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Key Private Equity Criteria for Prosperous M&A

“We first have to acknowledge and appreciate that due diligence is going to be a disruption to their business, that the target will underestimate this disruption, or they will over-promise on what they can deliver and under-promise on the speed to which they can deliver the data.” - Greg DellaFranco

Prior to joining Deloitte, DellaFranco also served as Director of Corporate Development at KPMG. He has 16 years of experience in corporate development, corporate strategy, new venture creation, and alliance roles.

In this podcast, DellaFranco focuses on his team's unique due diligence approach, and how to determine a strategy for synergies and a successful integration.

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Greg DellaFranco

Greg held strategy and corporate development roles at Accenture, KPMG and Deloitte. He also served as a VP Strategy at BMO | Harris Bank. While at KPMG and Deloitte, Greg closed 12 acquisitions. While at Accenture Greg was a part of a new ventures team where he launched a global SaaS business. Greg was a part of deal teams who closed two separate joint ventures with an estimated deal value of $1.4B.

Episode Transcript

Here is more on Greg’s background

I am currently a Senior Manager of Corporate Development at Delloite. Prior to that, I was a Director of Corporate Development at KPMG, prior to which I was with Accenture for 16 years in various corporate development, corporate strategy, new venture creation, and alliances roles.

Within Delloite Consulting, our mandate is working with our practice leaders to help them think about growth across a spectrum of different opportunities or options, be it organic, be it by partnering, or via acquisitions. 

Can we talk a little more about corp dev, private equity, and your experience in terms of different lenses that they have?

We might be willing to take a longer payback than a PE or pure financial buyer because of the strategic importance that we put either in investment space or a particular target. When we are looking at what options there are available in the marketplace, we begin to develop hypostasis through three lenses. 

The first is the strategic lens, where we have established our short-term and long-term priorities for the year and we try to figure out how properties available on the market align with these strategic priorities. The second is the cultural lens, where we focus on how well will the cultures of respective firms align, what should be preserved from targets, and what needs to change. 

The third is the financial lens, where we look at the business case, try to understand the metrics that are associated with that, and try to see how that aligns with our guidelines. When we are in the early stages of looking at the market we also look at things of transaction feasibility and if we are able to transact in the space.

How about the perspective of the target company or the company that’s selling? What would be their value proposition in terms of going with strategic or typical financial?

From my experience with KPMG, when we were looking for a specific acquisition candidate, we weren’t necessarily looking for scale but for something I will call ‘practice in a box” or “leadership in a box”. If we were able to find a potential acquisition candidate, who themselves were looking to grow, the value proposition we would give to them would be the foundation for growth within KPMG. 

The value proportion is essentially the way of saying that we are a good home for their people, we have a well-recognized brand and we have capital. We aren’t just looking for scale - we are looking to fill the needs that we don’t currently have today.

The message to the targets is not ‘’come and be one of many’’, but rather ‘’come and help build $100 million business around you.

What about the principle or owner who is just purely looking to exit and move on to something else?

From an initial valuation perspective, that would create a little bit of pause. We would want to understand why he or she is looking to exit, but then drilling down into the next layer of the management team.

Does the CEO or the principal have a strong leadership team, and is this team capable of the sales and delivery responsibilities of this business?

If the CEO was the rainmaker and drove the majority of the revenues and he or she was looking to exit, that would raise a red flag and we would have to pause and see what we would want to do with that property. 

What are some of the key things that your team does to prepare for the due diligence process?

The first thing we do is collect the hypotheses that we have formed either during the IOI or LOI stage. We call our key due diligence considerations, we align them along the lines of strategic, cultural, and financial.

These considerations help guide the key actions and key diligence questions we are going to ask. We also use these as a reporting mechanism and keep the diligence teams focused on top priorities and the key questions, objectives, and expected outcomes. 

What are some of the top issues that frequently arise?

I would say it’s the speed in which the target can move. There are two sides to that, one, if it’s a banker-led process, or if it’s the one where you have engaged in exclusive conversations with the target.

First, you need to understand that due diligence will be a disruption to their business, that the target will underestimate this disruption, that they will overpromise on what they can deliver and underpromise on the speed to which they can deliver the data. 

The data will frequently be incomplete and at the same time and we will have a lack of access to the target’s key resources, be it the leadership team or talent. These two points are particularly true if you are dealing with an exclusive relationship. If it’s a banker-led process, more people in the organization know about it, but not everybody knows about it.

But if it’s not a banker-led process and you are dealing with the CEO, they are going to get completely overwhelmed. This is why communication is the key, which is why, when I was with KPMG, we had a daily blog that would keep everyone updated on the latest findings.

Were there other benefits you saw from creating a daily blog and featuring the latest findings there?

It brought the teams closer, because many of the teams, while we had a war room set up when you are working with folks from functional areas, are not necessarily in the room.

Because there is so much information flowing between the workstreams, we wanted to try a way to make the teams more connected. Things come to us during due diligence and it is our job to get things out to people and this created a more coordinated approach across the workstreams.

Were there any benefits? Did you see more findings coming about or people just feeling more comfortable communicating those findings with each other?

The calls we had with the workstream weren’t workstream focused. It’s all designed with ensuring that each workstream got the benefit of hearing about another workstream. This is especially beneficial for the environment that I am in, where risk management and legal need to be connected and for tax and legal to be connected.  

What are some deal breakers you’ve seen during due diligence?

I was on one deal and throughout our process, we discovered that the company did not have any pipeline. As we began to dig deeper we quickly realized that there were potential issues with the solvency of the company.

Aside from obvious ones from a legal perspective where you find out something is wrong or not permitted, things that become dealbreakers, in my world, are around risk management and auditor independence. 

If it turns out that we audit 50 percent of the target’s client base, that means that we won’t be able to serve those clients for the foreseeable future and this means that the financials, the ROI, and the payback will be challenged.

From a risk management perspective, because we are a part of a regulated industry, if we are getting into a completely new business that has a new way of contracting, that can be challenging as well.

From, cultural perspective, if during due diligence you find out that your cultures just don’t match, that can be a challenge.

Looking at the cultural perspective, I am curious to know what’s your approach for handling the integration process?

Early on during the due diligence process, we are seeking the integration team and looking at the type of person that we think is best suited for this transaction. We are looking at the leadership team internally and trying to see whether or not we have the right leaders in place to grow this business.

We begin to identify the sources of value in the business case. Purely from an integration methodology, we have begun to evolve from a functional integration to more sources of value integration approach.

There are three or four pillars that would highlight the sources of value, and underneath that, you would have the functional areas. We would organize our teams around the sources of value so that we can focus on things that are going to have the greatest impact on the business case.

As we get closer to closing, we begin to bring the target into the integration process, so there would be our person paired with a person from the target. Our job is to try to identify the areas where one of the people from the target can have a leadership role. 

How do you keep from double counting synergies?

That is a challenge because of the systems that organizations have in place. The way I read into your question is what is the performance measurement approach once you close a transaction?

This presents its own challenges because of the complexity of the organization and how sales can get tagged in the organization’s respective systems. Instead of having your traditional scorecard, we are also putting in a strategy triggers assessment.

Through diligence and integration, you begin to identify factors, weather be it competitive, client-related, technology, regulatory. You are beginning to identify those triggers that would make you want to pause and reevaluate your strategic plan.

If any of those triggers were to happen in the market, that would cause the deal to go up for review.

What would you point out are the most challenging aspects of integrations?

From our perspective, it can be challenging integrating across countries if you have an international integration, because each country has its own member firm, they have a unique culture, and sometimes they have their own systems and way of doing things.

This is why working with different countries early, treating them as if they were workstreams onto themselves in due diligence is a thing we have spent a considerable amount of time focusing on. 

Do you find your process of integration being replicated by each country you are working with?

Yes, we do. Not to sound extreme, but take whatever process you are running and it becomes exponentially greater by the number of countries that you have. 

Greg, do you have examples of integrations gone wrong?

Challenges that we heard about include things like people or the CEO thought that they were ready to be a part of a larger organization, and as it turns out they didn’t want that. That also ends up trickling down to staff level, which is the most important component and you run the risk of losing people, which then can potentially impact the business case.

What sometimes ends up happening is that integration issues are not so much because of what you have or haven’t done, but your hypotheses not being proven. Maybe you had a hypothesis on how you could take this business and align it with an existing business to have a combined value proposition for clients and it turns out the value proposition didn’t resonate with clients. 

What do you do in a situation where a CEO doesn’t want to be a part of a large organization or changes their mind?

That’s a difficult conversation to have with that person because our deal constructs include a retention program and that we ask the CEO to be a part of the organization for a period of time, possibly three years.

If that person decides relatively quickly if this is not a place that they want to be in, that is going to be a difficult conversation because that means that they have bonuses, a part of the purchase price that is deferred over a period of a couple of years that they are going to walk away from. 

What would you say is the biggest challenge that you personally face today?

Here at Deloitte, it is thinking about how to take full advantage of the power of the Deloitte network to execute upon the business case. Challenges you find here are sometimes things that you can’t control.

Sometimes you can’t find the right acquisition candidate that suits your needs. Essentially, what we continue to manage internally is the build versus buy analysis.

Although not necessarily a challenge, we are working with stakeholders, helping them to think through various options instead of just jumping to acquisition and walk them through that analysis so they can better understand the spectrum of options available at their disposal. 

If you were to look back at your career, what would be some of the most important lessons you’ve learned that you can share with us?

I’m a big proponent of communication and a big proponent of making sure people understand their part, but also understanding other people’s roles and the part they play in a transaction. It’s important to be collaborative, think strategically but act tactically.

You need to put together the project plan, track your due diligence request, track your risk, and strike a balance between that, which can sometimes be a struggle. As a business adviser to my stakeholders, I need to think two steps ahead of them. 

Looking next into the next five years for M&A, what would you like to see different?

I think there are opportunities to bring teams even closer together, through tools, through technology and collaboration tools. I think that in the future, there is a continued opportunity to collaborate and do things from an electronic perspective.

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