Roll-up mergers can create significant value through scale and cost savings, but not all roll-ups perform as expected. Speed of integration may be the most challenging factor when acquiring and consolidating multiple assets.
While most private equity firms want to move quickly - with integration plans of 90 to 100 days - an integration cannot move faster than the organizations can handle. Practical plans must consider bottlenecks represented by the abilities, motivation, and talent available. Every successful roll-up begins with due diligence, which will help inform thinking on integration speed and planning.
Due diligence should provide a clear picture of each company’s cultural profile, including efficacy of employee/role matches. The process should uncover whether the right talent is in place and on board or whether talent can be developed.
The ability to retain and develop employees can make or break an integration, and resistance is common, often driven by fear of failure or change itself. Resource constraints can exacerbate the problem. A lack of properly trained and educated talent can hamper integration efforts, particularly if transition efforts are happening faster than staff can absorb.
Without addressing cultural change, each additional asset will be working in parallel rather than as one company moving forward together. To unify the companies, a mission statement must be developed and communicated clearly and often. Additionally, leadership should be visible and accessible, including trusted, respected staff from each add-on company that are “in the know” and can report back to concerned employees.
One often overlooked contributor to cultural integration is email. Immediately standardizing employees on a common email domain can help to build a sense of commonality and inclusion for all employees.
Open communication must be established to alleviate employee anxiety, along with an efficient process for employees to ask questions and receive timely answers. This should occur immediately upon announcing integration and should address the strategic vision for the company and topics that directly affect each employee, such as integration plans for compensation and benefits.
Quick Wins vs. Long-Term Projects
During planning, compliance requirements may dictate certain immediate action, and quick wins should be identified that will create unification. Beyond that, the plan should address long-term integration concerns and clearly communicate them to the team so that the culture may still be developed.
While achieving and communicating quick, positive outcomes builds confidence and displays management’s commitment, understanding the cost/benefit of quick versus incremental integration elements will mitigate risk presented by unnecessary acceleration- and failure.
In one engagement, CR3 Partners worked with our client to move targets to improve the insurance plan of an asset while leaving pay structures unchanged in order to avoid negative ramifications. CR3 recognized the quick win, but also where incremental change was required. Decisions regarding each were communicated quickly to minimize employee attrition and maximize morale and retention.
Backoffice, IT & Administration
New processes and systems must take into consideration the team’s ability to manage change. Some teams are capable of immediate and transformative change, while others require more guidance throughout the process.
The new company must quickly standardize reporting to management, lenders, and investors. Rarely will companies run like systems so planning should be addressed prior to acquisition as system implementations or conversions can be lengthy, requiring training and process change.
During another CR3 engagement, a new ERP system was required. For six months, three sets of books were closed and consolidated offline, demanding foresight, planning, well-defined processes, and enhanced training.
Operational integration can create efficiencies and reduce cost, but also represent both high risk and high reward. A roll-up strategy must consider both near-term and long-term operational future states.
For example, in an ideal state, retail stores may source products directly from any warehouse. While a new system might enable this functionally, the near-term state may preclude it until logistics and employee training are positioned to actualize the process.
Branding & Growth
Branding is essential to ensuring market confidence. Branding should include a clear identity package and messaging to accurately communicate events and guide consumer understanding. Failure can devalue the brand and negatively impact sales.
In many roll-ups, growth strategies are implemented prior to successful integration. All facets of integration must be optimized before the company is equipped and positioned to manage growth.
In a recent roll-up, CR3 integrated the operations of two retail concerns, including fulfillment and logistics, which positioned the new company to take full advantage of e-commerce, leading to greater reach and opening new customer segments.
At CR3 Partners, we help clients unmask and understand risk factors. We execute strategies that are actionable within immediate constraints, while developing plans to meet long-term, established goals. A successful roll-up demands specialized expertise that typically is not a priority within companies or a private equity firm’s internal talent pool. Leveraging experts help to ensure that risk is identified and mitigated, that a sound, actionable strategy is tailored to the unique profile of the add-on companies, and that company management understands and adapts to the requirements of private equity.
Management and private equity must also plan to exit the experts and transition to internal staff. Experts should be leveraged short term to develop the integration strategy, establish tools and a foundation for executing the strategy, and position internal talent for ongoing management. At CR3 Partners, one hallmark of a successful integration is when we exit and the organization continues to thrive on its own.
Finally, and perhaps most importantly, the speed of integration must be customized and precise. The right speed aligns expectations with the ability and talent available within the acquirer and companies.
About CR3 Partners, LLC
CR3 Partners, LLC is a national turnaround and performance improvement firm that assists, guides, and collaborates with management teams and their constituents facing any sort of transition, opportunity, stress, or distress. Carmen Barrett is a Director based in CR3 Partners’ Dallas office.