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Five Tips for Realizing Revenue Synergies in M&A Transactions

At the most basic level, companies pursue a merger or acquisition because they believe the combined entity will be better off than the two individual parts. In equation form, this could be represented by 1 + 1 = 3. Synergies are the advantages that come through the combination of the two entities. Three common types of synergies include: revenue, cost, and financial. For this article, we will examine five tips to follow to ensure that you recognize revenue synergies in your next transaction.

What Are Revenue Synergies?

Before we discuss how to realize revenue synergies let’s get a definition of what they are in place. Revenue synergies result from an acquisition when the combined entity generates more sales than the two companies could individually. For example, these synergies could be realized when a larger company with a vast client list acquires a smaller company. The larger company can drive more business into the acquired company than the smaller company could generate as a standalone operation.

Revenue synergies are an interesting factor that can provide attractive economics for both parties. A seller that will help generate revenue synergies for the buyer as a result of the seller’s unique offerings can demand a higher price. On the other side of the coin, a buyer may be willing to pay a premium if they believe the post-close increase in revenue will offset the additional consideration paid to the seller.

In our current environment of cheap money and high competition for deals, revenue synergies are playing a more important role in developing a business case for an acquisition. However, a recent McKinsey study reported that a majority of companies in their survey had fallen short of their revenue synergy goals. The average gap between goal and attainment was 23%[1]. The same study also found that the time to capture these synergies is approximately 5 years, much longer than the 2 years reported for capturing cost synergies.

Recognizing revenue synergies may be difficult for various reasons: setting realistic targets, measuring performance, and coordinating teams from both companies to focus on the right tasks. We now turn to our five tips to help you realize revenue synergies in your next transaction.

Recognizing revenue synergies in your M&A transaction

 

1. Understand Where Revenue Synergies Come From
To capitalize on revenue synergies a company must first understand where they come from. One of the first exercises a team should take when conducting diligence on a target is to identify where revenue synergies will come from. This should be a deep dive process. The risk to your organization is huge if this process isn’t detailed and thoughtful. Overlooking synergy opportunities will result in a deal that doesn’t come out as great as everyone imagined it would.

When identifying and analyzing the source of revenue synergies consider the following:

  • Where to sell products/services: Should you expand your product line or the geography in which you operate? What cross-sell opportunities exist with current clients?
  • How to sell the products/services: How can you enhance the combined salesforce and optimize your channel operations?
  • What products/services should you be selling: Can you bundle products and services in new offerings for customers? Will you need to re-brand your offerings? Is it possible or necessary to develop new products and services?

 

After answering the above questions, it is then time to ensure that team members from both companies are well-prepared to help capture these synergies. This will include cross-training for sales teams, ensuring that a single decision maker is identified for each client, and that leadership is behind the effort.

2. Visible Ownership From the Top
M&A transactions bring about change for both the buyer and seller. This is an exciting time, but for many employees it will also be a time of high stress. Teams will be scrutinizing leadership more than usual to see how they truly view the transaction. Leadership from both sides of the deal need to make a joint effort early in the process to convey the level of importance and their support for the deal. Identifying who owns what part of the transaction process and that upper management is proving full support is critical.

If your front-line employees have the impression that leadership isn’t fully invested in the deal, they may adopt similar behaviors. If that happens, good luck achieving revenue or any other synergies.

3. Include Your Sales Team in Strategy Discussions
Every part of an organization is important, but the sales people have a very important function: bringing home the bacon. The best product in the world isn’t going to help your company if no one is there to sell it to clients. Include your sales team early and often in strategy discussions. They can provide insight as to how a strategy may impact the sales cycle and how the front-line sales team will be impacted. A new offering that adds time to the sales cycle and requires each individual gain new skills will need to be carefully structured.

Pay special attention to your sales team’s current capabilities and what you are asking of them for a new offering. It is a misguided assumption that “sales are sales”. A new product or service will require each sales person to acquire the knowledge necessary to discuss the offering with prospects. How complex the new product or service is and how different from the current products/services will be an important factor when deciding how long training will take.

4. Support, Support, Support
The post-transaction company will be disorganized for a short period. Integrating IT systems, HR, accounting, and sales functions will take time. These various systems and groups won’t be integrated on Day 1. There will be a period where two systems are operating while integration takes place. Understanding that integration takes time will allow you to better prepare. Have a cross-functional team ready for Day 1. Task the team with ensuring processes work during the transition period, updating systems, and defining and improving new processes.

It is important to ensure the cross-functional team knows that they have support from management. Equally important is ensuring the team has access to the resources they need to be successful. Support is key and failing to provide the necessary support will lengthen the time required for integration. This could result in loss of synergies as the team simply tries to complete the project without paying attention to detail.

5. Track Metrics
It wouldn’t be possible to provide a list of tips without including some type of data-based piece of advice. Identify metrics that will help you and your team decide if the transaction is going as planned or if it is starting to deviate. Track and review metrics, at a minimum, monthly. Create one set of metrics that focuses on inputs and another set that focuses on the results of the inputs. With a scorecard in place, be sure to keep accurate score and communicate the results to department heads, stakeholders, and upper management. Use the data to identify problems before they become an issue.

M&A activity isn’t likely to slow down, and companies will need to capitalize on synergies to deliver value post-transaction. Knowing where the synergies come from and implementing the tips mentioned above will allow your business to avoid being one of those who reports less than stellar results only a few months after close.

Sources

[1] Chartier, J., Liu, A., Raberger, N., & Silva, R. (2018, October). Seven rules to crack the code on revenue synergies in M&A. Retrieved November 1, 2018, from https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/seven-rules-to-crack-the-code-on-revenue-synergies-in-ma?cid=soc-web

Corbin Bridge on Linkedin
Corbin Bridge
Corbin Bridge is a licensed investment banker at InvestmentBank.com. He has prior experience assisting private companies in developing and executing acquisition strategies. Corbin works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. His areas of interest include Blockchain, AdTech, and Entertainment. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Corbin resides in Las Vegas, Nevada.
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