Issue 3 - November 2010
The First 100 Days
Well before closing on the acquisition of a company, the sponsor should develop a 100-day plan for the acquired company that will put it on the path to achieving the sponsor’s investment goals.
Whether acquiring a stand-alone business or carving out a division from a larger company, sponsors need to launch the investment on a course that will maximize the likelihood that it will achieve the goals that prompted the acquisition in the first place. Whether a sponsor anticipates minimal changes in how the business operates or radical changes in the vision and direction of the company, what happens during the first 100 days after an acquisition is completed is critical to establishing the tenor of the new partnership. To maximize the likelihood of success once the acquisition takes place, sponsors should develop a 100-day plan well ahead of time.
During the period leading up to the acquisition, the sponsor presumably has communicated its investment thesis clearly to management of the acquired company and had frank discussions on how it expects to achieve the goals that underpin its rationale for the investment. These should include realistic expectations about the level of involvement the sponsor expects to have, reporting requirements it expects to institute and the various metrics it expects to employ to monitor the company’s progress toward its investment goals. (Sponsoring companies commonly complain about the sometimes cloudy distinction between the roles and responsibilities of their CEO and those of the acquired company’s CEO.)
Once an acquisition takes place, it is important that the sponsor and company management finalize a concrete plan for achieving the investment objectives; and doing so within the first 100 days takes maximum advantage of the relationships and momentum that have been established during the negotiations. Management should be charged with preparing a bottom-up business plan that sets forth the tactics it proposes to achieve the agreed-upon near- and mid-term goals for the company, the metrics it recommends that the sponsor employ to measure progress, and a road map of middle management responsibilities, milestones and timelines that will be used to implement the plan. The plan should then be presented to the board (that is, the sponsors), for (first hand) input and approval. If the portfolio company operates in a sector that is not well known to the sponsor, or the sponsor believes that the company requires dramatic changes to either its business model or operations, the board might be well-advised to retain experts with executive level experience in that sector to provide additional guidance during this process. The agreed-upon business plan can then be used to establish annual incentive plan targets (potentially reflecting a mixture of financial and nonfinancial goals) and performance rewards that incentivize the actions deemed necessary to achieve the business plan’s goals.
A detailed one-year plan is particularly important, but we would recommend that the plan encompass at least a three-year horizon so that the management team and sponsor can agree on the nature of the medium-term direction that will be pursued to reach the goals that have been established, and the steps that they expect will be required to get there.
SIX KEY FOCAL POINTS FOR THE FIRST 100 DAYS
Each of the following issues is critical in positioning a new acquisition for success. While some may seem commonsensical, each requires thoughtful planning and execution.
Clearly communicate with all key constituents on day one and again during the first 30 days. A comprehensive communication plan should be developed to address the anticipated concerns of key constituents, including customers, suppliers, employees (including unions or workers’ councils) and financial stakeholders. If the acquired firm has various operating entities resident in different countries, it is possible that this will require tailored communications in terms of both content and local language. In many cases, this plan will be developed and implemented before the acquisition, but once the transaction is complete, these stakeholders will want to learn more about the sponsor, its goals and objectives in making the acquisition, its vision for achieving those goals and objectives, the thinking behind any announced management changes and a report on the financial stability of the company after the acquisition. Consideration should be given to having the sponsor and senior management meet individually with key customers, critical vendors and valuable employees to share their vision and enthusiasm, calm fears, solicit concerns and gather input. Directly or indirectly, these conversations should address the sponsor’s level of commitment to the company and the opportunities that are created for each constituency.
Establish control of cash from the first day, even if there is an abundance of it. Many acquisitions, particularly divisions carved out of larger businesses, are more focused on profit and loss than on the cash flows. First identify all of the ways obligations can be entered into cash (such as by field staff, individual store location, corporate, p-card and contract) and how cash disbursements can be made (such as check, wire transfer and petty cash). Armed with this inventory, evaluate and adjust authorization limits to levels the sponsor is comfortable with, then modify the related procedures accordingly. Tightening down the many ways cash can be committed to and disbursed will often save the company significant dollars in situations where controls were somewhat loose under prior ownership. In addition to maximizing cash flow in the short run, taking this step in the first 100 days fosters a culture of cash maximization that is often critical to achieving the long-term goals of the sponsor.
Implement corporate governance policies that provide the appropriate level of oversight by the sponsor and establish authority limits at different levels within the portfolio company. Companies permit varying degrees of authority to obligate the company and disburse funds. In more decentralized organizations, significant authority sometimes lies at relatively low levels. A sponsor needs to evaluate commitment and disbursement authority levels from senior management down to the most junior levels and adjust them as necessary. At the senior management level, authority limits establish the degree to which the sponsor desires to be involved in decision-making beyond approval of a business plan and monitoring of results.