This article deals with a topic all Private Equity sponsors have tackled when they undertake acquisitions to grow an existing platform company – how to identify issues affecting a platform’s ability to scale and support SG&A capabilities to support the needs of acquired companies, employees, service lines, and locations.
While everyone always cites “maintaining business continuity” as a post-acquisition integration goal, straining shared SG&A services right out of the gate injects variety of critical risks into the newly acquired business:
- Lost revenues from customer attrition due to disruption of day-to-day operations such as order entry, customer service, and service delivery
- Margin degradation due to increased administrative costs and costs of sales resulting from missed deadlines and re-work requirements
- Challenges to statutory, management, and equity sponsor reporting resulting from reduced availability and veracity of consolidated financial and operations information
Whether they be small add-on transactions, carve-outs, or transformative deals that increase the platform size considerably, platform SG&A services like HR, IT, Finance & Accounting, Purchasing and other core services need to be ready to scale to support the expanding platform.
For many equity sponsors, an assessment of short-term platform SG&A needs is undertaken as part of due diligence. However, particularly near the beginning of the hold period for the platform, contemplating only the SG&A enhancement needs based solely on one or a few potential acquisitions can both create a false sense of readiness, as well as lead to platform SG&A enhancement decisions that cannot provide the necessary scale over the life of the investment.
Addressing platform SG&A readiness requires taking a long-term view of the growth of the platform to provide a sound basis for assessment.
Global PMI Partners has worked on over 50 Private Equity transactions across dozens of industries. Our approach for gauging SG&A platform scalability is focused on answering the following questions as part of an SG&A platform assessment exercise:
- What kind of acquisitions will the platform make and integrate during the hold period to help fulfil the investment thesis? Will acquisitions all be in the same industry and at the same point in the value chain, or will they have differentiated SG&A requirements? How many acquisitions of each type are possible, and in what timeframes?
- For each different kind of acquisition and integration (“acquisition archetypes”), what different or additional SG&A integration due diligence, planning and implementation considerations will need to be considered?
- What is the potential impact of each potential acquisition on key platform demographics such as revenues, number of employees, number of geographic locations, and number of discrete services provided?
- How do existing processes and applications map against future requirements to stand-up the platform and integrate acquired entities?
- Where are the gaps between current SG&A capabilities and capacity, and what challenges are there to bridging those gaps in a sustainable fashion?
- Are there potentially different scenarios for full and partial integration of new acquisitions, and how will each scenario impact platform requirements and integration planning?
- What investments will be required, and when, to deliver both short- and long-term and sustainable SG&A platform enhancements that deliver synergies and support the overall investment thesis?
- What is the sequence and timing of those investments?
- What is the roadmap action plan for their completion?
Informing Integration Planning and the Integration Playbook
There are many methods, tools and processes used to identify company strengths and weaknesses and in finding acquisition candidates that can supplement and/or complement your existing business. The detail of each tool is outside of the scope of this article, though it is worth knowing that they are all simply about getting managers to decide on the right company as a merger partner or acquisition target.
An additional benefit to the above-described approach to SG&A platform assessment and planning is to provide information to inform and enhance the development of both integration plans for any immediate acquisitions, as well as the Integration Playbook that will help guide integration planning over the life of the investment.
Work-products and decision-making that we most often see enabled by having first undertaken an SG&A platform assessment and planning process include:
- Post acquisition costs and synergy opportunities
- Acquisition integration checklists (everything that needs to get done as part of the integration plan)
- Post Acquisition integration strategy & plan
- HR, IT and Finance & Accounting detailed integration workplans
- Integration risk and cost assessments
- Technology and supply chain integration challenges
- Product definition, description and structure integration challenges
- CRM integration or data migration
Summary: The benefits of SG&A platform assessment
- SG&A platform assessments will result in a plan to help get you ahead of core infrastructure requirements and thresholds before they are strained and causing issues.
- The output helps assess potential integration scenarios for full or partial platform consolidations, and helps evaluate the platform consolidation opportunities and investments required to deliver both short and long-term and sustainable SG&A platform enhancements
- Provide the platform management team with a clear roadmap of how to build a serial acquirer SG&A engine.
- Gives the Private Equity an understanding of the SG&A risks, investments needed and potential synergies.
- Helps de-risk the platform investment and is normally less costly than legal constructions and negotiations (particularly when conducted as part of pre-deal due diligence).
Michael Holm and Scott Whitaker are Partners and Matt Podowitz is an Associate at Global PMI Partners, an M&A integration consulting firm that helps mid-market companies around the world by delivering exceptional consistency, speed, and customized execution on the complex operational, technical and cultural issues that are so critical to M&A success.