Many studies have concluded that the majority of M&A deals fail to deliver expected value to shareholders. That this is true across the full spectrum of companies is instructive. If large public companies – with their institutional experience in acquisitions and knowledgeable, well-developed infrastructure and deal teams – are susceptible to unsatisfying transactions, then smaller private firms with more limited experience and resources would do well to focus extra attention on key points to drive up the likelihood of a successful deal.

As the M&A market heats up, it is imperative that middle market private companies not miss out on immediate opportunities. Here are some lessons learned to help middle market private companies get back into the M&A game successfully and the specific priorities that may help keep them off the sidelines. For these companies, inadequate diligence in the planning and execution stage, as well as poor integration planning, are often cited as contributing factors to unsuccessful deals.

The due diligence process
Good due diligence doesn’t happen by accident. Once a letter of intent is signed and “deal fever” takes over, there may be a rush to complete the deal process. A number of key questions must be thought through before the clock starts running. Companies that are successful tend to follow a distinct process every time. For privately held firms, even though they will likely do fewer deals than their larger brethren, this should be a priority regardless of the time gap between a deal.

Planning and execution
Too often, deal participants try to achieve perfection in an imperfect information environment. An M&A transaction has limitations in terms of how much information a buyer can obtain prior to closing. Hence, it is important that everyone on the deal team understand what the “must-haves” are versus the “nice-to-haves,” so that they can focus on the former and not get bogged down by the latter.

The most successful private companies are often those that have a well-defined, clear and consistent process for deal types that are in their focus. This readily replicable process can help ensure that functional participants are “up to speed” with the process early on. They can then focus on the essential details, such as the value drivers of the transaction.

Strategy Considerations
Understanding what drives the deal structure is critical to the successful execution of a deal. It is imperative to plan around that structure to make sure that the goals of the transaction - tax goals, cash goals, etc. - are being achieved.

Adequately understanding the industry-, country-, and deal-specific risks and uncertainties is another area where many companies fail, especially private companies looking to expand geographically. Different countries have their own regulatory, tax, and labor issues, and the deal team must be able to comprehend and anticipate how a country’s rules, regulations and business culture can affect the deal or create hurdles in the execution process.

A middle market private company needs to have the self-awareness to evaluate up front the capabilities of their internal team. With resource limitations, as well as perhaps experiential limitations, smaller acquirers will want to consider how big of an outside team they will need to employ on a deal to determine that issues are skillfully addressed.

Execution considerations
Having a consistent process that can be applied across multiple deals is an important path to saving time and money. However, there are some aspects of deal execution that must be looked at individually.

Leadership of the due diligence process should be determined early on. The company should examine whether the process should be led centrally, or if leadership should reside with the management team that is going to be integrating and running the business.

Once leadership is determined, the team must be selected. Internally, decisions must be made as to what functional areas should be involved. After the internal team is drawn up, the third party team members should be added. If outside lawyers, accountants, and actuaries are brought in too late, the deal may have already moved beyond where they can have a real impact on the valuation and the drivers of success for the deal.

Along these lines, communication is a major area where many companies make a wrong turn. In fact, this is one area where smaller companies may have an advantage of scale over larger ones, but can still miss the mark badly if they aren’t paying attention. With less hierarchy, the lines of communication are fewer and more direct among decision-makers and key deal team members. It is important to stage regularly scheduled checkpoints to assess progress against the plan. Facilitating cross-functional communication between all the different players, such as marketing, operations, finance, tax, and HR, can allow companies to more easily address issues and work to deliver value.

Issue Focus
Many private companies that have survived the downturn have done so by focusing on cost reduction. However, the sustainability of these reductions is still in question, thereby making the results of these efforts a special focus in deals. Understanding the underlying quality of assets - not just from a financial standpoint but from an operational standpoint as well – is imperative for middle market companies looking to acquire.

Usually, the word “diligence” brings to mind tasks such as spotting risks and trouble areas. However, from a more forward-looking perspective, due diligence should also focus on spotting opportunities. Those engaging in diligence should therefore think about the full spectrum of the transaction and consider the opportunities and the risks. It’s important to identify where key efficiencies can be integrated into the deal structure.

In understanding the potential risks, a buyer might first try to understand the target’s practices in certain areas to help determine how extensive its diligence might need to be in those areas. For example, if the target’s leadership views tax as a “necessary evil”, it might signal that they are not equipped with the right resources to handle tax-related problems.

Coordinating with financial, legal, and other workstreams can help spot issues up front and help formulate a plan to address these issues. There may be “exposure” items that a company is inadvertently treading on, and coordination between different functions can save the day.

Reporting
The relevant diligence findings, including accounting and tax issues, is an area where many companies struggle, especially in cross-border transactions. Having a robust reporting process in place helps prevent possible broad-reaching issues from falling through the cracks.

While there should be a final report summarizing critical issues and observations from the due diligence process, taking these findings into account when developing the negotiation strategy and planning for integration can be difficult. Having the same leader for both the due diligence phase and the integration phase is one of the most effective approaches with respect to information transfer.

Merger integration
Preparing for post-transaction issues is a key component of the diligence process for any corporate buyer. In addition, for private companies, it’s essential to identify early on the integration and post-transaction issues – especially “people” issues – that might arise during the integration phase in order to prioritize needs and issues with more limited internal resources.

Post-merger integration has long been treated as an art. Successfully executing and integrating across several dimensions in a very compressed time frame along with business running as usual is a huge challenge that requires the deft touch of a talented leadership team.

Diligence should be conducted with an eye toward integration. Through diligence, the deal team becomes aware of the target’s accounting methods, its staffing practices, and how its systems are designed. This information can facilitate the development of a good integration plan.

Coordination, communication, accountability, and collective focus can be the keys to a successful integration. Experience is also a major contributing factor to the success of a deal. The higher the number of deals entered into previously, the higher the probability of the desired outcome.

The post-recession M&A landscape holds many challenges for both acquirers and sellers. Understanding the leading practices laid out in this paper displays how middle market companies can navigate through the “new normal” environment and help drive value.

By Andrew Wilson, Partner, Deloitte & Touche LLP, and Jim Watson, Deloitte Tax LLP. Click here to access the PDF.