Can anyone speak to their experience with the earnings J-curve in mid-market transactions? More specifically, a situation where the acquired company has a strong management team in place. TIA!
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1. An increase in the cost of payroll and benefits resulting from i.) the elimination of wage inconsistencies among like employees; ii.) an increase in the employer-paid portion of employee benefits (more paid holidays / better healthcare coverage / new incentive bonus plan / etc.)
2. Increased administrative expenses with insurance being a good example. It is not uncommon for mid-market targets to be underinsured (no recent insurance reviews / liability coverage limits that are inconsistent with revenue growth / lack of business interruption insurance (if desired) / stale property values / etc.)
3. Cost of hardware upgrades yet alone implementation of new information systems.
4. Elimination / abandonment of rough-edge policies - "contractors" paid in cash / services provided to the company at below-market rates due to seller relationships / services provided by the sellers at no cost to the company that will not continue post-closing (use of other facilities for customer entertainment, etc.).
It is important to remember that many mid-market companies (typically family owned) do not operate in a manner consistent with the standards of professional investors. A company may be able to earn handsome profits by running lean-n-mean but can the model be replicated by investors who expect internal policies and practices to be consistent with "market" conditions? Substantive post-closing "surprises" that relate to historical performance (and not the economy in general) are more often the result of flawed diligence and/or deal structure.