A look inside the world of M&A from leaders who have seen it all

John D. Rockefeller was a pioneer in the oil industry. He took such an aggressive approach to building and growing Standard Oil Co. in the late 1800s that the federal government felt it had to respond and prohibit monopolies.

He switched gears during the second half of his life and devoted himself to philanthropic causes, giving more than $500 million of his wealth — a lot of money today, but even more in the early 1900s — to help his fellow man.

Rockefeller revolutionized the oil industry and shortly thereafter, Henry Ford gave us cars that could be fueled by that very same oil. Walt Disney created “The Happiest Place on Earth,” Phil Knight helped transform the way we look at shoes and Jeff Bezos created a website where consumers can buy just about anything.

Each one of these business pioneers had a dream and an idea to change the world and refused to stop until it had been done, no matter how many challenges arose along the way. It’s the mindset that another wildly successful entrepreneur, billionaire Mark Cuban, has followed in his journey through life and business.

“I don’t care if you’re working a counter at McDonald’s or as a bartender like I did or as a doorman like I did, when it fails, whatever it may be, you’re going to learn,” said Cuban, in a 2011 cover story in Smart Business. “You’ve got to take that positive orientation to it and develop your skills.”

Cuban applied the lessons from his failures to co-found HDNet, buy the NBA’s Dallas Mavericks and become a TV star on ABC’s “Shark Tank,” among countless other accomplishments.

Every entrepreneur has a different approach and a unique way of viewing the world. But at the end of the day, they all understand the power of relationships when it comes to making things happen.

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“It’s the ability to sit down and talk, whether it’s breaking bread at lunch or dinner or just taking an opportunity to get to know somebody,” says Umberto P. Fedeli, president and CEO at The Fedeli Group. “Get to know their background. Get to know how they built their business and how they make decisions. How they decided to do this and how they decided to do that.

“Initially, it may not even be about the business or the transaction. It could be about family, a hobby or something that you both have in common. You build rapport, get some common ground and that’s how you arrive at a deal that becomes a win-win.”

The Fedeli Group is one of the largest privately held risk management and insurance firms in Ohio. Fedeli the individual is an active investor who has achieved tremendous accomplishments, both in business and in philanthropy in Northeast Ohio. He knows how to bring people, and companies, together.

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Umberto P. Fedeli, president & CEO, The Fedeli Group

He also understands that as you’re building that foundation, you are thinking about the end game the goals for both you and the person you’re negotiating with. One skill that all good entrepreneurs bring to the table is the ability to ask a lot of questions and get something useful out of every conversation.

“You should have a whole discovery process where you ask a lot of questions and find out what’s important to this person and what their goals are,” Fedeli says. “Try to find out how they process information, how they think, how they make decisions, what their concerns are. As much as you can, ask appropriate questions, and then do a lot of listening, that’s what you want to focus on.”

A matter of timing

The Riverside Co. is a global private equity firm with an international portfolio of more than 80 companies and more than $5 billion in assets under management. The firm has invested in more than 410 transactions, and most of them have been quite profitable. But co-CEO Stewart Kohl says they haven’t all been winners.

“We have lost money on several of them due to fraud, mismanagement, failed strategies or sometimes just buying the wrong company or betting on the wrong industry,” he says.

“Our biggest mistakes have been not buying some companies that would have been huge winners — like Burt’s Bees, a terrific brand of natural health and beauty products that we could have bought for well under $100 million when it was young, but the price seemed too high. Many years later, after significant growth, Clorox paid almost $1 billion for it.”

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Stewart Kohl, co-CEO, The Riverside Co.

Here are the four critical elements Kohl looks for that reduce your odds of making a mistake and give you a better chance to turn an OK business deal into one that leads to substantial profit:
■  Buying the right company (defensible niche, compelling value proposition) in the right industry (winds at your back).
■  Quickly improving the management team by adding top-level talent and/or replacing underperforming executives.
■  Improving the company’s management information systems and taking advantage of opportunities to close pricing leaks and reduce costs.
■  Supercharging growth through add-on acquisitions that are then properly integrated.

In addition to his role at Riverside, Kohl is vice president of Citicorp Venture Capital and COO of the National Cooperative Business Association in Washington, D.C. He has seen a lot and experienced a lot in business. One of the most common misconceptions he sees in the world of M&A is the distorted view many entrepreneurs and business owners have of potential investors.

“Some think of private equity as just being ‘financial engineers’ who try to leverage up and then cut costs to make money,” Kohl says. “Nothing could be further from the truth. In almost all situations, the only way for a private equity investor to make money is to help the company become bigger and better.

“The best private equity firms have developed proven skills and tools to accomplish this outcome on a regular basis. Most often, we partner with the company founder/owner and work together toward this goal with a strong alignment in terms of risks and rewards.”

Fear of disruption is an attitude that tends to drive the concern about investors, says Julie Boland, Cleveland managing partner for EY.

“There is sometimes a fear from entrepreneurs that investors may be disruptive to the managers and owners of the business,” Boland says. “Through the diligence and deal process, entrepreneurs and investors should discuss working protocols and how involved the investor expects to be in the business.

“Cultural alignment is critically important and is often a factor in deal execution failure,” she says. “We are seeing more buyers and sellers evaluating culture in a deal setting to either ensure a complementary culture or to better understand what change management may be required to align interests.

“Without a cohesive culture, management will not perform and execute as a high-performing team, which increases the risks around integration. Plus, a company runs the risk of losing the people and talent that were acquired.”

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Julie Boland, managing partner, Cleveland EY

Poor execution on integration is one of the most common factors in a deal not meeting expectation, Boland says.
“An organization can mitigate risks associated with execution by specifically defining roles and responsibilities, having strong governance and project management and ensuring dedicated resources are available,” she says.

“Lack of appropriate due diligence is another common challenge we see in the deal process. Surprises in quality of earnings acquired can have a material negative impact on value. Careful diligence around all aspects of a deal (earnings, competitive environment, regulatory challenges, etc.) and good business judgment should minimize, but not eliminate risks.”

The importance of alignment and a sense of common purpose in the negotiation of a merger or acquisition cannot be overlooked, Fedeli says.

“It’s not necessarily what you think, it is what they think,” he says. “It’s also having the right questions in this whole process and also making sure that you really listen to and talk to as many of the various people that are important in making the decisions.

“You always want to make sure that you really have dealt with the decision-maker. If you are dealing with people who are not the decision-maker, you may not really find out what their real concerns, real issues and real points are, and perhaps you could end up with some issues that could be a deal breaker.”

Mal Mixon made 50 acquisitions when he was CEO at Invacare Corporation. One of his key tenets was to never overpay for an acquisition.

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Mal Mixon, former chairman & CEO, Invacare Corporation

“You should buy for what the company is worth, not for what it’s worth when you get it,” Mixon says. “A lot of companies, when they decide on the price, they include the value that they bring to the table. And therefore you don’t get anything accretive out of it.

“All of my acquisitions were accretive. They brought earnings per share to Invacare. So I didn’t want to overpay for them. When I looked at an acquisition, these are the issues I looked at: Do they really fit with Invacare? Do they make us stronger? Is it a new product line? Is it a new geography? Does it eliminate a competitor?”

Drop the excuses

One of the ongoing challenges in 2016 is continued uncertainty regarding the economy. It leaves many companies feeling like they’ll never grow again. But there are strategies that can help you get things turned around.

Here are three strategies Kohl recommends:
■  Pricing. If you haven’t thought about your prices lately, chances are that you’re missing out on revenue with a near 100 percent margin opportunity. I’m continually surprised at the gaps that can be discovered during due diligence. Carefully analyzing your pricing history and ensuring that you’re getting the correct value for your products and services is often a near-term way to boost your bottom line.

In one dramatic case, a software company that Riverside acquired was charging $60,000 for a new product.

After evaluating the value it delivered, it was determined the company could raise the price to $400,000 without an impact on sales volumes. Even if you fear the results of a price increase, you can still stop ‘leaks’ in your pricing caused by unnecessary discounts — that alone can add a 2 percent boost on average.

■  Sales tune-up. Take the time to understand the sales process. Build a formal sales process based on an evaluation of sales techniques, current and prospective customers and your pipeline that is rigorously monitored. Be sure you’re dedicating your sales resources to the right places and clearly communicating a compelling value proposition. Less focus on the most competitive or unrewarding customers frees up resources for new, higher yielding campaigns.

■  Accretive acquisitions. Competitors may also be suffering slow growth, making this a great time to acquire a competitor or two. This can add scale and provide opportunities for synergies for both companies. Growth is rewarding in multiple ways. Winning investments generally have a sales chart that looks like a ruler placed at an angle up and to the right — steady growth every year, no matter what the broader economy does. Now is the time to stop blaming a sluggish macro-environment and to take matters into your own hands.

Don’t be afraid to walk away

Some deals are just so obvious that anyone can see the reasons why two companies should become one. Others aren’t so obviously meant for each other, but an experienced entrepreneur — who can see what others can’t — will see the potential.

And then, of course, there are those deals which aren’t a good fit from the start, but the people involved continue to push ahead anyway, believing that they can make it work or that they have put too much effort into trying to make it work to just walk away.

“It’s always about the people,” Fedeli says. “The people are the most fascinating, the most fun and sometimes the most challenging part.”

Mixon suggests you trust your instincts.

“If you ever sense that the other party isn’t being totally honest with you, it’s time to get out,” he says. “If they tell you something that is not true, or omit something that you really needed to know, that can be just as bad. If you find out something that is totally misrepresented to you, you’re probably looking at a dishonest person.”

In the end, Kohl says business deals can be similar to a marriage.

“On the upside, they can make you truly happy (and help make you a boatload of money),” he says. “But on the downside, it is messy (and expensive) when it ends in divorce. Keep your eyes on the prize — despite all of these challenges. When it works, it can be remarkably fun and life changing for you, your company, your employees and even the community.”