ERP Strategies for Mergers & Acquisitions

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Over the last several years, we have worked with many companies that acquire similar or adjacent businesses and merge them into a new company. Doing so has significant implications to enterprise software deployment options from master data management, business process automation and reporting and analytics. With such complexities, how do you implement your ERP successfully across multiple legacy businesses and modes of operation.

Defining and implementing the right ERP strategy can be the lynch pin in realizing the benefits of your M&A investments. Find out the many options in this edition of The ERP Advisor.


 
ERP Strategies for Mergers & Acquisitions

Mergers and acquisitions are common practice in the business world, but every time they occur, they create disruptions for all parties. There is significant amount of information needing to be considered before and after a merger or acquisition is made to ensure the project’s success. In addition, leaders are left to determine the most beneficial course of action for assimilating the organization(s) into one or another or a ‘NewCo.” process.

ERP Scenarios when faced with a Merger or Acquisition

Company executives have a few options when considering the direction to take for their ERP system(s). Similar to ERP systems themselves, there is not a one-size fits all option and many factors need to be considered before making a final determination.

Maintain the Software of the Main Company for Both Entities

The most apparent course of action may seem to put one company onto the other’s existing software. This solution provides the least amount of disruption, leveraging the benefit of many existing employees will already be well versed in the system, eliminating the need for them to be retrained.

Adversely, employees of the company being met with the change may be resistant to giving up their familiar software and processes. It will take some effective change management to get buy-in from the affected employees that the change is what is best for the company and that they will be supported in their efforts to become familiar with the new software.

Abandon all Existing Software for a New Model

On the other hand, leaders may conclude that migrating off of both (or all) existing software would be in the best interest of all involved. Maybe the scope or size of the company has changed significantly, meaning neither software will meet the growing needs of the new entity. The “New Co” leaders must calculate all costs and benefits and the position of the owner’s investment period will likely dictate which direction to take.

If this is a long-term investment for the owner of the company, they could earn the value back out of the system and turn the merger or acquisition into an even greater profit. For an owner who knows they will take a steep discount due to the integrity of the data and wants to get the maximum value for their sale, doing the hard work ahead of time will maximize their profits from potential new owners. Unfortunately, there are also risks associated with this option.

Employers run the risk of forcing employees of a more modest industry to use a more sophisticated application if they are moving into a larger, more complex company. These complications can lead to lower adoption and risk during and after implementation. Converting to an entirely different system can also be costly to the company in terms of time, money, and disruption. Company executives must ensure that the benefits outweigh the costs before making any changes.

Leave Existing Core Software and Utilize a Consolidation Tool

It may be in the best interest of all entities to leave existing, core software in place and implement a consolidation tool to bring only necessary information into a new tool, such as enterprise performance management, employing an advanced general ledger concept.

As with any major decision, there are benefits and risks to remaining constant across all entities. Major advantages to this option are that it is much less disruptive, it requires less change, it is less expensive, and it does not require the need to go big to accommodate for many geographies or accounting. It is also beneficial because it creates a possible scenario in which there is a short horizon for owners to earn their money back on their investment if they have a short timeline to receive a return on their investment.

There can be negatives to implementing this course of action. Leaders will find there is no “single source of truth” for customers to access information about their orders or for leaders to analyze across all lines of business, geographies, or ERPs. This can create inconsistency across the organization and create frustrations for customers and employees. Related, it can possibly prevent the full realization of customer access to new products across the legacy entities.

Implementation of One or Two Key Systems, Aided by an Integration or Reporting Strategy

With larger platform companies, it may be best to utilize one or two key systems as the go-forward platform. This can be a compromise of ideas when companies merge that have vastly different processes. When these vastly different processes are encountered, organizations can choose to leave them on their existing software but consider an integration or reporting strategy to integrate key information into the platform ERPs, whether that be within a performance management tool, or a customer interface.

But Can You Consolidate Your Gains Quickly Without Burning Down the Whole System?

Sometimes, your solution may be as simple as looking at your options without needing to go through the process of selecting a new software or integrating one company onto the other’s platform. There are still steps that can be taken to get all value out of your acquisition.

ERP Optimization Options: “Stuck with What We Got”

Let’s say you have made the acquisition and then strong-armed your way through the integration period. You probably lost a couple of key people, and you might even have lost some of the people who recommended the new system. What do you do with the ERP after that?

We are most likely not going to change out the software at this stage and are just going to focus on optimization.

Bolt-Ons and Cloud Solutions

If you have an old application, which doesn’t do some of the things you need it to do, then you can leverage bolt-on modules, or most likely, go to market and find a 3rd party best-of-breed cloud solution.

One example specific to an investment bank would be delivering a new solution to achieve the synergistic savings that M&A owners seek from their investment. But in post-acquisition, we might find that one half the company uses JD Edwards, another half runs Microsoft Dynamics NAV. So how do we build a solution that allows us to take advantage of our new position in the supply chain?

The answer would be a third-party supply chain planning tool that could integrate with each system and bring in actual inventory and materials information, so you can see where you are making purchases across the globe. Pulling that data into a best-of-breed supply chain planning app can help maximize discounts with vendors throughout the world.

Implementing these solutions can help you leave those transaction systems running on the local level, which can keep users who have been working with those systems for years, productive.

Commonplace Post-Merger Solutions

Here are a few areas where cloud applications have broken the most ground and would be the best place to look first.
 
  • Financial planning and analysis
  • BI and analytics
  • CRM

Business Technology Takeaways for the Next Acquisition

We hope you walk away understanding that business applications should be brought up in M&A discussions before the acquisition.

Of course, we think M&A discussions should include business applications because we are ERP specialists, but the fact is, we have seen this over and over where organizations have not taken the time, and later on the acquirer is challenged by unexpected, additional investment in technology on top of their initial investment to buy the company.

But it doesn’t need to be that way. The information about systems integration, which is known post-merger, really could have come to light before the deal was struck. If you haven’t read our article, M&A: Ask the Right Questions about Existing ERP Solutions, there we discuss exactly what that technology due diligence should be.

To actually do this right, this is an area where an expert can end up saving you millions with a very small investment upfront. Give us a call if we can help; we can even help you get in touch with your target’s ERP vendors, so you can get some information that way. We have a lot of suggestions to help you.

Conclusion

While mergers and acquisitions can force disruptions for all parties involved, understanding the horizon of ownership and return on investment will determine the best strategy for a merger or acquisition scenario when there are one or more existing ERPs to leverage or replace.

 

 

Get Expert Help From Our ERP Consultants

Announcer: This is the ERP advisor.

Introduction: Today's episode: ERP Strategies for Mergers and Acquisitions.

Juliette: Good afternoon, everyone. Thank you so much for joining us for today's webinar: ERP Strategies for Mergers and Acquisitions.

Shawn Windle is our speaker for today. Shawn is the founder and managing principal of ERP Advisors group based in Denver, CO. Shawn has over 20 years of experience in the enterprise software industry, helping hundreds of clients across many industries with selecting and implementing a wide variety of enterprise solutions. His podcast the ERP advisor has dozens of episodes with thousands of downloads and is featured on prominent podcast platforms such as Apple and Spotify.

On today's call, Shawn will share his insights on how identifying the right ERP strategy for your business can help be the linchpin in realizing the benefits of your M&A investments.

Shawn, welcome! Thanks for joining me today!

Shawn: Here we go, how are you?

Juliette: Oh, there we go! Good. Oh, that dreaded mute, right?

Shawn: I know that was the theme of 2021: You're on mute!

Juliette: Right? Exactly. Well, simply put: This is a big topic to try to digest, and I think today we're just going to break it down as it relates to ERP systems for M&A'S. And how the aspect of having the right ERP strategy can be essential for a successful deal.

The little bit I know, which is not much, but most businesses, their processes are embedded in their ERP system, right? So related to an M&A like what does ERP have to do with buying new businesses merging one company with another. Can you start us off with that?

Shawn: It's a great point. It's a great question. I mean for our world, it's like everything, but I can get out of my world for a little bit. Really looked at broadly, an organization or people basically that want to go out and buy another company, for whatever reason.

So, let's say they go out, like one of our clients did, they wanted to buy a company because it had an adjacent product, meaning it was related—in same kind of family of products.

So, we sell product A today. But geez, we could sell A and B tomorrow together and we could increase the market for both. We're already selling to the same customers so you can reduce some costs, so it sort of makes sense. We're not doing any dating analogies now that we're out of February, but you know, it's sort of like people kind of moving in together. You get a roommate, you share stuff, and it's cheaper. It's cheaper to do business, right? So, then the company goes out, looks at the other company they're interested in buying, and they're like, “what are we buying?"

Well, there's physical assets that they can purchase, like inventory--if they have inventory. They may own a building, but they probably don't. It's probably more like assets. Let's say the distributor has a forklift or there's other machinery, desks, computers, or whatever they buy. There's stuff--there's real things that they want.

But what they're really buying the organization for--if it's an operating kind of M&A deal--how the business operates, the brand name, the products that they sell in the market, the channels that they have, and all of the intellectual property that that company has developed.

Now, all of that “how to” or the procedures of how you run that business--Where is it? It's really in the systems. So how do we do planning? How do we do sales order, functionality, fulfillment, accounting, reporting, and all this stuff? It's actually in the ERP.

Now, of course, it’s even more so in the people that are doing this stuff day in and day out. So that's the other value that an acquirer will have--is to get these great people that know what they're doing in this space. But there's that software sitting there. They've run the business with this software. It's important that we get the software and it'll help us. Then, after we acquire the business, things change, which, frankly, happens a lot. The software is there to sort of automate all the business processes and stays there.

So, from an acquirer's standpoint—I think this is why we wanted to do this, and we're going to do some blogs and some white papers and all that stuff to help--I think most are aware of it, they really don't do the diligence on the ERP to really understand what it is that they're getting. Now, if they're just going out to buy a product like a brand or a service, maybe it's a services firm—and we've just worked with a big international services firm and they're buying organizations throughout the world. They wanted geographic locations, they wanted the resources, and who had the experience--the systems maybe don't matter as much. In that case, then all the knowledge sits in the person’s heads that they're buying. But the problem with heads is that they can walk out of the room.

So, looking at a business from a diligence on the ERP can really help the acquirer to say, “Whoa. There's a lot of enterprise value that we're getting here from the system.” Because the know-how of the business is in the app. That is another factor that comes into it. We’ve seen organizations get valued higher, meaning the cost of buying them is higher, because the systems are set up in a way that they run through the systems versus less in the people. I mean, it's always about the people--I don’t care what anybody says, but yeah, there's a little bit to get us started.

Juliette: It makes perfect sense. I don't know if this is the right time to ask this question, maybe later in the call, but could a merger or an acquisition end based on whatever the ERP system that current company has.

Shawn: Yeah, absolutely. Again, no dating analogies, but you know you get into the relationship, and the acquirer starts the diligence on the acquiree. They like the people, they like the leaders, they like the products, the service, or whatever they offer, it looks good, and they continue the discussion.

“Hey, let me take a look at your systems.” They go in and they're like, “Oh my gosh, you're running on an application that's 30 years old, that’s running on an old server, or that's not supported by Microsoft or the operating platform anymore, so the security risk is high. You're running everything in your business off this old app that nobody supports anymore. Well, OK, we still want to do the deal, but we're going to add another $1,000,000 or take $1,000,000 off of the purchase price to pay for a new ERP implementation.”

So, they can still continue, but there are mitigations that folks can do.

I think we should use house analogies for March: “Who knows what's going to happen with interest rate? It's just been through the roof.” So instead of the dating analogies in February, March is about buildings and houses.

So, it would be like going into a house. "I love this. I love the location. I love the features.” You go to the basement and there’s water. Is that going to stop you from buying the house? Well, it depends on how deep the damage goes and how much it's going to cost to fix it, right?

It's very similar to that.

If all the other indicators are pretty good, then we can remediate ERP issues, but the problem is that most folks don't know what to even look for when they're doing an acquisition on the ERP side.

A couple years later. Guess what? We have to dump $10 million into the business because the software isn't working.

Juliette: So, it's not necessarily a deal breaker, but it absolutely could affect the bottom line, right?

Shawn: Yeah. And as you're saying that too, Juliette, I'm thinking through my history. Here’s a great, very apropos example.

We had a client that was very fast-growing on their way to doing a spec—one of the special purpose acquisition companies--basically to do a public offering through this spec vehicle and their systems were custom. Their whole business was built on a digital platform. Everything was digital. That's what they offered. Their accounting system was very rudimentary and there was a lot of enterprise data and transactions flying around and they had solutions to track it all, but it was very complex.

Their concern was that they weren't going to be able to do the public offering because the systems weren't audible. They just weren't. It took developers who worked in the systems a long time to figure out how things were working.

So, you could see if another organization was to go to that business and say, “OK, we want to buy you, but you're all digital and we're really just buying this system and the system has inherent risks in it.”

We're not going to do it, right?

So, the more that the business model depends on the software—it would be like buying the house—if the ERP is like that foundation, then you're not going to buy that house because it's going to cost you as much to fix the house as it is to buy it. Same thing with M&A—with the merger or the acquisition side—where if the software is so vital to the operations, which it usually is like 25-30%. Does that help?

Juliette: It helps and with that said, from your experience of working with companies going through an M&A, do companies usually acquire a new ERP system when they acquire a different company?

Shawn: That is such a good question.

I'm trying to really look across what I know. Not just our experiences with clients, because the client—the PEs—will bring us in to help them to switch the ERP's. I would say the minority of the time, they switch ERP's. And here's why because—and I don't know if that's 20% or 40%, but it’s not the majority.

Because switching the ERP is really risky. Like really, really risky, right? It takes a lot of time. It takes people out of their core business and what they're doing, but to do that you really have to have the right team, you have to have the time, you have to have the capital.

I would say that more of the longer-term investors are the ones that do it. They are the ones that say, “Look, we’re not in this for a three year turn around kind of thing.” Because if you only have three years to get a return on your investment, that’s not a lot of time.

Especially because the software, “it's going to take a year”—try two, “Oh, it'll take you know six months” --12 months.

Unless you're some of our clients that are PE backed that just bang it out and get it done, which is a great way to do it, but the risk is so significant, and the cost is so high that you need time to get a return on the investment especially with PE guys and gals that are very financially focused. An owner/operator might be like, yeah, let's do it and we're doing this for the long term and it's OK. Whereas the financier is like, “I got to get a return to my investors and if I don't I get fired. So, you know, we'll hold off on the ERP for now and come to that come back to a couple years later.” Then they sell the business, and it becomes somebody else.

 

Juliette: Right. Well, it seems like there's enough going on during an acquisition or a merger, to add in a new ERP system into the mix, that’s a lot to ask, especially for the employees that are already going through that change, right?

Shawn: Absolutely. You are spot on, and I will tell you I have seen a huge difference with the employee thinking even in the last year. Where people are--there's a lot of business that's still happening despite COVID, despite mandates, and whatever else is. We've got things happening overseas that are terrible, but business is going on and people are getting busier and busier and busier with their day jobs and organizations are still in that sort of investment mode. They're out doing new things. They are acquiring new businesses, so there's so much day-to-day upkeep that people have to do, they just do the basics—it's like the basics—like the accounting departments are busier than ever and that's why they're looking to do a lot of automation, frankly.

I remember in 2020—I think it was around Christmas time in the November/December timeframe—I was telling my clients, “I really don’t think we should try to go live at the holidays because people are fried.” You know, they either got sick, they had somebody got sick, or whatever. They're freaking out about their jobs, and their lives, and their kids are at home all the time, and they're driving them up the walls and let's not do anything like this and people are already about the, you know, but I see that sort of level of anxiety still in a lot of our clients.

People are working hard, tons of supply issues, I mean, it’s a cliché thing to talk about, “Oh the supply chain issues,” but I was on a call yesterday and the clients like, “Our stuff was sitting on the dock—like it was at the dock—and our customers were calling and calling and calling saying, ‘where is this?’”

Well, the customer, who is much bigger than our client, he basically said, “You guys just need to go to the dock and get it. I don’t know what to tell you. I can't get a provider or freighter to go pick it up. They're busy, they're losing orders. I don't know what to do.” This is craziness, right?

Juliette: Wow, yeah.

Shawn: So, we're still in this crazy time period, so that's why I say—and I think it's going to level off, going into the spring. I know in Colorado where we're at, as I look out the window, you know, it's getting prettier. We have this beautiful view, a green mountain, and it’s starting to turn a little bit green, like I think we're going to have a beautiful spring. I think throughout the whole country we're all coming out of a deep freeze—Things will settle down. I think of you know, again overseas, and I think people will kind of, you know, “Ahhh.” They're going to be a little more of whatever, but I will tell you there's still a lot of baby boomers selling their business because they're worried about capital gains tax.

So, there's a boatload of money that private equity has. Tons and tons and tons of cash because they are allies and so great. There are still going to be deals. That was my long, long, long, long, long way of saying, “That is something we look at. Can this team really do this ERP work now?”

And maybe, yeah, we need it, but not at the expense of losing these key people. Sometimes though, maybe we don't need the people. Maybe they're not key. I was just in a conversation this morning with a guy who's working with a private equity team where they bought $150 million food company. All the execs are out—every single one of them, out! All the people that were involved in their systems are out. So now there's new people coming in and they're trying to figure out, “What do we do with this software?” And they got to do something with it too.

So, again, you just must be aware of these poor people and where they're at. And make sure you incentivize them for sure because they are not only doing the diligence bringing these businesses together, but then they’re probably worried about their jobs, also.

Hey, let's do an ERP implementation, so maybe let's back off a little bit--Let things calm down. Do the project. Because if you're going to do it, I mean we talk about this all the time, Juliette, do it to win—do it to do it right. Get it in, get it done, and move on. And if you can't do that, you're just wasting a lot of people’s time. Then people get plowed into the ground even more because of a failed implementation.

Juliette: That's right--And as you said that can cost someone their job, right?

Shawn: Yes, and then it can cost a private equity a loss in a return where we're talking about severe implications to portfolio returns and—it's just bad. So that’s why there isn't an answer of, “Yes, you have to switch your ERP,” or “No.” You must assess the scene to see what’s really happening here. Then I think it’s obvious—I think it becomes a lot of sense.

It's like another client that we're in. They're like, “OK, we're ready for a new system. We've been struggling. The old owners weren't willing to get the dollars to do it, and now the new owner is. We're all in! This is great!” This is fantastic, we love seeing that.

Juliette: Well, considering the fear and the anxiety that people are having that you mentioned. What would happen if a new company decided they wanted to keep the existing software after the merger and acquisition? Is there a case for leaving the legacy system in place?

Shawn: Absolutely. We had a company, a client, a couple years ago that was very aggressive on a very, very aggressive acquisition—I wouldn't say spree, I guess I just did. Sounds like a shopping spree at Target, right? Like my wife goes in for one thing and then she ends up with like a million. We're not talking about her because it's not February anymore.

But it's true that they were buying, you know, 6-7-8-9-10 companies a year, and there was a very strategic reason why, and they left the legacy companies on their existing software. They did ask for mandated data in a certain format so that they could upload that into what they called—and I think it's the right phrase—” A Super GL”—which was Audible. And then they also had a business intelligence framework to do a really deep operational analysis, and then we had the financials over here, and then we had all the subsystems out here—I loved that solution for them. I mean, the thought of rolling out a new ERP across the world—that scares the hell out of me, and I do this for a living!

We had another perspective client out of the Netherlands that was looking at doing that. Great family business, several hundreds of years old, been around forever, looking at rolling out an ERP. I just wasn’t sure that was the right thing for them. I just didn't feel like putting one system across the world was the right thing. I guess what made me feel that way was the people leading the project saw the vision—nobody else in the organization did. So that's very, very, very risky. At least as far as I could tell—We didn’t get that deep into the deal. We actually passed because we didn’t have the experience in that particular country. But it was really interesting to see the risk a project leader could take on and be willing to do everything about it—but then, you know sometimes they just go away and now the company is stuck with all this software.

So, there are definitely cases where it makes sense to switch, or not switch, in this instance. Like you said, “Stay on legacy, pump the data up.” Maybe we don't get pure 100% visibility into the operations, but that's also what people are for—to go find out what it is. But then I have other clients who are like, “No. You are coming into our platform because we do want to be able to do demand planning, material requirements planning, forecasting across all of the divisions—all of the entities—because we can save a ton of money and we can actually drive a lot of efficiencies that way.”

So, it goes both ways, but you have to look at it. Don’t just do one or the other. That’s the key point.

Juliette: Well, again, not truly knowing much about this topic. So, if there’s an acquisition, do they tend to change the ERP system or stay with the legacy software? Then, if it’s a merger, do they absolutely change it or do they tend to stay with the existing software?

Shawn: So, like I said, if company A buys company B, I think—let me do this separately.

Let's say it's a private equity company, so it's an investment company that buys a portfolio company, right? So, the purpose of this entity is to make returns on capital, that's what they do. So, they go out and buy companies. They help this company to perform better in the market and then they will sell it. That is what’s going to happen.

So, they buy a house at $100,000 and they sell it at $200,000. That’s what the private equity—in that case, what I’m saying is the minority of the time—maybe 20%-30% they change ERP. Because these guys, unlike buying a house that you're going to hold onto for maybe 10 years, they're only going to hold onto it for a couple years. It’s like flipping houses, right? So, you don’t want to put in a whole new HVAC system in a house if it doesn’t really need it, but if it really needs it, you’ve got to do it. So that’s why they do it, but I think it’s the minority of the times. But there are private equity firms that are out there that buy companies and want to hold on to those companies for the long term, so they have more time to make their money back on that investment.

Now the other instance is where there’s sort of a merger. So, we had one that we worked with recently where it was two businesses. One was about—they're about this small difference in size—maybe 300,000,000 and the other one was 200,000,000 and they came together and sort of looked at both organizations’ software solutions and said, “These are both bad. We just doubled in size. Neither of our platforms can support this, so we’re going to have to switch.” So, we help them through that process and—it was hard because you’ve got the people-stuff going on. The person who’s driving the requirement that’s for the revenue assurance is, “here’s what I need: da, da, da, da.” And then they quit. We just built the system around what they needed, right? So, they’re hard projects.

I’ve been involved in a lot of those projects over the years, especially when I was with Accenture, and we would do that. It’s just a lot of work because you got one group saying, “OK, well this is how we do it.” And then the other group says, “OK, well this how we do it.”

OK, well how are we going to figure out what we do?

Well, it depends on how well these companies come together and make those decisions. And as a consultant, we could help facilitate that process and flesh out, “Hey, here’s the best practice, here’s what we should do,” but you have to still have these champions—These people that are like, “yeah, let’s go for it. I’m going to be the subject matter expert over this and get it done.”

So, the merger is a different kind of scenario because usually what happens is a merger is more like an acquisition where the bigger company buys the smaller company, and the bigger company has worked out a lot of stuff already in their system. So it's usually easier for the smaller company to just move into the bigger company’s software. But again, I can think of five instances where we didn’t do that, so you could always leave the little guy on their existing system and bring in trial balance data, bring in operational data for KPIs, reporting, and analytics and you can live in this two-world system—or two-system world—where they at least integrate for some key things.

Juliette: Yeah, well, maybe this will continue on with that answer, but can you speak to some different scenarios as it relates to ERP systems and mergers and acquisitions? Have you seen any strategies or scenarios that work more successfully than others?

Shawn: Yes. I don't know what they are, but I'm like, “what are those?” Again, I've talked about several of them, but I guess—in my experience now, I’m not a PE guy. I’m not an operator who built this business to 250 million and sold it, or whatever. I’m just the ERP guy. That’s what I am and we are. We are all here—and gals, of course—but from our view, from the broader firm’s view, I’m thinking of Quentin, Carly, Justin, and Grant, and Dave, Robert, and Brian—all these people that are involved in these real projects, like what is the best thing to do? Typically, what would we say?

And I think the answer is the least amount of change, the better. Always.

It's just that there's so much volatility in an M&A deal already between the people. Like, “Oh yeah, we’re merging.” Like when I was at PeopleSoft JD Edwards like, “Oh, we’re coming together and there’s a little bit of overlap, but there’s some differences and it’s going to be great.” PeopleSoft was buying JD Edwards. That’s what was happening. It wasn’t necessarily positioned that way, but that’s what happened, and it made sense because of the financial performance of both firms. Who was a little stronger than the other? Who could do it?

And then, of course, Oracle came in, “Gobble, gobble, gobble.” The whole thing. That one was much more clear. That's the good news about a firm like Oracle, you do know where you stand in that acquisition. Although they’ve done a really nice job with NetSuite. That’s another one we could talk about—that acquisition or merger—I guess you could say it was definitely an acquisition. But they’ve done a great job of pulling that one off. A really good job of pulling that off—leaving NetSuite autonomous as its own global business unit and letting them, kind of, do their thing. So, I think that’s been good.

I think what we have seen is the best is, again, the least amount of change—and I really loved the model I told you earlier: Leave the legacy businesses on their existing software. Get whatever data that you can, suck it into whatever systems—whether it's like an FP&A or corporate performance management or enterprise performance management tool, and grab operational data out of these systems and push it into like a Click, Tableau, or Power BI. You know, nice strong analytics—Snowflake—these tools that they can store like gobs and gobs and gobs of data. Then write the analytics on top of that to see how contribution margin by product is, or whatever. You’re not going to get that out of your trial balance.

So, that's probably what I think is sort of best practice.

But again, there are scenarios—we’re involved in several of them right now—where that's not best practice for these organizations. Where to grow, to meet the strategic goals of the organization, they have to be on the same software solution. If they’re on different ones, it’s not going to work.

So, I think that, maybe, the nugget I could give everybody on this is: when the business operations are different it’s typically OK to leave on different platforms, but the more similar the operations are amongst the entities, the better chance you have to get ROI by putting them on one solution.

I think that’s a really good rule to look at. So, again, thinking of an organization we're in right now, very adjacent products. They really want to tuck in one of the products into the product portfolio. You better get on one system to do that. Another business, again, one that we worked with recently—completely different. There were some similarities, but the system requirements are so different that it’s OK to leave them out there.

I don’t know if that’s helpful or not but that’s what I’d say.

Juliette: Well, kind of high level, because I think this question is pretty large to answer, but how does a company approach finding the best strategy for their M&A? Can you speak to that a little bit?

Shawn: Yeah, we use a lens—maybe it's borrowed from someplace else along the way that I used to work—where we look at strategy, people, process, and technology with all of our clients, and we say, “What really is the strategy here?” and “What are the people really like in the culture and their tech savviness?” and “What are the business processes that they operate?” and “What are the technology platforms and pillars and goals?”

“Oh we have to be all cloud.” or “Oh we’ve got serious security risks so we have to be in a private cloud.” Or whatever they are.

We look at those four lenses in, sort of, a kaleidoscope. That is what I would definitely recommend to anybody going through M&A and evaluating systems is: you have to look at those four areas to say from a strategy perspective: how does new software support our ongoing strategy?

So, I can think of a data center project that we did several years ago where they wanted “lights-out billing.” They didn't want a person to touch the billing because they were going to scale—they were going to double in less than five years, and they needed that level of automation. You didn’t have it before—now you need it. That's the strategy. You're going to have to suck it up and hope like hell that we can pull it off. I still get a little queasy with that one.

So, the strategy, sort of, drives to what we're trying to do into the future, so that's important. Whereas if the strategy is from a user perspective, “We're going to buy this business, we’re going to help them out, we’re going to help the operators to get some best practices and get some stuff in, and then we’re going to sell this in five years.” Don’t change. That’s the strategy.

The people side: You have to understand that you can hire as many consultants as you want. I’ve got a lot of them, but it is going to be those people in that organization that you are really going to be dependent upon doing key factors for the implementation. If you have a team that’s interested in that, they have some background, that sees a long-term value in it. Great, but if you have a team that doesn’t--you are setting yourself up to fail. You can bring in $5,000,000--$10,000,000 worth of consultants. They still can’t be the ones that make the decision on how the chart of accounts should be set up. It really needs to be key people. So, people’s huge.

Process. If you have a straightforward business—much easier to automate with enterprise software. If you have super complex business processes where you're doing all kinds of crazy, wild stuff that's not very static or it's very dynamic, that's going to be hard to automate in this system.

Then the last area is technology, whereas if we're on legacy technology—PE buys an organization, and the technology is legacy. It’s old, right? Then they look to turn the company out in and spin it around in five years. Chances are that the next buyers—bigger and more sophisticated—will say, “I'm not buying this because of the technology. You must fix it. I’m not going to take that risk.” OK, well, we’ll just discount the purchase price by an exorbitant amount more than what it would have cost to have done it—guaranteed.

I would advise and inquire, “Oh, you need to replace Sage 100 and, you know, we could probably do that project for $500,000 all in.” But you know, I would say take $5,000,000 off because it could be that terrible and ugly. Literally you’re going to lose money if you have super old technology.

So, strategy, people, process, technology. Look at that kaleidoscope. Look at each one of those lenses. The answer will just pop out. The truth will be there. There’s really truth in that. It’s important to say, “There is no right answer.” It really does depend on what you’re trying to drive from those four areas with the business today and then going forward.

Juliette: That's right, that's right. Bottom line, what I get out of this is: It's a matter of whether or not you're going to keep the company lead--what you invest in and if it matters enough to you to pay the price and go through an ERP implementation, or if honestly, you're just buying it and you're going to move on—it can just stay as it is, right?

Shawn: Literally, that's what it comes down to.

Juliette: Right. Is the headache—the expense of it all—worth it?

Shawn: I was just going to say, you move into a house, right? I learned a rule years ago about housework, “Oh so you think it's going to take 30 minutes—so you double the time.” So, 60, and then you go to the next increment. “Oh, 30 minutes will take me 60 hours to do a project.” Maybe it’s not that bad. Well, you’d have to ask my wife on that one, but it’s, sort of, the same thing with these ERP projects. There are orders of magnitude that you don’t even think about.

Data. We had a client that was acquired, and they really needed to get out of their old legacy system because the old parent company was ending the contract for supporting it. They paid us $1,000,000 for data migration.

Juliette: Oh wow. Oh wow.

Shawn: The data had to get out. It was a nightmare, but they had to get the data to run the business. Fortunately, we figured it out and we got it done. If it hadn’t gotten done, what would this organization have done to run their business going into the future? So, there's so many factors that come into it you don't even think about.

Literally is like rebuilding your house—it's not even just like remodeling—in some instances it's rebuilding it.

So just the key thing, Juliette, that I want you to know and everybody else who's listening to this is: just be aware of what could happen and, again, use the kaleidoscope. If you have a little bit of fear in your stomach when you look at this, but the answer will be clear on what to do.

Just like, you got kids and you’re going to have more kids and you’re in a two-bedroom house, and you want to have more kids and, “we gotta go, we don’t have a choice. We gotta do this.”

You’ll make it go right. You’ll make it go right once you know exactly what the right thing is to do for everybody.

Juliette: That's right. We've discussed this on other calls before. You can either make the decision or the decision will be made for you, right?

Shawn: Yes, all it takes is an acquirer, a potential acquirer to come in and do their diligence on you when you have an old system to say, “Ooh, I was going to offer you a certain amount of money, but because of your old system, I can’t do this.” That kills a deal. We’ve had companies come to us that say, “We didn’t get acquired because our technology was so old. Help us.”

So, you’re right. The decision will be made for you. I think you’re exactly right.

Juliette: Fingers crossed that you get a good valuer that can bring back valuable information and correct information.

So, I think we're coming to the end of our time. Any parting words to wrap up our chat today? Because I think we could continue talking about this for so much longer and maybe we'll pick it up in another call, but any parting words to, kind of, tie up today's call?

Shawn: Yeah, I would say this is a bit of a different angle, but when you talk to a software vendor salesperson—and we talk about this a lot—especially in this M&A world. They don’t necessarily have all the insights into what is happening for real in this situation, and that’s not their job to do. Their job is to sell their software. So, especially in this area, just be weary of a promise of, “Oh yeah, you can put in this solution and it's going to drive these synergy costs. It'll pay for itself in six months because you're going to have better purchasing volume because you can hit higher minimum order quantities. Or you're going to have better planning. Your inventory turns are going to go down because you can see your inventory around the world because it's all in one app.”

Those are good points and they’re truths, but to get to those points just takes time. It just takes time. Now, if you want to consolidate AP across all these businesses that you bought. And you want to buy an ERP for that? OK, but you know there are procure-to-pay solutions that are best of breeds that you could use to that are a lot cheaper than integrate.

Don't tell the ERP guys I said that.

No, they’ll be the first ones that say that. They know. They’ve got good partners out there.

The key point is: if you feel like it’s not going to be easy to do this, yeah, you’re right. But it can be done.

Juliette: Like I said, going through an M&A on its own is stressful, right? And then as we know, going through an implementation on its own is stressful, so combining those two together, I can't even imagine.

Shawn: Right, that's right.

Juliette: Well Shawn, thank you as always for sharing your experience and knowledge with us. We appreciate it. Thank you and thank you everyone for joining us for today's call, please let us know if you have any questions. We're happy to help in any way we can.

You can call us, email us, whatever works best, we're happy to help.

Be sure to join us for our next webinar scheduled for Thursday, March 24th. We will be offering a free CPE event introduction to ERP Systems. We’ll cover the basics of ERP systems from “How to buy an ERP system” to “What to buy and from whom to buy for a complete ERP implementation.” Please go to our website erpadvisorsgroup.com. For more details and to register.

ERP Advisors group is one of the country's top independent enterprise software advisory firms. ERP Advisors Group advises mid to large sized businesses on selecting and implementing business applications from enterprise resource planning, customer relationship management, human Capital Management, business intelligence and other enterprise applications, which equates to millions of dollars in software deals each year across many industries.

This has been the ERP advisor. Thank you for joining us.

Announcer: ERP Advisors group is one of the country's top independent enterprise software consulting firms. Advising mid to large sized businesses on selecting and implementing business applications, including ERP, CRM, HCM, business intelligence and other enterprise applications which equate to millions of dollars in software deals each year across many industries.

This has been the ERP Advisor.

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