How to Measure M&A Success
Once a merger or acquisition deal is signed and moving forward, how do you measure success? And how long does it take to achieve that success?
These are excellent questions — and we hope you are asking them early in the process. They don’t, however, have simple answers. After all, your situation may be very different from someone else’s: the sizes of the companies involved in the transaction, the delta between their cultures, differences in business models and the procedures an organization puts in place to handle the transition can dramatically affect the outcome and timeframe of an integration.
Let’s begin with the question of time.
How Long Will it Take?
Assuming the two engaged organizations are able to coalesce and coexist, how long before they are cooperating and working as one? If the deal is a simple acquisition of a smaller firm that does essentially the same thing as the larger firm (for instance, a regional law firm that buys a small practice in another town), the culture shift may be fairly small and the friction minimal. The two firms could be working together with relative cohesion within a couple of months.
If, however, the differences are larger, or if the companies involved are complex, it can take up to three years for all the dust to settle. But even in the most complicated circumstances, some order should be emerging in the first 90 days, and the new organization should be seeing tangible progress within six months. In the majority of cases, the integration will be producing the expected efficiencies and synergies by the end of the second year, if not sooner.
Next, let’s discuss what metrics you might monitor to determine how your merger or acquisition is performing.
10 Measures of M&A Success
To a large degree, how you define success going into a deal will determine the way you measure it. So much depends on what you expect out of the merger or acquisition. For instance, if your expected outcome is access to a new market, you’ll likely want to keep an eye on regional sales and indicators of increased visibility in that region. If, on the other hand, you bought a firm to add new expertise to your portfolio, you’ll obviously want to monitor interest in, and sales of, those services. But you also might also want to look at utilization in that practice area, as well as overall firm profitability.
No matter what you expect from your merger or acquisition, you’ll want to track multiple metrics—beyond your primary objectives. Here are 10 common ways you can assess the success of your integration:
- Number of clients. Consider tracking this number across your entire firm (in case there is a halo effect that benefits multiple practice areas), as well as for the specific area of your business that has changed.
- Revenue. There is no reason to go through the significant trouble of M&A if it doesn’t make you money. Again, look at both the whole firm and the affected business unit(s). With so much change in the organization, it’s easy to take your eye off of the business development ball.
- Revenue per client. Are you now able to attract larger, more valuable clients?
- Run rate savings. Your run rate is simply an extrapolation of your current revenues and expenses into the future. Plot your actual and expected run rates on a synergy curve and track the results over time. How quickly are you seeing the benefits of synergy? Most successful integrations completely realize these efficiencies within two to three years.
- Cross selling of services. A well integrated firm will be able to upsell and cross sell services. How often are your other practices referring and selling the new services?
- Cash flows. Has the merger or acquisition facilitated or impeded your flow of cash? A successful integration should have a very positive effect once you have achieved synergy.
- Client complaints. M&A activity can wreak havoc in a once-smoothly running organization. Keeping a log of client complaints is a good way to understand the scope of the problem — and pinpoint the areas you need to address most urgently.
- Quality of new clients. Quality can be a subjective measure, but it can give you a sense of which direction your M&A activity is taking you, especially if you have a pre-M&A benchmark to compare against. One way to measure quality is to score a client on a 1-5 scale across a handful of factors, such as: 1) Do they pay on time?, 2) Are they easy to work with?, 3) Do they allow you to do exceptional work?
- Level of staff stress. Has the merger or acquisition made working at your firm more difficult on your staff? Are managers and HR fielding more internal complaints? Are people taking more sick days? Are they working longer hours to compensate for the distractions of an evolving organization? Is the office atmosphere more tense than usual? It’s not unusual for the level of stress to increase in the months following a deal, but you should be taking measures to mitigate those issues over time.
- Staff turnover. Depending on the nature of the integration, you may or may not expect people to leave the organization. If the merger or acquisition created redundancies, then staff departures were probably part of the plan from the beginning. The worst outcome, however, is when unforeseen circumstances — often clashing cultures — compel top talent to leave the firm. Closely monitor this trend from the very beginning. It can sink a promising integration like a torpedo.
Whatever your reason for considering a merger or acquisition, be sure to define clear expectations for the deal. Set quantifiable goals — objectives that can be measured and monitored along the way. Then track your progress as you roll out your integration plan. Do you need to make adjustments? Is there a major problem (like the departure of key staff) that requires emergency triage? If you aren’t looking, you will miss many of the early warning signals. And if you are a firm that plans to grow through acquisitions, measurement helps you learn from your mistakes.
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