Today I'm here with Nichelle Maynard Elliott. Nichelle is a public company board member and corporate deal maker with over 20 years of M&A business development and strategic partnership experience. She's a highly experienced corporate executive focusing on mergers and acquisitions. In this episode, we're going to focus our conversation on how to successfully build a corporate development function from scratch.
Can you tell me specifically how you work with companies to build out their corporate development function?
The first time I was asked to do it was when a friend, who was a general counsel of a company, said her team was looking at building Corp dev function. She just asked me to come and talk to the senior team. I am happy to meet with senior teams and available to talk about what putting together a function looks like consulting on various people you might add to the team.
When should an organization consider building out a corporate development function? Is there a benchmark in terms of transaction or revenue size?
There are several factors to consider here, and it depends on the company's growth strategy and whether or not M&A is part of that growth strategy. If it is then a company needs to look at the number of transactions they would be doing annually based on their size, and based on the company's internal resources to determine if they want to do things with external bankers, or if they're ready to build a corporate function internally.
Is there a certain amount of deals they would start looking at before they consider it?
It depends on the size of a company and the size of the transactions, and whether they've got some sort of roll-up strategy in their mom and pop businesses in the industry that they can move pretty quickly on. I think if more than half a dozen deals are to be completed annually, start to finish, that might start looking like you need a corporate function.
Walk me through what to consider when building out an acquisition plan?
You start to think about what the targets might be. If you are going to specialize in a certain industry, you need to think about what's available for targets, and whether you have salespeople or folks internally that are going to be able to help you with your deal sourcing or targeting things on your own.
If you're in a type of industry where there is a small number of players, you're going to use investment bankers who are going to bring deals to you. You have to look at what your sources are to start with, and then how you want to execute on any deals that you have.
Is there a specific way to determine what sources you want to rely on between internal building versus relying on bankers?
If you've got a Salesforce or an external-facing operating team that knows the market or the industry well and has relationships, it's always a good idea to be listening to those folks and taking those.
In my last corporate function, I was in an oligopoly, where there were a small number of very big players, so a lot of times the targets came to us because they knew that we would be the right people and they wanted us on the shortlist of potential buyers.
Finally, if you've got relationships with investment banks, it’s always worth listening to what the banks have to say. If you work with a few bankers that know your strategy and they know what you're looking for, that's great.
Otherwise, you just review what comes in. If you don't have those resources and you are more outward-focused, then you might be looking for deals on your own.
What are the initial conversations that should be had when considering a corporate development function and who should be involved?
It's a combination. Your CEO would be involved if there's a strategy function that manages organic growth versus growth by acquisition. You need to have your finance team involved, and your CFO and a key stakeholder will also be on the legal team. if you've got people in your law department who have transaction expertise, then you would use those as well.
What advice would you give to an organization deciding the size of their Corp dev function? Is there a good metric to follow when considering the scope?
You want to determine first how the internal group is going to function. You're going to determine how much you want to outsource versus bringing in good internal resources, bringing folks in-house.
If your company warrants an internal function, it's just going to be more cost-effective for you to bring in a couple of resources. If you can function relatively leanly, that's sometimes a better bet than doing your outsourcing work.
Another question is really to determine how the team is going to be staffed. My company was very lean, so we did things with a very small group and we did as much in houses as we could and we found that to be the most cost-effective.
What would be the right way to start building that Corp dev team? What is the right mix of backgrounds?
You'll see that a lot of Corp dev heads either have finance experience or have legal experience. We found that our team functions best when we had someone who had legal expertise and someone who had a sort of standard finance expertise.
Bringing in-house investment bankers that have worked for you on prior deals is also very useful, because not only do they know the analyst work that needs to be done or valuation and models, but they may have some understanding of your industry, which is also helpful. It is a combination of your finance, professional, transaction lawyers, and your investment banker types.
What are your thoughts on promoting internally versus sourcing externally?
I think that a combination of both is good. It depends on the culture of your company. We did a lot of internal hiring. The positive is you're going to have people who understand the industry and who have operational expertise. The other thing is whether you're going to have long term professionals versus rotational type opportunities. Sometimes the perception in a company is that M&A is attractive, which draws a lot of people’s attention. They may or may not have the background that’s needed, and they may also need more time to get up to speed, which may not be the time that you have, especially if you're very active in M&A.
What are the best practices for hiring an effective team?
Strong analytics are key and negotiating skills are paramount. These should be the people who are not only great negotiators from a base perspective, but also know the culture of your company, understand how you negotiate, and have an understanding of the business and the industry. There are a lot of companies that are higher risk-takers, and then there are a lot of very conservative companies. The same Corp dev professional, who happens to be conservative is not going to work well in a very high risk-taking environment, and vice versa.
How should the operational structure be considered? What unique organizational characteristics should be included in this consideration?
You can have a couple of different structures. You can have a corp dev person who reports directly to the CEO, and as long as the CEO has a manageable team of seniors executives that report to him or her, that's probably the best place for it to be. The CEO knows and understands the strategy and will be less likely to have concerns that might be conflicts of interest as compared to reporting to the CFO, for example.
And there are a lot of companies that have structures where the head of M&A reports to the CFO, there's logic to it because obviously, it's under finances. The potential issue is that the CFO may have conflicts of interest because he or she is looking specifically at spending money and may not always have a broader view of things.
Another area where Corp dev can sit is in the strategy function because sometimes the Corp dev person both has expertise or oversight for mergers and acquisition, but also has expertise in the area of organic growth.
What about the structure, or the approval process of doing the deals and creating checks and balances to prevent the CEO from catching deal fever and going on an acquisition spree?
It starts as far back as analyzing the deal, the potential for growth and finance, and what your rate of return is based on the modeling that you've done. There's an agreed understanding of that in the company. Some metrics help determine whether a deal even rises to be approved.
Then, based on the size of the deal, you would have maybe an executive team of people, including the CEO and the CFO who review deals, look at metrics and decide whether to move forward. That's how you set up your limits of authority to make sure that more than one set of eyes is reviewing the deal and making the decision.
Can you tell me about bringing in specialists to validate assumptions and organizing your team by functional experts?
If you're the type of company that has deep core knowledge, you probably have your internal experts. If you're looking at an adjacent space, something new or different, you can benefit from bringing in specialists who may know a little bit more about that particular area that you're going into, and help with the diligence process.
There may be something quirky about the financial structure or inner workings of a company so you might need financial experts to help you with that. They can help you with a transformational deal or something much bigger than you've done before.
Organizing your team by functional experts depends on how large your team is going to be. Depending on your function, if you have something that is managed at the corporate level, rather than at the business level, clearly that would be an area where you would have functional expertise internally.
It would make sense to separate your integration teams from your actual transaction teams to get the deal to the finish line.
Is having them separated common? I feel like I've seen more and more companies combining Corp dev and integration.
I've seen it both ways. I've seen integration as a subset of the Corp dev team with people on the team who manage the integration exclusively. They usually come in towards the end of the negotiation of the deal. They need to be involved in the diligence process to a certain extent because they have to get up to speed on what it is that they're integrating, but they may not be the same folks who are negotiating the deal to get it to closing.
What are Corp dev roles with divestitures, and in terms of working with joint ventures and alliances?
In a company's life cycle, you may buy in the same assets. So, it's good to have the institutional knowledge of what, when, and why you acquired, as well as what you've been able to do to improve that business and improve the value because that speaks to what you can get for the business on the market when you're trying to divest it.
So it may make sense to me that acquisition and divestitures go hand in hand and should be managed by the same people, just slightly different. If you know what you're looking for or in a target and how to diligence a target, that informs how you prepare diligence for an entity that you're going to divest.
I think it also makes sense to use Corp dev for JVs and alliances because JVs will eventually have some sort of exit structure that's negotiated in the documentation and you'll need to bring the Corp dev people along at that point. The alliance is also similar to joint ventures because sometimes those are spaces where you found another entity and do better together.
What are some of the largest mistakes companies make when building out an M&A function and how can these be avoided?
A potential mistake is having a one-sided experience and having a team that's too heavily focused on one area and one function. If for whatever reason, you have a team that is predominantly finance-based, they may look at the numbers and have an analysis of the numbers, but not understand how that works from an operational perspective or what the legal landscape might be.
What advice can you give to practitioners tasked with developing such a function?
One of the first steps is to look at similarly situated companies and understand best practices that other companies may be employing in your space. Look at your competitors and their crop function and the size of their Corp dev function, particularly companies that you admire and you think that they're doing well in the space.
It's also important to be flexible and build in the capacity to be nimble. Understand the landscape of your market and your industry, and what are the opportunities for acquisitions. Are you looking at doing things that are just regional or within the United States, or are you looking to expand globally? What is the culture like?
Does your strategy differ by geography? Are there other Greenfield opportunities that are more appropriate and in what situations? Do you need to buy IP and expertise for buying an intellectual property? These are some of the elements that you can be thinking about when wanting to build out your team.
What's the craziest thing you've seen in M&A?
One thing that comes to mind is how different cultures negotiate deals differently. There was a transaction that we did where we were looking to sell a business. And it was an auction. We had several bids that came in and most of the bids kind of centered around what looked to be a reasonable number. And then we had just an outlier that was maybe three times the average bid that we were getting.
What we came to understand is that the way they bid on a deal in this different geography is to throw out the highest number just to stay in the game. In their second or third round, they've cut their bid to even below what the average was.
Anything else you'd like to share with us?
I do think that it's really exciting to be in a company that is at the beginning stages of putting together a team because it means that you've got a lot of growth and an opportunity ahead of you. Not everything is going to work. Sometimes you might hire the wrong team member. Sometimes you might need to change strategy or the market changes and you need to do things differently. Try to enjoy the process.
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