional leads. 

Building your M&A team

If you are a proactive acquirer, it is always best to have dedicated M&A people managing your transactions. Having retained knowledge from one deal to another is a huge benefit that will help you run a smooth transaction. It will be extremely difficult and inefficient if your M&A team has to learn everything from scratch for every deal.

Two of the most critical departments that you need to have full time are HR and IT. Almost every time, you will always onboard new employees into your HR systems. Having a professional HR that knows how to break down the system so you can accommodate all the new hires is crucial. 

Also, there will always be an IT integration in your transactions. Having a dedicated IT person that knows how to navigate through your systems, and understand the target's system too, will help integration. 

Last but not least, you need lawyers. Every M&A team needs an in-house counsel that has transaction experience. They should be your closest partner for every deal so they can understand your risk appetite and your risk framework. 

However, you still need an external team of lawyers for every transaction. They are there to support your primary legal team, and they should also be up to date and understand the market. 

Project Manager

The role of a project manager is to make sure that the deal leads will execute the process according to how it's designed. They should only deviate from the process when there is a significant change in the deal, such as an international deal circumstance or an auction, and they need to compress the process. 

Ken believes in the power of process, which is based upon iterations from previous mistakes. When you deviate from the process, you're more likely to make mistakes. 

Ideally, project managers are people inside your company who have experienced managing integration in the past. More often than not, you can find these people in the IT department. You need to do is teach them the aspects of diligence and how the process runs.

If you are only doing a few deals, then your deal lead can be your project manager.

Deal Sourcing

“The biggest risk in any transaction is culture, and even the most strategic deal on the planet will not overcome cultural conflict.” - Ken Bond

Good economics is never enough to overcome cultural conflict, says Ken. This is why they prefer to do proprietary deals rather than deals coming from bankers. 

In his experience, you will get a lot more time to know the seller and assess their culture if you are in a bilateral deal. If you are in an auction process, you will not have sufficient time to understand the target company and its culture thoroughly.

As for deal sourcing, they have their own dedicated deal sourcing team. If you are going to be doing a lot of deals, then having a dedicated sourcing team is extremely important. This team knows your strategy, and they know what type of companies you would potentially consider. Your deal sourcing team should look like a sales team with a reward structure for putting successful transactions in your organization's pipeline. This should keep them proactive in looking for quality deals. 

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