April 25, 2018
How Digital Transformation Can Lead to a Pain-Free Acquisition
In IMA’s latest Inside Talk webinar, my colleagues and I had the opportunity to walk our audience through Bridgepoint Consulting’s recent acquisition transaction with Addison Group. Because we work with companies on financial and digital transformation initiatives, going through an acquisition ourselves was somewhat of a “physician, heal thyself” experience.
In our presentation, “A Pain-Free Acquisition: What Do Investors Want?” sponsored by Oracle NetSuite, we dug into the level of effort involved in preparing information for investors, along with how we navigated an accelerated 41-day due diligence timeline. Key to the process was using an integrated ERP to provide a single source of truth for Addison, laying the groundwork for a successful close and a strong future relationship.
Here are a few key take-aways from our conversation:
Find the right strategic fit
As in many professional services firms, our partners owned the company and had no debt. We had built a unique delivery model, focused on helping CFOs grow their organizations, along with scalable processes to enable our own growth and success in the market. As Bridgepoint Partner Monica Gill noted, we were looking for the right opportunity but did not need to sell, so we could wait for a strategic fit. “We had six partners aligned on why we were considering a transaction and on the deciding criteria before we started anything.”
After engaging an investment banker to help identify potential acquirers, we sent investor solicitations to 177 companies and received 27 nondisclosure agreements in return. We sent those companies a confidential information memorandum (CIM) detailing our financial data, overall growth strategy, client bases and staffing and received 11 letters of interest. Bridgepoint’s executive team narrowed that group to six private equity investors and met with them in intensive half-day sessions. Our data made it clear that only one company made sense as a future strategic partner: Addison Group, a national professional staffing and search firm expanding its growth strategy to include consulting organizations. As Monica put it, “had there not been an Addison, I don’t think we would have done a transition.”
Put the right reporting tools in place
Because we started with a number of interested parties, we had multiple requests for information involving not only revenue data but also data from HR systems such as employee compensation, turnover and other key metrics.
Our smartest decision as a company came 18 months earlier, when we invested in a fully integrated ERP system through NetSuite. The implementation was driven by a desire to have an effective tool in place to grow, while maintaining a very small internal finance team. We were thinking about building value, not about an acquisition – but the result was that we had a digitally enabled, cloud-based financial reporting environment already in place when the time came to compile data for the CIM.
Because of that investment, we achieved real-time accessibility to verifiable data. We were also able to avoid a pause to remediate systems after the transaction. Addison Group now leverages our NetSuite implementation, and we’re working to implement our automated processes for one of our sister companies. These improvements further improved our negotiating position and helped us achieve our highest growth as a company in the first quarter after the acquisition, which is quite unusual.
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Bring data integrity to due diligence
Once we entered the due diligence process with Addison, we agreed to close the transaction on an accelerated timeline of 41 days. We needed to validate years of historical data and had never been through an audit. The combination led Monica to speculate that KPMG might have been a little skeptical about the data it was about to receive.
Cathy Bedrick, a partner at KPMG, didn’t disagree. “Despite the work that goes into preparing the CIM, we think of it as a good story that tells what happened historically and projects where business could go. It’s our job from a diligence perspective to make sure we can validate those numbers and that the historical projection can carry forward.” KPMG analyzed three years of data to reach that understanding, and Addison was able to use it to better understand the subtle differences between traditional staffing and the consulting model.
Bridgepoint completed our due diligence requirements by day 23. We then met with Addison and KPMG to do a deep dive into the financials, using NetSuite’s real-time data to answer questions like “How was yesterday?” on the spot.
The ERP implementation made it possible to base both historical numbers and projections on verified data. “You’re going to live with those numbers, so be thoughtful and make sure the data is accurate. Reconciling differences at the negotiating table is a lot more expensive and time consuming.” As Cathy noted, “When the data can’t be reconciled, the amount of work it takes to be comfortable starts to be overwhelming. Data integrity concerns cause potential buyers to walk away.”
She also noted that a fully auditable system lowers the perception of risk for investors. “There are always ways to get past not having those systems, but it becomes a much more manual process. I’ve had to pull bank statements and verify deposits because we couldn’t find any other way to get comfort that there was an actual business behind what we were being told. The key for us here was being able to tie the financial piece into the true metrics that drove the business: people and utilization.”
The due diligence portion of an acquisition is the beginning of a long-term relationship with your potential investor. Good data integrity and a transparent approach helps to create alignment and trust.
- Maintain a single source of truth. Leveraging an ERP will ensure that you can tie financial data back to the start of every transaction.
- Designate one person to answer financial questions. A single point of contact keeps your message consistent. Start with a small team and pull in additional people as the transaction unfolds.
- Do not create data. Don’t try to pull together data for an investor that you don’t use to run your business. It’s better to explain why data is not available or not relevant, so you can resolve any misunderstandings and set clear expectations for the future.
- Be transparent with successes and failures. When you’re a growth story, not everything you try will work. While it’s tempting to keep the focus on successes and great margins, being honest about unsuccessful efforts shows initiative and helps the buyer understand your business.
Bringing It All Together
Acquisitions and mergers are rigorous, detailed undertakings. Having the right digital strategy and systems in place will streamline your efforts and maximize the value of your transaction. It is also important to leverage advisors and develop a strong working knowledge of the process before entering into it.
In addition, understanding the purpose and intention behind the financial data investigation can help you use the process to educate your buyer, build understanding and align your organizations.
Watch On-Demand webinar Replay
If you are considering an acquisition now or in the future, get in touch! Our cross-functional team of experts can provide strategic finance, compliance and technology solutions to ensure a smooth and efficient transaction. Learn more about our transaction advisory practice here.