"There are, to my mind, three fundamental pillars of value that apply to all companies: people, processes and systems. Working on the assumption that a company looks sound financially, interrogating these three areas helps determine whether it’s a good investment decision."
Mark Heraghty is a highly experienced senior executive in the European technology sector with over 20 years experience acquiring and integrating dozens of technology businesses across Europe. He has also worked at the sharp end of high-growth expectations, specialising in building business development approaches which deliver rapid B2B revenue growth. He has served as MD of Virgin Media Business and now operates as a Chairman, a Non-Executive Director and a Strategic Advisor to technology and infrastructure companies in the US and Europe.
There are, to my mind, three fundamental pillars of value that apply to all companies: people, processes and systems – and the people discussion is by far the most nuanced. Working on the assumption that a company looks sound financially, interrogating these three areas helps determine whether it’s a good investment decision.
I look for leaders who can share their vision and take their stakeholders – customers, employees, investors - on a journey. It doesn’t matter how good you are as an individual; if you can’t persuade the people around you to join you, you’ll never get there at all. It’s important to take a highly critical look at the leadership team and its capabilities: what is their mission? Are they capable of delivering on it? Are they willing to listen, change and adapt?
I equally look for leaders who are humble enough to recognise and accept they might not have all the answers. Many first time CEOs, especially those coming from a technical background, can be somewhat dismissive of the “softer” side of business - brand value, culture and HR.
The dynamic of a team growing to scale from 1-100 people shifts significantly. When you have a small team, you know everyone intimately and you can make good instinct-led hiring decisions based on meeting everyone in person. As the team grows, especially when you start to operate over multiple locations, more robust processes must be put in place. What might have worked fine in the past simply won’t scale.
You also need to consider the second and third tiers of the organisation, below the senior leadership. There’s often a significant gap here in skills, in-house knowledge or resources; and it can present a real worry for an acquirer. This happens for a number of reasons, largely cost-based. For example, the spending discipline instilled in companies in the early days can mean that anything not directly impacting sales is seen as a lower priority. The focus on building exceptional leadership teams can mean that the next tiers down – from VP to line management – become sidelined. There’s a real lack of appreciation for the importance of building a strong team under the upper management, and a similar underappreciation for how hard it can be. It is not something that happens organically: it needs to be engineered. But it’s not impossible. Small companies absolutely can hire and retain great people at all levels with the right mix of money, equity, brand value and culture. You just need to try harder.
There’s also a lot to be said for hiring to bring in experience - youth has many advantages but a few grey hairs are of equally significant value. Culture is a broad-brush term, but it’s very important. I want to get under a company’s skin to look at the fundamental building blocks of its values, and then ask whether it can truly execute on that vision. Starting with the leader, I want to know whether they are capable of delivering. Do they have high emotional intelligence? Arrogance is a particularly red flag. But, even if the leader has the right soft skills, I also want to know if they have successfully instilled a similarly aligned culture. If the chemistry isn’t there, if the team isn’t going to be a great fit, then the business is not going to work. A cultural alignment between the company vision, its leadership and its team are simply indispensable. By the way, first instincts are almost always correct, so trust them.
It’s also obvious that an acquisition is a transformative event. The acquirer must therefore realise that the carefully constructed culture that they find so attractive is also delicate – and in their hands. An acquirer should rapidly clarify what within the business aligns with their needs and what doesn’t. Then be explicitly clear, with rational justifications, about what will change and what won’t. If I have to make tough decisions and have difficult conversations to manage expectations around team, brand and reporting lines etc., I make sure that those conversations happen early on in the process.
Scalability is the number one challenge. Many businesses have poor processes in place that may have worked fine for a 10 person company but are not fit for purpose in a 100+ person organisation. Even with the best technologies and systems in place, if these are built on weak, non-scalable processes, the business has a problem. Companies must ensure that they have a clear, actionable vision for cost-effective scaling across all business functions. In the SaaS sector, this mindset is often second nature, with businesses set up to scale as a primary objective from day one.
Systems and Technology
A detailed audit of IT systems speaks volumes. I’m particularly keen to see the intelligent application of industry standard systems and platforms rather than the use of technologies developed in house. As you build a business, you need to build processes and systems that are ever more independent of people.
Finally, be realistic
Sometimes, the top level financials look sound, but digging into the numbers it becomes clear that, say, the five year projections bear no coherent connection to the past five years. I would never judge a company for presenting their numbers in as positive a light as possible, but unrealistic ambitions are a serious red flag that will result in me interrogating those numbers particularly hard. I need to be able to understand exactly how - aside from cash – the management team intends to achieve its dramatic change in outcomes. I would much rather see sensible, achievable projections (which also take into account the disruption of the transaction period) than overly rosy and ambitious claims.
This story was taken from Notion’s The Art of Exiteering Report