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Executive Corner: Lost Value in M&A: A New Way to Create and Capture Value

Russ Ryan on April 27, 2020 - in Articles, Column

Buying or selling a firm creates risk and opportunity for both buyers and sellers. Up to 30 percent of a firm’s potential value is lost during and after the typical acquisition. For those selling, they’re losing millions in potential rewards for their efforts building a firm. For buyers, their return on investment can evaporate almost instantly.

For this installment of “Executive Corner,” we explore how innovative firms are gaining new insights to maximize value when buying, selling or preparing to sell. Russ Ryan, principal at Rusk O’Brien Gido + Partners (email: rryan@rog-partners.com) interviews Blake Godwin, partner and vice president of Client Savvy, a CX consultancy and technology provider (email: blake@clientsavvy.com).

Ryan: All firms see some degree of employee turnover and client attrition after an acquisition. How can a firm predict the risks before they buy?

BLAKE GODWIN

Godwin: The problem is bigger than most realize. The Wall Street Journal reports that client churn is the No. 1 cause of failed acquisitions, accounting for half of all failures. Gallup research shows client churn increases 60 percent after an acquisition, and McKinsey reports that, on average, 5 percent of clients churn immediately after acquisition. Harvard Business Review (HBR) published statistics showing key staff turnover spikes 300 percent the year following an acquisition, and that turnover among acquired employees remains twice as high for nine years!

Smart buyers will specifically investigate client and employee sentiment during due diligence, benchmark the data against industry norms, and be aware of the specific risks in their acquisition.

Buyers should demand comprehensive client and employee surveys during due diligence to uncover the relative risks of client churn and employee turnover. They also can assess where loyalties lie. If the No. 1 client is loyal to a specific project manager rather than the firm, and if that PM shows signs of potentially turning over after the acquisition, the buyer can better estimate the actual post-acquisition revenue and profit streams. The buyer can apply the appropriate discount to their offer knowing exactly how much revenue is at risk. Alternately, the buyer can discover a hidden gem: a firm that has a surprisingly strong client base and engaged employees. If the buyer knows more about the relative strength of these metrics than the seller, he or she may find a particularly attractive investment and buy at a relative discount.

Ryan: What can a sophisticated firm do to position itself before a sale to mitigate the risks of turnover and churn, and how could they capture that in their valuation?

Godwin: Buyers are always wary of risk when entering the difficult world of an acquisition. So much of the discounting in a valuation serves to mitigate risk. Leaders are in the position to measure, measure and measure. They can track where clients and employees stand today, and begin implementing strategies to improve loyalty for both. Designing an experience for clients by implementing Client Experience Management strategies will decrease churn, increase loyalty and show up in all the metrics a buyer may look at (not to mention increasing revenues and profits in the short term).

Using the research from HBR and Gallup previously cited, if turnover increases 300 percent and churn increases 60 percent after an acquisition, the average 150-person firm loses $5.1M in value post-acquisition. This cost, while not always clearly understood in transactions, has driven multipliers down across the industry. A firm that builds a solid foundation of highly engaged employees and fanatically loyal clients can position for a much higher sale price because it can demonstrate these risks are mitigated.

Ryan: For a firm that has made an acquisition, what can it do after the fact to mitigate value leakage?

Godwin: The leading reason why clients and employees leave after an acquisition is failing to help acquired employees or clients “complete the journey.” Develop a plan to specifically address the fears and concerns of each stakeholder (clients, employees, subconsultants and vendors). Empathy and Journey Mapping are great processes a firm can use to spark innovation here. Finally, gather feedback with a passion. Every critical moment of truth on this acquisition journey is a place where a client or employee can rapidly (and dramatically) change their emotional state. Wherever that might be, ask for feedback. Make it a clear and formal part of your integration strategy. Firms that do this well can unlock an additional 30-50 percent in ROI after their acquisition. That’s huge.

Ryan: What resources exist to help a leader get started?

Godwin: Client Savvy has created a collection of whitepapers to help firms explore ways to gather feedback, map client journeys and address other challenges before/during/after an acquisition. We produce an annual gathering of leaders from across all professional services who spend two days sharing case studies, learning from experts, and connecting with peers about ways to manage their client and employee experiences. We invite Informed Infrastructure readers to visit www.clientexperience.org to learn more.

 

Russ Ryan

About Russ Ryan

Russ Ryan is a principal at Rusk O’Brien Gido + Partners.

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