While a tuck-in acquisition is being negotiated, the 800-lb.-gorilla-in-the-room question is this: how much of the value of the seller’s business can the buyer actually expect to realize going forward? Managed properly, the transition of the seller’s business to the buyer’s portfolio should result in a 100% transfer of revenue, with each account continuing to produce everything it is expected to produce. (This is why it's important that a potential buyer does their due dilligence.)
Nevertheless, it’s wise to anticipate outcomes that deliver other than full value, say Paul Reilly, Peter Schaefer, and Stuart Margolis, partners, New Direction Partners (NDP). It’s also important to take steps that protect value during the tuck-in’s crucial early stage, while adjustments to the plan can do the most good.
In a tuck-in, the payout to the seller takes the form of commissions on future sales from the accounts that the buyer has acquired from the seller. Obviously, it's in the interest of both parties that the acquired accounts remain 100% productive, but there are reasons why some of them may not continue to achieve their full potential. The buyer therefore needs to determine in advance, says Reilly, whether the deal will still make sense if less than 100% of the anticipated volume comes over after the tuck-in is in effect.
What-if, by the Numbers
He recommends building financial models based on fixed and variable costs at several percentages of acquired sales volume: for instance, 90%, 75%, and 50%. It’s also worthwhile to model a better-than-best-case scenario in which the volume exceeds its anticipated value. As Schaefer says, when the right buyer and the right seller find each other, “it could be more than 100%.”
Now the buyer can make what-if plans for each outcome, sticking to the principle that future royalties paid to the seller should be in line with the actual percentage of business realized. Reilly says that NDP has structured tuck-ins in which commissions decrease when sales from acquired accounts fall short of the mark and increase when sales exceed the 100% target.
Schaefer points out that no matter what the actual percentage, all sales are accretive and should drop profitably to the buyer’s bottom line (assuming that you have added little or no overhead costs to achieve the tuck-in). But, he says that both parties should recognize the situations that might keep the transfer of business in a tuck-in from being all that it can be.
Some of them are related to customers’ perceptions of the newly merged company, and some of them stem from the challenges of bringing two formerly separate businesses together. For example, notes Reilly, in tuck-ins where all production has been transferred to the buyer’s plant, the new arrangement may be an uneasy one for some customers.
Don’t Play Musical Chairs with CRSs
A move certain to cause nothing but uneasiness, according to Reilly, is reassigning a client to a new customer service representative (CSR) while production is being moved to the new location. “Changing CRS and production at the same time gives clients an excuse to leave,” says Reilly, who strongly recommends leaving CSRs in place until all of the new production arrangements have been worked out.
Reilly notes that some clients may have been doing business with both printers prior to the tuck-in—a situation that calls for delicate treatment now that the two are one. Decisions about how to handle these accounts should be based, he says, on doing whatever it will take to keep the customer happy. “You need a very good handshake” during this part of the transition, he says, to avoid disrupting relationships and alienating customers used to getting their work done in the old way.
Another issue arises when the seller’s pricing is not the same as the buyer’s. Reconciling the difference, says Schaefer, could cause attrition if some customers find themselves being asked to pay more. But Margolis points out that the biggest obstacle to achieving a 100% transfer of business could be a purely internal one: a mismatch between the buyer’s and the seller’s compensation plans.
Vaccinate Against “Infection”
Ultimately, says Margolis, everyone needs to be on the same plan. Otherwise, the buyer risks the “infection” of resentment and the loss of motivation that can spread when some salespeople come to believe that they are being less well compensated than those on another plan. Schaefer agrees, acknowledging that there probably will be resistance from some quarters to a unified compensation plan.
This means, he says, that it’s up to the buyer to “enamor” everyone on the sales team with fair treatment and a reasonable compensation scheme. The best way to do that, Margolis adds, is to set a phase-in period for the new plan—implementing it, say, over six months so that everyone will have time to get used to it.
The question of actual vs. anticipated business transfer comes up in every tuck-in, but since the answer depends on future performance, there’s no formula for guaranteeing a result. However, with the help professional consultation during planning and negotiations, it’s possible to head off the factors that could keep the deal from being 100% satisfactory—or even more—to everyone concerned.