In the Deal Makers Series, we interview leaders, experts, and innovators in the merger and acquisition and private equity space about how they get successful deals done. The series highlights perspectives of investors and buy and sell-side advisors working across industries and geographies.

For our first installment, we interview Jonathan Moore, Partner and head of Advisory Services at PKF O’Connor Davies, a leading accounting and advisory firm.

What is your current role and tell us a little about  how you got there?

I’m a Partner at PKF O’Connor Davies, a Northeast-based regional accounting firm with approximately 1,000 employees. We provide full-service accounting, tax and advisory services to our clients. I head up advisory services which includes the consulting practice, transaction, risk, cyber and digital advisory, along with our TalentConnect and investment banking services. 

 Before joining the firm, I was a Partner in a smaller accounting and advisory firm that merged with PKF O’Connor Davies in 2016. I wear many hats within the company.  I lead both the Transaction Advisory Practice and am also  the Head of Corporate Finance for PKF North America.

Tell us about a typical client for the Transaction Advisory Practice? What does the work helping them consist of?

Seventy percent of our transaction advisory business is generated from working with private equity (PE) firms who are making a new investment in a business to acquire it or are purchasing an add-on to an existing platform company they own. In this case we perform the financial due diligence, provide a quality of earnings report about the target and  analyze the tax and other financial implications of the transaction.

We also do work with sell-side clients, helping business owners get ready to sell. We prepare a quality of earnings report evaluating the financial position and earning potential of the company. This helps a seller understand how much they can expect to sell their company for. We also assist with tax due diligence and often conduct cyber and IT reviews as well. In the digital age, and now in a more virtual work environment, cyber and IT considerations are becoming more critically important for buyers and sellers.

You’ve work on a variety of deals and acquisitions. What are some of the factors that you think contribute to a successful merger or acquisition?

In terms of the numbers, the quality of earnings report is key. The valuation and purchase price for a company are directly tied to a company’s historical financial results and the quality of earnings is how we measure this. Target acquisition companies or owners who provide numbers that are defensible, understandable and trending in the right direction is huge for ensuring a smooth and relatively quick transaction.

Other key factors that make for successful transactions include a leadership team that presents a clear vision and an understanding of their growth targets plus data to back it up. When companies show they have systems to monitor performance and have given thought to the type of culture and workplace they are fostering, those are also positive indicators.

It’s about companies proving with data that they have plans, strategy, vision and strong financials. When these components are in place then deals happen fast and all parties walk away happy.

Are there any common lessons or themes you’ve seen in deals that are not successful?

Yes, my team often jokes about how we should create a podcast like “Confessions of an M&A advisor.”

On the financial front, an inability to provide and show trustworthy or reliable financial information is the biggest  impediment to a successful deal, buy or sell side. If there is a lack of insight on what is driving a company’s performance and little ability to explain why targets are missed, then it can be challenging to get a deal done. A buyer won’t trust that management can deliver on what they are promising.

Too often, I’ve seen transactions fall through when there is a clear mismatch between the culture, mission, values and communication styles of two organizations. It becomes clear during negotiations and discussions around a deal that the two companies are simply not rowing in the same direction and in these cases deals are typically  not finalized.

There are also challenges when a seller doesn’t necessarily understand all the very complicated and nuanced features of the deal. If someone has never done this kind of transaction before, especially if they’re selling to an experienced and larger buyer, then the seller may not understand all the potential implications of the deal. For instance, they may have been conducting business on a cash basis for the lifetime of the company, however the buyer is evaluating the company’s financials on an accrual basis – or a more detailed level. The discrepancy in the expectations of the financial differential between these two perspectives can result in a mismatch of expectations and even unexpected tax implications for the seller, and I’ve seen deals fall apart for this reason. 

How often do these problems become clear before the transaction is complete versus once the deal is done?

For issues related to finances, they typically appear as due diligence is completed and the terms of the deal are negotiated. But for culture, leadership or communication issues, these often don’t show up or are ignored until the integration phase at which point the deal is already closed. The focus is then on how to fix them in the best way to keep the return on investment (ROI) of the deal on track. 

To avoid problems and mitigate risk pre-deal, as you advise on a transaction, what are the most important pieces of data you perform in due diligence?

From a quantitative perspective, everything is on the table. We focus on reviewing historical business trends across product, margin, sales, fixed vs variable costs, cash flow, inventory, customer churn and concentration, supplier terms and more. What is most important can vary based on the value drivers of the specific business. 

 What we also find  important is asking buyers, “what are the value drivers in this acquisition? What is your investment thesis?” This helps us frame our work in the way that is most relevant to the client’s strategic decision making.

 When we work on the sell-side, we draw on past experience, working with the founder to identify what the investors are going to want to see. We want to help them present their company and its financials in a manner that is reliable and defensible and also be in a better position to mitigate risks. 

Often, organizations start to address cultural issues only when there is a problem. In an ideal scenario, when would leadership and culture come into play for an M&A deal?

Ideally, it’s before the deal is even talked about. I think about this from the perspective that every business should have a succession plan which identifies the value drivers of the organization and how to ensure that the company keeps growing even as leadership may change. Culture is a key part of these value drivers and evaluating it should be part of the succession planning process. Indeed, culture can trump numbers. When thinking about a deal, if everyone shares the same values, then it’s easy to move forward and get the desired financial results. But if two organizations are not aligned on values, culture and mission, while  the financials may look good, they will find it challenging to grow together. So really, the earlier the better.

Culture can trump numbers. When thinking about a deal, if everyone shares the same values, then it’s easy to move forward and get the desired financial results. But if two organizations are not aligned on values, culture and mission, while  the financials may look good, they will find it challenging to grow together. 

 I’ve experienced firsthand why culture matters in M&A. I worked for a small firm and when we were small it was easy to manage culture, then as we grew and as we looked to merge, we had to really consider culture. When we started to look to merge, it became evident that it wouldn’t work for us to join certain firms because our cultures were too different. We didn’t want to merge if it would require throwing out the culture we’d worked hard to develop.

What is the value of integrating leadership and culture into due diligence? How does this look in practice?

In many situations the current management or ownership will stay on even after the deal, to lead the transition or roll over some of their ownership into the new company. Private equity firms are looking to back specific leadership teams. A critical part of our work then is to understand the investment thesis of the buyer and how specific leadership traits or teams would fit within this thesis. Buyers need to evaluate if leaders really share their vision for the growth and strategy, and if they have the skills and behaviors needed to execute. 

Often, buyers just go off “gut feelings” but everyone is on their best behavior during a transaction and the “gut feeling” cannot ensure that when the deal goes through that the leadership is prepared to implement changes and achieve targets. Buyers want evidence and data to back up the financials and performing systematic assessments of leadership and culture during due diligence can ensure there is evidence to back up “gut feelings.”

Have you ever seen leadership and culture drag down a deal or hinder growth? What did that look like?

I’ve certainly seen instances when we have dug further into a deal, leadership and culture problems have become very obvious. There have been major issues with communication and misaligned values and vision. If we’re lucky, these problems become clear early in the due diligence and plans to address them can be made, but sometimes these issues are not clear or are overlooked until a deal goes through and targets are missed.

How about on the flip side? Where have you seen strong leadership or cultures drive growth? 

I find markers of strong leadership and culture to be when leaders are answering questions before I even ask them. This shows that a company is motivated to get the deal done and is thinking through the implications of the deal. When the target company answers questions based on fact and not emotions or projections, that’s a sign of good leadership. I can think of specific transactions too where the culture of the target acquisition was very focused on empowering employees to drive results and the positive evidence of that culture could be seen in the financials and in how people interacted.

Overall, when those involved in the deal are looking for a long-term investment and growth, rather than a quick pay off, a transaction goes on to be successful.

As you think about the next few years, and some of the evolution, what are you most excited about?

In general, there is so much momentum for deals. There is so much capital, between dry powder in PE and lots of cash sitting on corporate balance sheets, to be deployed. Then the baby boomer generation is starting to make succession plans and look to transition out of ownership. I’m excited about how much liquidity is in the market —  so much capital looking to be deployed. Plus, there is all this new technology that is changing the ways we work. I think this combination just makes me excited for a future full of robust M&A activity. I’m looking forward to getting the pandemic behind us and ramping up our transaction practice.

Beyond that, I am also excited about shifts internally about how we do our work. I think we are starting to take a more holistic approach to evaluating a business, looking at the quality of earnings but also the quality of leadership, systems, technology, data and culture. Additionally, looking at how business on both the buy- and sell-side and considering the environmental and social impacts of their work. That kind of impact evaluation is something new that we’re beginning to focus on. I think it’s important we incorporate all these facets into how we do our analysis and then leverage technology to make the process even more seamless and efficient. •

We’re so grateful to Jon for sharing his expertise and insights on M&A. Check back here for more future installments of the Deal Makers Series.

Learn more about Leadership & Culture Due Diligence »

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