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The unwritten rules of M&A

Ten tips to help strengthen your company’s acquisition strategy

Jim Karman

October 5, 2018

By: Jim Karman

When I started working at RPM International Inc. in 1963 with my good friend from college, Tom Sullivan, whose father, Frank, founded the business, it was a $3 million company. When I retired in 2003, it was a $3 billion company, and now it is over $5 billion. Acquisitions were a big part of our growth strategy — with RPM completing more than 200 acquisitions during that time.

After my retirement from RPM, I have continued to be a part of several more acquisitions for our family-owned furniture manufacturing company. Through the years, we came up with certain “unwritten rules” that defined our acquisition negotiation and preparation strategy.

Here they are:

  1. Open with a fair price. Don’t try to bottom fish a good company. Take a step to create goodwill right off the bat.
  2. Don’t agree to any earnouts. An earnout is a contractual provision in which the buyer pays the seller additional money based on future sales or company performance after the company has been acquired. These are very difficult to manage and nobody is ever happy in the end. As an example, if the seller doesn’t hit his earnout targets — he will blame the company for not doing enough or cutting marketing expenses, etc. If the seller thinks his company is worth more than what you are willing to pay, have them come back when the price is justified.
  3. Remake the financial statements provided to be compatible with yours. Have a pro forma statement prepared by your outside accountants, which will eliminate unintended bias.
  4. When the details are being hashed out, keep the main buyer and seller out of the room. Let the lawyers and representatives handle everything on their own. Otherwise, you tend to get a lot of grandstanding by the lawyers trying to prove their worth to their client. Keeping the top parties out will expedite getting the details worked out quickly and efficiently.
  5. Carefully review the management team. Make sure it can be coordinated with your team with no problems, overlaps or gaps.
  6. Keep your management team informed of key decisions as negotiations move forward.
  7. Be aware of any problems alluded to, even briefly, and make sure all concerns are discussed promptly.
  8. Be alert to the possibility of a “stalking horse.” This is someone who is seemingly helping you, but is actually working to set up their own deal.
  9. Keep a strict time table — with no delays. Be especially aware of any delay proposed when your plan is partially presented, and on the table. Such delays can ruin your plan or advantage.
  10. Stay away from turnaround situations. There are too many good companies out there to waste time on these.

By sticking to the above points, we found that expectations for all sides were clearly in the open. As a result, we ended up with a better chance for both the buyer and the seller to be happy in the end.

Jim Karman is the retired president, vice chairman and board member of RPM International Inc. His book, A Rising Tide Lifts All The Boats, is available for purchase from The Learned Owl Book Shop in Hudson, Ohio.