You bought a company – now what? Before you rush to reinvest everything, remind yourself that you probably bought this company because it has been doing something right. We’re going to go over how you should approach post-acquisition at the right pace so that you don’t upend the operation while you do make progress towards the potential you envisioned when you started pursuing this opportunity.
Understanding Post-Acquisition Integration
Post-acquisition can mean different things depending on who you are as a buyer. For comparison:
- In mergers, you’re blending cultures and systems.
- In strategic acquisitions, you’re adding-on capacity and blending others into your culture.
- In typical small business acquisitions, you are blending into the target company.
For the sake of the rest of this guide, we are focusing on the last example where you as a buyer acquired a company – likely a small business with seven-figure revenue – and you are now blending yourself into its operations.
Your Post-Acquisition Integration Approach & Timeline
After closing, you should look at your integration into the business in different sections:
- The First 100 Days: You are learning, building relationships, and setting the tone as the new leader.
- The First Year: You are working through the stages of the business, which can vary greatly through the months even for businesses with low seasonality.
- The First Two Years: You reach a significant milestone by working past the first year of adaptation and completing the second year where you move past being “the new owner” and into place as “the owner”.
Those First 100 Days are most critical. How you approach them will dictate how you establish your presence as a leader and how effective you are in instituting change while maintaining existing operations. We recommend you handle that period as follows:
- Month One – Learning. Talk to the team. Ask them for input on what they would do as a new owner. Figure out what’s breaking, what’s working well, and where attention needs to be placed.
- Month Two – Planning. Before you start taking action, take time to map out plans. This is a matter of discipline and thoughtfulness. In reality, month two is still incredibly early and you will continue to be inundated with new information. Outside of emergencies or questions of integrity, resist your urges to implement changes too early.
- Month Three – Starting. This is when it becomes acceptable to start putting plans into action. You can signal at this time that you’ve listened and observed and will invest in making positive changes to the company.
Integrating the Entrepreneurial Operating System into your Post-Acquisition Approach
EOS is an approach to managing and overseeing a business that we recommend to all our small business clients. After buying a business, it can be a powerful tool to discipline yourself in how you create plans and set priorities, as well as providing a “common language” for any leaders on your team. As you learn more about how to leverage EOS, you can incorporate it throughout your team, though we don’t recommend that from the beginning unless you have experienced using EOS with a company before for at least two-years.
Proper use of the Entrepreneurial Operating System truly is not achieved until 18 to 36 months of dedication to it. That is because there is a cadence across a few key aspects of EOS:
- Weekly Scorecard & L10 Leadership Meetings
- Monthly Partner Meetings
- Quarterly Planning Sessions
- Annual Planning Sessions
In the course of eighteen months, you’d be well-versed in the weekly scorecard and leadership meetings with 78 occurrences and should have well-tuned monthly partner meetings with 18 completed. However, you’d only have been through six quarterly meetings and one annual meeting. These are when you establish rocks (objectives) and strategic plans, which funnel through to your weekly and monthly sessions. EOS simply takes time to understand and apply to your business, and that’s part of why we recommend you start early. Leadership team size also dictates the quality of EOS implementation, because it can be difficult alone. A team of three or four works well for a small business, allowing for agility and diverse perspectives without weighing down the process before it has been understood and refined by the owner.
Pre-Integration Planning
In reality, proper post-acquisition integration begins before closing. Planning begins with your work through due diligence, as detailed in our comprehensive Acquisition Due Diligence Checklist. Use that checklist as a reference for what due diligence needs to cover and keep track of key points to incorporate in your first 100 days and beyond.
A corporate-level acquisition or merger may involve creating an “integration management office”. For an entrepreneurial approach, consider your integration management team. This is likely to be the same team that would be in your weekly leadership meetings under the EOS model, but you may assign managers and even key front-line staff members who can help to improve the individual systems and processes they touch. We lean on trusting the team members in the acquisitions we complete and believe in this approach, but that is personal preference. However, typically employees are not told about a sale until the close date, so you may bring your pre-integration planning to them post-close, or it may be something you develop during your first 100 days as you figure out who would be on the integration team.
Out of this stage, you would develop a detailed integration roadmap defining:
- What needs to happen, including desired outcome and its purpose
- What the priorities are, including the criteria used to determine priority
- What your proposed timeline is, including a critical path and flexible deadlines
- Who the directly responsible individual is for each objective
Early on, you should think about how to blend objectives that would be quick wins to build momentum and avoid shaking up too much at once. Employees are at a fragile time where you need to build trust to show them they have security and confidence in the new direction you set. That doesn’t mean play soft. You should also set significant strategic initiatives in place. Just keep an eye on employee morale and reception in the process and address it head-on as needed.
What Makes A Successful Integration
Organizational Structure
There are several aspects to consider to make acquiring a company and integrating into it successful. First, look to align the organizational structure. This could mean working your approach into what exists, defining what exists but isn’t documented, or recreating structures through the Entrepreneurial Operating System.
Culture Assessment
Merging cultures is another key element to consider. You will need to assess the culture, determine what unwritten behaviors exist, and set the tone for how you handle situations. Culture is often described through use of core values, but it’s experienced through behaviors, how you face challenges, how you communicate and how you treat people. How that is handled today in the business may not be what you desire going forward and changing that existing culture can be a long and arduous process, but it’s a critical aspect of your role as a leader.
Stakeholder Communications
Your internal communications begin on Day 1. It’s best to address the employees together with the owner at the start of the day and at the start of the week, allowing for plenty of time for questions and discussion for that day and the days that follow. Your first message should honor the company and explicitly share with the employees that their employment is secure while quelling concerns of upending how their jobs look today. Let them know your plan right now isn’t to make changes, but to learn from them and keep the business flowing along as it has. Remove their concerns and provide them with confidence. The past owner should understand their role on this day is to help with this.
External stakeholders may include suppliers, vendors, partners, and so forth. Your transition plan negotiated during due diligence should have addressed this. Typically, the past owner will help to introduce you personally to stakeholders to provide a smooth transition. Likewise, external parties don’t want to be taken off guard or be concerned of having to handle changes. You should also invite their opinion on how you can work together better, but that may be more appropriate after the past owner is no longer involved in the meetings.
Operational Integration and the Urge to Streamline
Many times an acquired company has been operated in recent years, or decades, by a complacent owner who has been successful with things as they were. There may be a plethora of technology, systems, and processes that you would like to upgrade and renew to improve the bottom-line and overall capacity.
Avoid upending what exists today in the first days. Return to your approach for the first 100 days – learn, plan, then start. We have seen many owners rush to implement new software before they have fully understood how exactly it would and could be used. They end up with a poor fit solution with low adoption and compliance rates from staff. Software integration requires proper understanding, qualification of tools, and planning for training staff on the use, purpose, and value.
Systems and processes should be handled similarly. You bought the company because it was doing something right, even if undocumented or underoptimized. You may have even valued the under-optimization if you believed you could unlock value post-close by improving operations. Learn, prioritize, plan, and progressively streamline operations. Free yourself from the feeling that it all needs to be changed overnight, because it not only is an unreasonable expectation, but it can be damaging to change too much at once for both your staff and your own ability to measure impact.
Financial Oversight and Monitoring
Whatever your background and skillset, you need to take a level of responsibility for the financial health of your business as the owner.
Financial Reporting
You need to know your numbers. Whether you are generating financial statements, a staff member is, or you’re partnered with an outsourced accounting firm, identify a schedule for reports and stick to it. Within the first ten days of each month, you should have the past month’s profit & loss, balance sheet, and cash flow statements ready to review. As you go, if you can speed up this process, you should. Timeliness of financial data is important.
On that note, you may want to keep a rolling 13-week cash flow statement ready so you know your exact cash position. This is a great tool to learn how the business works early on as the new owner. Knowing your numbers helps you identify priorities and align objectives according to need and feasibility.
Budgeting for Growth
Budgeting for growth is something many acquirers consider too late in the game. You can start with reasonable estimates even at the point of looking for deals. Look at the company’s owner cashflows, set aside 60% for debt-service, and the remaining 40% would cover owner-operator salary, growth, and cash buffer. This is where you can establish that your target company’s earnings would need to be around three-times your intended owner-operator salary. Once you figure out what you can set aside for growth, also consider the full aspect of “growth”. It doesn’t apply to top-line revenue increases only. Your efforts to improve bottom-line or grow capacity by streamlining operations need to be prioritized and budgeted for as well.
Employees and HR Considerations After Closing
In buying a small business, your employees are critical to continue operations smoothly. This is evermore true if there is a key employee such as an operator, leader, or management team member. In the case of these team members, you may consider a “stay bonus” or retention bonus. These are financial incentives tied to a timeline, released when milestones are met, to help ensure business continuity and employee commitment. They can be important when trying to secure institutional knowledge and capacity alike.
How you set an individual stay bonus ranges based on need. Some are as short as three months and some as long as three years. Amount can vary even wider, whether a flat dollar figure or a percentage of salary. The focus is on identifying what is valuable and feasible to both parties and appropriate for the given need. Also remember that if you’re doing your job well as a new leader, you should introduce new opportunities and an improved work environment, so overly relying on financial incentives may not be appropriate.
Compensation Structure to Align Incentives for a CEO or Operator
If you have hired a CEO to operate the business, consider an incentive structure aligned to financial health. That means taking a multifaceted approach to compensation. If you were to tie bonuses to either revenue or profit alone, the other end can falter. Under-investing to falsely elevate profits doesn’t serve the business any more than overspending to maximize top-line does. Instead, develop a plan that releases bonuses as profit and revenue goals are met, as well as integrating key objectives (or “rocks” from EOS) are met. The right operator will love this compensation structure.
Staff Training and Development
After the first three to six months pass, you will have a strong grasp of what training and development is needed. For training, look for skill progression across the staff. Do your best to look at your high performers to avoid the trap of overinvesting in the poor performers who maybe shouldn’t be with you long-term. There’s a tendency to focus on the lowest performers while neglecting the highest performers. Don’t do that.
For development, consider improving the management structure. Gino Wickman, author of Traction where EOS is detailed, wrote a book titled “How to Be a Great Boss”. This provides an excellent outline on how to manage people while providing a structure for developing your people. In essence, you are developing your managers so they can develop their direct reports.
Overcoming Integration Challenges
Managing Change
Resistance to change is likely to be the most significant challenge you contend with. It’s natural for people to resist change, so it’s your objective as a leader to support them through change and provide the right context to eliminate barriers.
We believe in the matrix “Managing Complex Change” (copyright Dr. Mary Lippitt, 1987). Within, Lippitt identified five critical components to work through change, as well as what lacking them causes:
- Vision: Without it, people are left in Confusion on what is trying to be accomplished
- Skills: Without skills, Anxiety builds as people are incapable of achieving the vision.
- Incentives: Misaligned, at best you may see Gradual Change.
- Resources: Without the needed resources, people feel Frustration by not being supported in the way they need to be.
- Action Plan: Without a proper plan of action, a series of False Starts kill momentum, morale, and confidence.
Cultural Clashes
We’ve mentioned culture’s importance, but the reality of the clashes you may face can become dangerous. As positive as culture can be viewed in the business world, there are many negative cultures as well.
Your role as a leader is to determine what changes are needed in the culture, what’s a matter of difference in approach, and what is inconsequential. There may be battles not worth addressing now, and others where time is of the essence. If the past owner operated in poor faith, which you may have uncovered signals of in due diligence but only realized post-close, you can expect a culture of lacking integrity. Working through rewriting the culture involves a lot of work, communication, and likely, some challenging conversations and staffing changes.
Business Operations Continuity
The previous owner likely operated with institutional knowledge that may take you years to unlock. While they may have been through multiple market cycles, you may need a decade or more before you experience the full effects. They also didn’t have debt service that may take away half of your earnings or more. This is why disciplined attention and honesty on finances and structured organizational management is something we reiterate so frequently.
KPIs to Measure Integration Success Post-Close
Measurement is critical but challenging after closing on a business. It’s new to you – whether you’re deeply experienced in the field or not. Small businesses are quite unique either way. The main KPIs you track should be part of your weekly scorecard, as detailed in EOS. Some recommendations include:
- Employee Morale Measurement: To keep your finger on the pulse.
- Top- and Bottom-line Figures: To know your numbers.
- Objective/Rock Completion Rate: To establish how accurate you are in reasonableness of your goals and their intention of being “achievable yet challenging”.
Your individual key performance indicators need to be customized, but look at the categories recommended. Overall business performance and financial health, employees’ confidence and flow, and quality of goal setting. Don’t compromise in measuring these elements.
Carefully Manage Your Post-Acquisition Integration
Buying a company is no small feat. It’s actually the start of a series of feats ahead of you. In summary, you should begin immediately mapping out your post-acquisition timeline, learning about EOS, start planning for post-close during the pre-close period, determining how you will approach organizational structure, culture, and communications, building your financial management acumen, and understanding the existing staff.
Our parting advice
Learn to have fun dealing in chaos rather than being frustrated by it. If business ownership is new to you, you’ll learn that chaos is simply part of the role. Yes, you will streamline operations, reduce the workload dependent on the owner, and improve the business in all facets. And yet, chaos doesn’t go away, it just changes. In fact, creating order out of chaos is exactly what many successful business owners love.
About the Author
David is Bbg, Inc.’s managing director. He focuses on driving strategic growth and operational effectiveness. Passionate about helping others be at their best and fostering collaboration, he ensures excellence is seen in the clients we serve and the businesses we operate. Follow David on LinkedIn