Business News/ Opinion / Columns/ How you can deal with the founder post acquisition
3 min read 22 Mar 2022, 10:22 PM ISTAbhisek Mukherjee
Boardroom battles result when founder is unable to deliver on the financial targets
PremiumFrom being relatively rare and risky bets, mergers and acquisitions (M&A) have become mainstream in India. For buyers, it boosts growth and profits quickly. For sellers, it releases cash to founders, and provides capital and expertise to the company.
Given that most businesses in India are founder-driven, many transactions involve founder-led targets. Having observed multiple such transactions (some of which have been spectacular failures), we have learnt that the key success driver is in deciding how to handle the founder(s) after the acquisition.
Founders are different: for them, their companies mean more than size, profits and value. It is about their vision, capabilities and competitiveness; in other words, their identities. Traditional tactics of linking economic incentives to performance rarely work with founders, often confounding and frustrating acquirers. There are three founder traits that need to be addressed to make such deals successful.
First, founders value their independence the most. The ideal transaction for a founder is one where she monetizes the business, yet continues to run it independently, while receiving capital and expertise from the acquirer. While this may seem unreasonable to acquirers, many deals where these demands are not balanced fail. It is bruising for shareholders to manage a business where the founder is dissatisfied.
Second, founders loathe reporting to professionals, no matter how prominent the acquirer. Most founders have built businesses from scratch without brands, capital or time-tested processes—crutches readily available to corporate professionals. The founders have built products, closed sales and built client relationship based entirely on their own skills.
Whether we like it or not, the battle scars create an enduring disdain among founders towards career professionals, who have not been through similar struggles. This disdain, whether towards venture capitalists (VCs,) private equity (PE) or corporate acquirers, explains the business battles that make headlines (think Uber, BharatPe.)
Third, while founders often say that they want to move on after a transaction, they find it tough to let go. Like with many parents, their companies are their children and defining purpose.
We have noted two approaches that address these founder traits and have relatively higher probabilities of success:
One, manage the acquisition as a financial investment. In this, the acquirer adopts a hands-off approach after the transaction by only setting financial targets and not interfering in the target’s strategy or operations. The founder continues operating independently as long as financial targets (revenue, profits, or value) are achieved. While the independence keeps the founder motivated, additional financial incentives, such as profit shares or milestone-linked step acquisitions at progressively higher values keeps the founder focused. This is the approach adopted by many VC and PE firms.
On the flip side, boardroom battles and coups result when the founder is unable to deliver on the financial targets, or becomes a liability for other reasons.
This approach is not practical when the acquisition is strategic, that is, the target has specific assets that the acquirer intends to integrate into its own business, such as clients, capabilities, access to markets, patents, or even physical assets. In such cases, the second strategy becomes relevant: build a succession plan from the founder to a professional leader as an integral part of the acquisition agreement. The founder earns a substantial part of the transaction value only after she delivers on an agreed succession plan to a professional approved by the acquirer.
In short, a strategic acquisition has a significantly higher chance of success if the founder of the target is succeeded by a professional in a structured and time-bound manner, typically within three years. The professional leader should be on-boarded within the first year and should progressively take over within the pre-defined timelines. Forcing founders to trade their independence for capital, especially while reporting to professionals of the acquirer, is often a recipe for failure. Exceptions exist, but the probability of success is low.
In sum, when acquiring founder-led targets, the biggest success driver is the relationship dynamics between the acquirer’s leadership and the founder(s).
Founders value their independence and their positioning. So, acquirers must choose between either allowing independence, subject to financial targets, or ensuring that the founder earns full value only after effective succession to an approved professional.
Abhisek Mukherjee is co-founder and director, Auctus Advisors.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
MoreLess
Updated: 22 Mar 2022, 10:23 PM IST
Recommended For You
You are just one step away from creating your watchlist!
Login Now
Wait for it…
Oops! Looks like you have exceeded the limit to bookmark the image. Remove some to bookmark this image.
Your session has expired, please login again.
Yes, Continue
×
":""; let upgradeCta = (nextActivationDate && planCode)?"Upgrade Now":""; let userPlanHolderMandBottom = "
