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Synergy – What the hell does that even mean?

by on December 18, 2014

Synergy is an overused term in M&A, in my opinion.

How do you know when you have “synergy”? How do you know when you don’t?

According to the dictionary, the main definition of synergy is “the interaction of elements that when combined produce a total effect that is greater than the sum of the individual elements, contributions, etc.; synergism.”

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I was talking with a client the other day and we were discussing synergy, specifically as it relates to M&A, though “synergy” is used in many other circumstances. As the CEO my client wanted to stress the synergies that would result from the sale of his company to another interested company.

A third party, listening in, stated that as a buyer he never pays for synergies because those are manifested AFTER the acquisition by the buying company so why pay the seller for that?

Any premium paid by the buyer is a form of present value of future, to be determined, benefit.

That got me thinking.

What the hell does “synergy” even mean?

The third party was taking the position, “Why pay the seller for something the buyer creates?” I get it but buyers pay premiums for companies all the time.

So why do they do that?

A strategic buyer is looking for something other than the lowest price, right?

Until we know what synergy means we cannot decide how to achieve it. Moreover, we cannot decide whether or not we are making progress or if we have been successful in getting it.

I believe “synergy” is a generic and overused, fuzzy word to describe some goal that is considered important to achieve. A “fuzzy” word is an abstraction, a broad statement of intent that sort of points in the direction of a desired outcome, but doesn’t describe it very well.

An example is “maximize shareholder value” or “create a strong competitive advantage.” What the hell do those statements mean?

Because “synergies” is a fuzzy word you have to be able to describe PERFORMANCES that represent the meaning of the goal. In other words, be able to describe specific outcomes that, if achieved, will cause you to agree that the goal is also achieved.  That you have “synergies.”

A goal is a statement describing a broad or abstract intent, state, or condition. Like saying we’re “looking for synergies.”

To understand what that means you have to ask, “How will I know one when I see one?”

A performance is an activity that is directly visible or audible, or directly accessible.

Performances that can be measured include an improvement in talent, product development, intellectual property, or new markets.

These are the things buyers are willing to pay a premium for, any buyer would agree.

So when you’re growing your business, focus on the these areas.  As a seller you can leverage these assets in order to increase the value of your business and sell it for a premium.

You might not get a buyer to pay you for the “synergies” the combination of the two companies will produce but you can get them to pay you a premium for some specific performances your company will provide.

If you’re wondering how you build a company that you can sell for a premium in a few years, contact me to discuss the Valuation Amplification Process.

I also invite you to download the white paper and learn How to Quickly Increase Your Valuation – A Proven 5 Step Process.  http://www.therevenuegroup.net/free-offer.html

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